Earnings Call: Q2 2021

Aug 10, 2021

Good day, and thank you for standing by. Welcome to the Verano Holdings Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Aaron Miles, Chief Investment Officer. Please go ahead. Thank you, and good morning, everyone. Welcome to Verano's Q2 2021 earnings conference call. I'm joined today by George Arcos, Chief Executive Officer and Founder and Brian Ward, Chief Financial Officer. During this call, we will discuss our business outlook and make forward looking statements, which are based on management assumptions and expectations. Actual events or results could differ considerably due to risks and uncertainties mentioned in our filings with SEDAR, including our financial statements and MD and A for the fiscal year ending December 31, 2020, and our financial statements and MD and A for the 3 6 months ended June 30, 2021. In addition, throughout today's discussion, Verano will refer to non IFRS measures that do not have any standardized meaning prescribed by IFRS such as EBITDA, adjusted EBITDA and free cash flow. These non IFRS measures are defined in our earnings press release issued earlier today and available at investors. Verano.com, which also includes the reconciliation of these measures to the most comparable IFRS financial measures. Please note, the financial information is reported on a pro form a consolidated basis as if the Altmet acquisition had closed on January 1, 2021, compared to the actual closing which occurred on February 11, 2021. As a point of clarification, the financial statements we filed on SEDAR are in accordance with IFRS, which includes the contribution from AltMed beginning on the day of the actual closing of February 11 versus the beginning of our fiscal year on January 1. With that being said, results will differ between IFRS numbers filed with SEDAR and the pro form a consolidated numbers Lastly, all currency is in U. S. Dollars unless otherwise noted. I'll now turn the call over to George. Please go ahead. Good morning, everyone, and thank you for joining us. I am extremely pleased with what we accomplished in the quarter, one that was instrumental relative foundational pieces that we've added to our portfolio to firmly establish our position as a top operator in the space And to drive long term growth and profitability. On our last earnings call, we guided top line revenue approaching $200,000,000 We are very pleased to announce Q2 revenue of $199,000,000 representing 39% sequential growth, which notably did not include contribution from the AgriKine acquisition, which we had anticipated closing in the quarter, but instead completed in July due to regulatory delays. Overall, since going public in February, which included the closing of the transformative All lines transaction, we have announced 11 additional acquisitions and already closed on 10. Given the combination of our activity highlighted by significant cultivation expansion, a multitude of new dispensary openings and most of all substantial M and A, we expect that there would be some measure Despite an otherwise strong quarter as a result of our extensive activity on the M and A front, the financials we reported included some margin due to the one time accounting impacts associated with integration across multiple transactions. These included significant one time inventory markups Across 3 high volume dispensary groups, the Healing Center and Terravida in Pennsylvania and Territory in Arizona, accounting for 9 storefronts, which adversely impacted cost of goods sold in the quarter. In addition to inventory markups, we were subject to a negative impact of IFRS accounting treatment of our biological assets in the quarter. Through focused R and D, we've enhanced our cultivation methods, which we believe over time will increase yields While reducing plant counts and costs attended to maintaining a higher plant count. Though we don't anticipate a near term top line impact from an accounting perspective, We had to absorb a steep decline in the value of our biological assets, which again adversely impacted our cost of goods sold in the quarter. Going forward, we anticipate an increase in the valuation of biological assets as new cultivation methods are deployed. We believe there is solid runway ahead of us in Pennsylvania with vertical integration coming online last month. The delayed closing of advertising not only hindered top line performance, but Margin expansion as it deferred our vertical benefit realization of Pennsylvania to the 3rd quarter. Excluding the impact Of these one time accounting items and the delayed Agrokine closing, our margins in the quarter would have approached our signature profile. That said, the unadjusted EBITDA margin posted in our financials was 26% 41% adjusted, which is very strong relative to industry standards. Looking ahead, we remain confident in our strategy, operations and people, And we are incredibly optimistic about the future for Verano. We will continue to be assertive in support of our strategic vision for the company And to close out the year, we anticipate approaching a $1,100,000,000 revenue run rate with a margin profile nearing former levels. Turning to a more detailed review of the quarter. As I mentioned, we are very pleased to report $199,000,000 in revenue, representing a 39% sequential lift and 164% year over year growth. Revenue from retail versus wholesale was 78% 22% respectively with retail revenues increasing 114% year over year while wholesale revenues increased 29%. Verano also delivered $32,000,000 of net income excluding the impact of biological assets and $81,000,000 in adjusted EBITDA in the quarter. Our gross profit margin excluding biological assets was 50%. Although this is somewhat lower than we had targeted, as I highlighted a moment ago, several significant one time events pushed margins below our signature profile for the quarter. We are confident that this compression was circumstantial