Last week, GTI reported revenue for 2Q21 of $222 million, up 14% sequentially and up 85% year-over-year. As CEO Ben Kovler said on the call, "this quarter's revenue exceeded our entire annual revenue in 2019 just 18 months ago," an extraordinary feat for any company, but extraordinary for a company operating in prohibition. Notably, the company has a net cash balance sheet (debt of $362 Million), free cash flow from operations of $48.3 Million YTD, and (A)EBITDA of $79 million, growing 11% sequentially which is more than double the level from a year ago. GTI's cash gives the company significant financial flexibility to invest for the future and continue to generate solid returns for shareholders. We expect more of the same performance in 2H21 and into 2022. The company's performance will remain elevated by the tremendous potential from adult-use sales beginning in New York, New Jersey, Connecticut, and Virginia. All of these new adult-use markets are expected to come online over the next few years. Therefore, it is reasonable to assume that these markets will see a surge in demand, like the Hedgeye Trackers in Nevada, Massachusetts, and Illinois. In 2Q21, the company closed Dharma in Virginia, Liberty Compassion, a Massachusetts-based cannabis operator. Further growing the East Coast presence was the expansion into Rhode Island with the acquisition of Vertically Integrated Summit. The acquisitions broaden the company's footprint to 14 states and 62 retail locations and put GTI in a solid position in the highly desirable Northeast market. GTI is also building brands and optimizing brand distribution, including canned beverages early in consumer adoption. GTI has brands distributed in 12 states and is scaling up capacity and build depth and breadth of brand distribution.
HOW BIG IS BIG?
At Hedgeye, we are estimating legal cannabis is roughly $21 billion, with industry sales up 13% in 2Q21 after growing 6% or $193 Million in 1Q21. GTI CEO Ben Kovler said legal U.S. cannabis sales are currently on a run rate of $24 billion on the call. The difference we believe comes from our inability to get accurate medical sales from CA, CO, WA, ME, MA, and NV. The most