and again anticipate closing out the year at a level closer to our signature profile. Despite the one time impact of the events I described, we achieved strong overall financial results while maintaining focus on strategic execution and continued growth in key markets through sound operations and disciplined capital allocation. We also made tremendous headway on several fronts, while maintaining a healthy balance sheet ending the quarter with $150,000,000 in cash And we remain unencumbered by sale leasebacks. In addition, as discussed in our Q1 earnings call, our financial health has been enhanced The upsizing of our credit facility by $100,000,000 at an industry best 9.75 percent on a non dilutive basis. We firmly believe that we will be able to meet our cash obligations going forward. Should the need arise for additional funds, we do not using dilution of our stock to raise capital. Instead, we would explore non dilutive options such as additional debt, Seeking improved terms in relation to our current facility and we remain under lever compared to industry standards. We have also implemented a new strategy for investment are key to our long term vision for the company. Now I'll walk you through the progress we've made in expanding our retail footprint and wholesale capacity in more detail. Starting on the retail front, our organic growth was highlighted by the opening of 7 new dispensaries in the 2nd quarter, including 3 in Florida, 2 in New Jersey, 1 in Pennsylvania and a flagship storefront in the heart of Chicago. We expanded our retail footprint further through acquisition, adding 9 fully operational dispensaries to our portfolio in the quarter, resulting from deals closing in Arizona and Pennsylvania. This included 6 storefronts in Pennsylvania between Terravida and the Healing Center, each of which holds 3 of the top performing dispensaries In Philadelphia and Pittsburgh, respectively. After Q2, we brought 2 additional dispensaries online in Pennsylvania and another in Florida, Bringing Verano's total active retail footprint to 83 dispensaries as of today, which includes 2 recently announced medical recreational storefronts Acquired in Reno and Carson City, Nevada, pending the close of the Sierra Wells transaction. Of note, we have maximized Our retail footprint in New Jersey with 3 locations and we are well positioned for the onset of adult new sales with our completed State of the art 120,000 square foot cultivation facility. Staying ahead of market growth, especially in states trying to reduce transition has and will remain a strength of the company. Importantly across our retail channel, the average number of daily visits to Verano stores increased from 7,000 in the Q2 of last year to more than 18,000 this quarter with proven efficiencies based on Same store daily transaction growth of 76% year over year. We are currently projecting to end the year with more than 90 active dispensaries. This represents an increase from our previous approximation of 85 stores as we continue to execute exceptionally well on our retail expansion plan. We see significant opportunity for continued growth in our retail business as we enhance and refresh our brand portfolio, position ourselves for transitions in core markets such as New Jersey and Pennsylvania and add to our retail footprint where permitted. On the wholesale front, Sales were up 29% from the same period last year. We continue to invest in cultivation expansion in line with market demand And currently have 806,000 square feet of active cultivation nationwide. In the near term, we expect our state of the art Multi Tier 26,000 square foot indoor cultivation facility in Massachusetts to come online in the 3rd quarter, Well, we anticipate realizing vertical benefits starting in Q4. With that, we will achieve vertical integration in 9 of 11 operating markets And lift total cultivation capacity to 832,000 square feet. Upon close of the Sierra Well deal, we will add another 10,000 square feet to our total. Looking ahead in West Virginia, we are one of a select few that is licensed for vertical operations. And we are taking a phased approach in building out a 40,000 Through our acquisition of Adukline, which closed in July. As in West Virginia, we are taking a phased approach to develop a second permitted Large scale cultivation facility under the agronoment Biologics license providing substantial capacity expansion in the Keystone State. In Florida, we have approximately 220,000 square feet of active cultivation and similar to Pennsylvania, we have a second large scale indoor facility with space for considerable expansion currently in development. Of note, following the completion of cultivation construction in Florida, Pennsylvania, We will eclipse 1,000,000 square feet of indoor capacity nationwide. I want to reiterate the importance of Verano's balanced strategy, driven by a focus on both retail and wholesale channels, where we anticipate the revenue split, which skewed heavily towards retail in the quarter, create meaningful operational efficiencies, which should enable us to produce industry leading margins upon completion of integration efforts. In limited license states, our wholesale presence should position us to outpace markets even after we've maximized our retail footprint. As we believe our continued investment in premium brand and product development will generate sustainable consumer demand. Turning to our investment in CPG brand strategy, development and consumer experience. As market conditions evolve and the widespread adoption The value's cannabis policies expands addressable consumer population considerably. We have measurably increased investment in our brand portfolio and the enhancement of our product lines. For starters, our legacy edible brand Encore Edibles is currently undergoing a top down brand refresh In parallel, we're sweeping R and D to enhance flavors, formulas and overall consumer experience. We anticipate a coordinated nationwide relaunch the coming months. Similarly, we are reformulating multiple extensions of the Avexia wellness brand, including tablets and tinctures as well as a packaging redesign. We are targeting the refreshed offering to hit retail shelves in 2022. Work is underway to develop a slew of new brands, including a wellness forward edible line geared towards millennial consumers. Across our brand portfolio, we are committed to continuous improvement in product quality and consumer experience. We continue to deploy resources on the development of proprietary flower strains driven largely by in house breeding. Our G Line offering, a portfolio of crossbred strains, hinging our top selling cultivars has been well received across our footprint. With 8 gs Line Strains already in market and generating positive reviews, we have a roadmap for continued innovation and breathing So do the way consumers connect with brands. We are investing in a full funnel digital ecosystem. This includes a new and much improved Verano website that is expected to launch in Q1 next year. A long term search engine Optimization strategy to increase visibility and we are in test development stages of a custom in house mobile app. Together these initiatives are intended to enhance the brand experience, educate consumers and increase awareness and engagement in the market We are very pleased with a continued dialogue around cannabis policy reform at the federal level. We welcome these discussions Esperanto has made it a priority to be a part of the broader collective of voices, helping to shape this legal framework for the future of our industry. We are committed to being a part of the process, especially as we all work together to ensure a more equitable landscape in the cannabis market. As with any change, this process will require patience, but by no means our success or strategy dependent upon federal legalization or any other regulatory change. We believe federal legalization could create new opportunities for Verano and drive further efficiencies. But we have plenty of runway ahead of us, assuming 0 legislative changes. Our business has been operating and thriving for years within the current complex regulatory framework, which differs state by state And fewer federal restrictions only provides further upside optionality to our business. We will continue to grow our operations while also actively participating around federal legalization. So while we are excited about the possibility of reform that could help us to further expand the business, Deliver additional shareholder value and create more well paying jobs as well as giving more back to our communities, I would like to reiterate my confidence in the following statement. Our capacity to deliver on these critical functions is not at all dependent upon transformation of federal policy. With that, I will now turn the call over to Brian to provide more detail on our financials before making closing remarks. Thank you, George. It's a pleasure to speak with you all today. To start, I'll begin my remarks by reviewing financial highlights from the Q2 2021 and then discuss our balance sheet and capital agenda. Please note the financial information is reported on a pro form a consolidated basis As if the AltMed acquisition had closed on January 1, 2021 compared to the actual closing, which took place on February 11, 2021. Also, all currency is in U. S. Dollars unless otherwise noted. I am very proud of what we accomplished in the quarter from both a financial perspective And our strategic execution in building a foundation that positions us for sustainable long term top line growth and profitability. The industry is experiencing broad consolidation and I believe that we are leading the pack through our efforts to add deliberate complementary assets to our portfolio At very attractive multiples. Before getting into more detail on our financials, I want to touch on our efforts to convert over to U. S. GAAP that I highlighted on the last earnings call. We have made progress as intended and we anticipate reporting under GAAP by the end of this year. This move is significant for a couple of reasons. It better positions us to uplist to a U. S. Exchange, which we believe is a matter of when, not if, And it also allows us to report under a more familiar framework, which should clean up a lot of the accounting noise that we're susceptible to reporting under IFRS. This includes the impacts George highlighted a few minutes ago, which were driven by our strength to close on multiple transactions as well as reporting obligations associated with the valuation of our biological assets as we have implemented enhanced growing practices to lower plant count and increase yield. Both impacted our P and L during the quarter, which in a way overshadowed a fundamentally strong quarter from a margin perspective. Moving on to the financials. I am extremely pleased to report 2nd quarter 2021 revenue of $199,000,000 in line with the guidance we issued This represents growth of 39% quarter over quarter and 164% year over year, Driven by positive impact from continued investments to expand cultivation and production capacity across our wholesale footprint, dispensary openings and contribution from closed acquisitions excluding the potential impact from AgriKIND, which did not close during the quarter as expected. We are also encouraged by the strong organic retail growth experienced in the quarter with same store sales up 13% from Q1 2021. Overall, Illinois and Florida remained our largest contributors to the top line. However, we saw an uptick in the contribution from Pennsylvania following the close of Terravita And the Healing Center acquisitions, which added 6 top performing dispensaries to our portfolio and Arizona, which brought adult use online earlier this year, where we added 5 active dispensaries through the Territory, Emerald and local joint transactions. In addition, we are pleased by the progress we're making in New Jersey, Maryland, Nevada and Ohio heading into the remainder of 2021. Before I continue highlighting our financials, I want to provide some additional color on a couple of items. First off, the IFRS accounting impacts we had to recognize during the quarter. Following the close of the Territory, TeraVita and the Healing Center acquisitions, we had to gross up inventory from 9 high volume dispensaries, Which impacted cost of goods sold by approximately $6,000,000 in the quarter or 3% of total revenue. Please note this directly impacts Gross profit, but we adjust this back as a one time item in adjusted EBITDA. George also highlighted our focus on implementing new growing methods to increase yields From an accounting perspective and due to IFRS reporting requirements, we had to book a $25,000,000 decline in the value of our biological which of course impacted our P and L, including an additional $5,700,000 that ran through COGS. This $5,700,000 is not Added back as a one time item in adjusted EBITDA and the margin erosion accounted for about 3% of total revenue. And as discussed, AGREKIND did not close in early June as we expected due to delays that were purely regulatory in nature. This impact was felt in 2 ways. Nearly a month of top line revenue contribution was not realized and we didn't unlock vertical integration in the quarter, which would have facilitated margin We estimate this negatively impacted margins by about 2%. Moving on, gross profit for the Q2 2021 on an unadjusted basis And excluding the impact of biological assets was $100,000,000 compared to $88,000,000 in the prior quarter $43,000,000 in the same period of last year. As a percent of revenue, gross profit was 50%. When considering the approximate 8% impact that I just underscored, We would have approached our historical margin profile this quarter. Looking ahead, although we anticipate some quarterly variation And regulatory uncertainty, including in New Jersey, we expect continued margin expansion and a profile approaching historical levels To exit 2021, as we complete integration of our acquisitions, realize the benefit from investments made across our cultivation footprint and open up additional retail doors. Looking at SG and A, we maintain a sharp focus on expense management, which has been and will remain a top priority for the company. 2nd quarter 2021 SG and A expense was $53,000,000 or 7 percent of revenue compared to $29,000,000 or 20 percent of revenue in the prior quarter. Although SG and A as a percent of revenue was Elevated in comparison to prior quarters, it was driven by inclusion of multiple acquisitions and associated earn outs, which have been added back to EBITDA as one time adjustments. However, we have also identified operational synergies during the quarter and as always, We'll continue working to identify additional strategic efficiencies. This methodology has been crucial to our leading expense management, which is a testament to our teams and their ability to collaborate and to streamline practices across our organization. As noted on the last call, we anticipated some fluctuation in SG and A resulting from integration and as we make investments in headcount to help propel our business as it grows. Net income in the Q2 of 2021, excluding the impact of biological assets, was $32,000,000 compared to $8,000,000 in the Q1 of 2021 $2,000,000 in the Q2 of 2020. 2nd quarter 2021 EBITDA on an unadjusted basis was $52,000,000 or 26 percent of revenue compared to $60,000,000 or 42% of revenue in the prior quarter and $24,000,000 in the same period last year. After adjusting for one time expenses, including inventory markups, Earnouts and other costs related to acquisitions, adjusted EBITDA in the Q2 2021 was $81,000,000 or 41 percent of revenue Industry leading EBITDA margins, especially on an unadjusted basis, have been a trademark for Verano since going public. While the printed margin in the quarter didn't reach our signature profile as a company, it was impacted by the IFRS accounting measures I described earlier, the lack of contribution from vertical integration in Pennsylvania and streamlining 3 substantial revenue producing acquisitions in the quarter. As Verano continues to integrate M and A assets, including 3 in July, we expect some fluctuations in margins as we deploy our strategic playbook and implement leading processes. However, maintaining an industry leading EBITDA margin is one of our top priorities as it will allow for continued efficient funding of meaningful growth opportunities over the long term. That said, we believe that we will The year nearing our signature profile in unadjusted EBITDA margins. Now turning to the balance sheet and cash flows, We ended the quarter with $150,000,000 in cash and cash equivalents, which includes the previously announced $100,000,000 upsizing of our existing credit agreement with an industry leading 9.75 percent rate for a non dilutive facility. We continue to structure M and A with a focus on efficient management of our cash position, which includes multiple payment milestones And utilizing free cash flow of the business. After June 30, we closed on AgriKinds, AgroniMed Biologics and Mad River Remedies. Cash consideration totaling approximately $70,000,000 was deployed with one delayed payment remaining in Q4 for Agri We continue to acquire real estate through our M and A and maintain a balance sheet in advantageous condition without the hindrance of sale leasebacks. As George mentioned, we actively manage our cash flow and feel well positioned with our continued generation of cash. We have the ability to lever up appropriately should the opportunity for additional M and A arise and continually push for a decrease in our cost of capital. The volume of our investments in capital expenditures remains elevated as we continue to expand our infrastructure in line with experienced and anticipated growth in the market. During the quarter, our investment in capital expenditures totaled $25,000,000 bringing our year to date CapEx spend to $63,000,000 We expect the continuance of investment back into our business for the near term and project to close out 2021 Exceeding $100,000,000 in total CapEx. Cash flow from operations for Q2 2021 was 29,000,000 And free cash flow was $4,000,000 This is another quarter of being able to self fund CapEx while remaining cash flow positive, Something we take tremendous pride in. Looking back at the quarter, I want to reiterate how proud I am of what we accomplished. We are moving at an expedient pace and have demonstrated a proven ability to execute at an exceptionally high level. Every We take in every decision made is driven by our focus on building an absolute powerhouse in this industry. Before turning the call back over to George, I want to leave you with an important closing thought today. We are relentless and completely committed as an organization to grow the top line while sustaining an industry leading margin profile. Now, I'll turn it back over to George. Before turning the call over to Q and A, I want to acknowledge the lack of our shares that expired today. We believe we have an obligation We manage the increase in liquidity of the company's shares, while continuing to preserve long term value for our employees, partners and shareholders. After careful consideration, we opted to let the lockup expire rather than extend the potential overhang. With that, it's prudent for us to manage the manner in which our shares are released from trading restrictions and we believe this unlockable will improve liquidity and trading value of the stock in the near term. We recognize that a lack of liquidity in our shares is to some extent limiting our stock's potential and we are exploring options to effectively improve liquidity, which includes routine evaluation of how we most efficiently facilitate the flow of shares into the market. Speaking for myself and as the largest shareholder of the company With that operator, please open up the call for Q and A. Your first question comes from the line of Russell Stanley with Beacon Securities. Good morning. Good morning, Russ. Good morning. How are you? Good. How are you today? Good. Thank you for the breakdown Around the gross margin impacts from the various events in the quarter. Maybe if I could just more high level Tracking back to some comments I think you made during a recent fireside chat, just wondering what you're seeing on the Pro demand front with and particularly with respect to the reopening in some markets and the share of wallet shift that others have Observed with consumers having more options to spend, are you still seeing an impact in that regard? And Did that have any impact at all in the quarter? No. I mean, we're seeing same store sales up. Demand for us Continues to grow over time as we bring new medical patient consumers online, new additional adult use consumers and the benefits of cannabis keep spreading. Demand keeps rising. Obviously, coming off of COVID, people have options now to dine and go out and do different things, but demand for cannabis continues to grow. Great. And then just moving on perhaps to Illinois, we see the lottery process is well underway to expanding the retail license base, Which obviously points to a meaningful expansion in wholesale demand to your benefit. Just wondering how you're thinking about your cultivation capacity there now and what your plans might be on that front and how do you map that to when you expect the licenses to actually translate into physical demand. So I would anticipate additional stores coming online More likely than that Q1 throughout the rest of next year, by the time they get to zoning, construction, etcetera, it does take some time. As far as wholesale capacity for us, we have additional capacity coming online in the back half of the year. So we feel comfortable with where we're at. And we're obviously very excited for these new entrants to come into the It's an exciting opportunity for them. It's obviously a great opportunity for Verano to expand our wholesale business. So overall, I think it's a major positive benefit for the state And for our company. Great. And maybe if I can sneak in one last question. You still have a number of retail Locations you can build out in Pennsylvania, I guess. Can you provide us an update as to when you expect to be maxed out, so to speak, on the retail front in PA? Yes, we have some additional stores opening this year. We have some stores that are going through zoning. So I would anticipate hopefully by summer of next year, we have all the stores open. I think that would be a fair target for us. In the Philadelphia region, zoning can be quite difficult, so timing can change, but I anticipate by next summer we should have all Your next question comes from the line of Kenric Tyghe with ATB Capital Markets. Thank you. Good morning, Henry. Hey, good morning, George. James, just a quick question. Can you first just point of clarification, did you So a 200 basis point drag on AgriKime. And then a follow-up on that. Can you just speak to it looked like it was a Noisy quarter in Pennsylvania, just looking at some of the industry level data on performance and growth. Can you speak to the underlying performance of the Pennsylvania market In quarter? And also just provide some color around that confirmation on the margin profile change, please. Yes, sure, Kenric. Good morning. It's Brian. So your first question around Pennsylvania vertical integration, that was our best estimate based on when we Integrated the 6 stores in the quarter as well as push the pace on the openings. So with AgriKai closing in early July, we do believe that could have been about 200 basis points. Going forward, that's going to be meaningful for our strategy. When we look at the quarter, I think it was really strong in Pennsylvania, continues to be a very sticky market, basket sizes are high. And I would say we're pretty excited about the market as a whole. So our prospects in Pennsylvania look strong. We're excited to unlock that vertical integration. We continue to open our stores and maximize our footprint there. Thank you, Brian. And just, sorry, final confirmation on this Well, I'll pivot to another question. The AgriCon, that was simply a regulatory related delay? Or were there some other reasons why you couldn't close in court as expected? I mean, losing that money thought was obviously expensive, so it'd be good to just better understand why. Yes, it's mostly regulatory in nature. Some of these deals are hard to get to the finish line, get through all the regulatory hurdles and a lot of the legal challenges. But yes, mostly regulatory, unfortunately. Appreciate that. And then, gents, if we just switch to Florida, it looks like you had a pretty solid performance in quarter there, particularly with Can you speak to how that business is tracking and performing against your own internal expectations And your level of sort of comfort around your prior guidance on store count exits, etcetera, in Florida for the year, please? Sure. I can start and Brian can take it at the end. We love Florida. The Altmet transaction was obviously transformative for us. We have a phenomenal team on the ground. Everything is going as expected and actually a little bit better. And that just speaks to the performance of the team. So we feel very confident in exiting the year with our store count. Cultivation expansion went very well. We're out of schedule. We're now starting that second So we feel very confident in our business there, both now and in the future. Thanks, Ochad. Brian feels the same, but he doesn't mean the same to me. Yes, 100% agree. I mean, we're going to continue to make large scale We've got 35 open stores. I feel really excited about the prospects, not only in the market, but with our footprint. That's all good and fair enough. One quick final one, George. I know you touched on and appreciated the color on the lockups. But Yes. Is there are there any vehicles, methods by which just you can look to help better get people All the like that additional liquidity in those shares coming on, I mean, we're all well aware of what a big overhang that's been Are there any, as I said, methods, opportunities, means by which You can keep that to any extent other than the assurances provided. I mean, how do we think about this? How do we manage it? And how do we Look to put this behind us as investors or rather get comfortable with it as investors either. Yes, that's actually A good question and a fairly easy one to answer. Over 25% of our shareholders are insiders. And I can tell you that I know Pretty substantial amount of the investors in our shareholder base and they have most of them in a long term view. You have to understand, we have people that have been with This is a long term focused company and the shareholders that have been with us for a very long time understand that. Every decision we've made was for long term viability of the company And they know what the future holds. I mean, with federal legalization on the horizon, whether that's a year from now or 5 years from now, that's a substantial change in our business, Not only for Verano, but for the entire industry. So people are waiting for that. And I think people will be pleasantly surprised as this unlock comes off and we're hoping that we have some additional liquidity. We need to have additional people come into the story, and that's why we didn't want to create another overhang and add the lockups because we So confident in our shareholder base and more importantly, we feel confident in our business moving forward. Great. Appreciate the color. I'll get back in queue and good luck guys. Thanks, Kenric. Your next question comes from the line of Camilo Lyon with BTIG. Good morning, guys. How are you? Thanks for the unpack of the puts and takes on the gross margin line. Certainly very helpful. Could you help us think about how we bridge Q2 margins and the comments around returning to the run rate profile of the business? So are we to assume that there's a steady progression back up to that level, for the back half of the year? Or Are you kind of residing here and you'll exit that level in Q4 starting next year kind of That pre kind of established profile margin level. Yes, Camilo, this is Brian. So we tried to unpack it the best we could. As we think about the back half of the year, we do believe we will approach our former Signature margin profile. So Certainly, with a lot of M and A in the quarter and even to start Q3, there's going to be a little bit of choppiness. But I want to reiterate, we have not slowed down. So we do envision getting gross profit towards the upper 50s and maybe even nearing 60. But again, it could be a little bit It's choppiness through the quarter. There's also as we transition to GAAP, we've got New Jersey adult use and significant CapEx. Those are some of the things that we're working through. But again, as we look at the back half of the year, we do think gross profit is going to tick up towards kind of our signature levels, especially with all the cultivation coming online. And you mentioned the GAAP transition that typically has a gross margin impact. I'm assuming that that's Also going to be the case for you, right? It's usually about 100 or so basis points of impact typically is what we've seen. Is that the right Frame of mind to be in with the transition coming? We're still a little bit too early in our conversion process to guide or One way or another, the one benefit we have is no sale leasebacks. And so from a lease standpoint, there is a benefit there. But with the A logical impact that we didn't add back of almost 3% in the quarter, certainly if you kind of remove that, our story changes in the quarter. So Just on a biological basis alone relative to Q2 and going forward, we're excited for that GAAP transition. Definitely just wanted to make sure that we had to draw our expectations set. And then just Switching topics a little bit to brand positioning. Maybe George, if you could weigh in here, I'd love your thoughts. You've really done well with The Verano brand positioning it from a premium perspective, as you assess your key markets, Do you see room in these markets for expanding the offering to include a full suite of good, better, best options? And if so, Which are the markets that show that immediate opportunity for that strategy to unfold? We do, but it really depends on supply. So the good, better, best strategy is easier to deploy when you have enough supply and you have the right type of supply. So it's really we don't look at it on a national basis, we look at it on So as we move forward, we'll make those decisions based on the supply that we have and what makes sense for that market. That's really We envision this playing out over the next few years. Okay. And I guess then is that would that answer the question as to What's holding back the mix between retail and wholesale from balancing out a little bit more than it currently is? Is it really supply driven or is there something else More intentional in terms of trying to supply your own retail stores first with product until that supply quotient becomes More flowy, such that you have an ability to supply other wholesale doors in a bigger way. Is that what the real issue is on getting the mix of wholesale higher? Well, there's a number of different factors there and I'll Brian commented as well, but there are certain restrictions in markets where we can't only supply our own stores, there is a certain amount of product we can supply to our own stores. And for us, brand recognition is also an important factor for us. So in markets where we can supply our own stores and we can eat our own supply, The preference is to make sure that these brands are widely distributed across the state. So we build that brand recognition because we feel that that's a better long term play. I'll pass up to Brian for his comments as well. Yes. So I mean just a little bit of additional context, as we now have Pennsylvania closed, cultivation there And along with other cultivation coming online, notably in Massachusetts plus with a lot of the CapEx, we do think wholesale is going to balance out a little bit. We can definitely be a winner in both verticals. And that's just in the short term. We also have Illinois and wholesale, which has great opportunity. The fact remains, we keep pushing the pace in Florida, which we treat Purely it's retail income. So those are some of the key drivers there, but we do expect a little bit more of a balance going forward. Got it. And then just lastly on Florida, have you seen any sort of price increased price competitiveness in the market? And if so, where do you stand on that level of competition? Do you Feel that you need to compete on price to continue to generate the throughput that you're seeing in your stores? Great question. So price is also relative to quality of the product. So right now we feel very comfortable with our business and where we stand. We're not entering that pricing competition war. We feel very comfortable with our product. We have great patient, Loyalty and our business continues to expand. So at some point in time, there might be a market where we deploy a more Strong good, better, best model. But right now with what we're doing, we feel very comfortable with and we're going to continue down our path. Got it. Thanks very much. Good luck. No, thank you. Have a great day. Your next question comes from the line of Scott Fortune with ROTH Capital Partners. Good morning and thanks for the questions. Real quick, outside the key states mentioned, where are we seeing with upcoming states of Massachusetts, Nevada, Ohio, as you bring those on and kind of a cadence to reach the high company margin profile that you guys are looking at as you go deeper Vertically, just kind of timing on these fits a little bit more? Right. We have cultivation first of all, good morning and thank you for the question. Well, we have cultivation expansion projects in the back half of the year that are coming online in Florida, Illinois, Massachusetts, obviously Pennsylvania, Ohio and Nevada. All of them are Exciting projects, we've been working on them and deploying significant capital there. Out of all those, I'm really excited to see Massachusetts. It takes a long time to get your approvals done there. So we should be planting that facility sometime next month and we'll see hopefully some benefit there towards the end of Q4 into next year. But we have multiple projects that are coming in the back half and So that's significant margin expansion for the company. Okay. I appreciate that. Thanks. And then real quick, what are you seeing on the M and A front as For valuations and potential strategic opportunities in new markets or going deeper in your existing I could kind of just touch base on kind of M and A opportunities for you guys. We look at every deal. They changed, they vary state by state based on the asset, what it looks like, what type of cultivation asset it is, is it indoor, outdoor, greenhouse, etcetera on the retail front, Is it a strong retail location? What was the prior what did the prior business look like? So we look at everything, but we only transact if it fits the Verano profile. So we've been pretty aggressive in the M and A front. We'll continue to be, but that M and A, it has to fit our So we'll continue to transact when and if it makes sense. We still have some assets that we'd like to pick up along the way and we'll continue to look at opportunities 1 by 1. Okay. I appreciate the color. Thanks. I'll jump in the queue. Thank you. Your next question comes from the line of Andrew Simple with Echelon Capital Markets. Hi, good morning everyone and congrats on the results. Good morning. Just my first question here. Verano is very active in the number of build outs With production capacity expansions and new dispensary openings across several states, I'm just wondering with With respect to the construction activity underway, are you currently facing any supply shortages or cost inflation to those projects That may be cause for any delays relative to what you've signaled in the past. If you could just give us an update that Everything remains on track or some states where there might be a couple of months delay? So So everything remains on track. Good question, by the way. There are supply issues across the country from what we hear. I do have a construction background, so we planned Accordingly for all of our projects, we tend to order materials prior to any project and have them on-site before we commence construction. So we don't Delays in between construction and add additional costs, so we feel very comfortable with our construction schedule. I hope that answers your question. Yes, it does. Perfect. Thank you. My follow-up question, you discussed in your prepared remarks, I think some pretty significant investments on In the product portfolio, in relation to the financial impact for Verano. So how do we tie these back to the Financial performance of the business. Do you believe we can experience some improved pricing levels on these products? Or is it more a market share play? Or do you think we There's some additional cost leverage on with these innovations. If you could tie that back to the financials, that would be great. Sure, Andrew. This is Brian. I mean, good question. When we think about CPG and brands, we're going to continue to invest. So certainly, there's going to be some short term costs. But as we look to the long term, we're trying to round out our portfolio, continue to enhance, go deeper with different form factors. There could be pricing opportunities, But for us, this is some short term expense for some long term opportunity within the portfolio. So it's something that we're definitely focused on. And we've talked a little bit about good, better, best strategy and some other form factors that we're looking to deploy. So I think it's a tremendous opportunity for this company. We've been very focused on brands now that we're at scale with 80 plus dispensaries, vertical in 9 states. We've got a tremendous footprint that we can deploy New products and enhanced products through. Thank you, Brian, and thanks for taking my questions. Thank you. Thank you. Your next question comes from the line of Bill Papadansasios with Canaccord Genuity Company. Hey, guys. Good morning. Congrats on the quarter and thanks for taking my question. Good morning, Bill. How are you today? Good. Thank you. So I just wanted to talk a bit about the decriminalization and the scheduling bill introduced by Chuck Schumer several weeks ago. Thanks for your prepared remarks. And I understand the company's success is not dependent on this bill passing. I was hoping to just gain some color on what amendments and what compromises would be needed in order to see this bill pass. I mean, it's really the same story, right? It's another positive incremental step. It's changing the minds of many, And it's happening slowly but surely. So do I think the bill happens or passes this year? Most likely not. But again, it's on the forefront. It's on people's minds. And we could see something on the banking side. We could see something on Decrim side. I don't think full legalization is in the near term going to happen. But These are things that need to happen in order for something to happen in the future. And we view it as another positive incremental step. That's really how we look at same thing we've been saying for years. It's a matter of when, not if, and we're just looking forward to more steps to a final solution. Okay, great. Thank you. That's all the questions I have. Thank you. Your final question comes from the line of Neil Girma with Tableau Securities. Yes, good morning guys. Congrats on the quarter. Many of the questions have been asked, but maybe 2 sort of small ones. One was just sort of to see if you can give a little bit more clarity on the timing of those Expansions in Pennsylvania and Florida, that's sort of a mid-twenty 2 that they come online and start contributing there. And then the follow-up on some of your comments to a previous Question on sort of your M and A philosophy. Obviously, you've done a bunch since you've gone public and closed most of them. As you look forward, your message previously and continues to be going deeper, you look at your sort of retail footprint sort of Fire more cultivation type assets and that would sort of help sort of bring that mix between the retail and wholesale a little bit closer together. Thanks. Yes, good question. So on PA in Florida, I expect most likely the back half of 'twenty two is when we'll Some change in our financials. These projects take time to really come to fruition and by the time you plant and harvest and cure, etcetera, I see more of a Q3, Q4 benefit in 'twenty two on those two markets. As far as on the M and A front, it really just it's a per market basis. So we'd like to be vertical in the majority of our markets. Right now, we're getting very close. We still have to deploy our M and A strategy. There's some other things. We have some Blue sands we like to tie up in our footprint and we'll start looking outside of it if and when it makes sense. Something we've been very vocal about, we look at every deal, But it has to sit if we're on a profile, we're in no rush to grow our footprint. It just has to be the right deal at the right time for us. Okay, great. Thank you. Thank you. Have a great day. Thank you for joining everyone. We're looking forward to the Q3 call. We appreciate everyone's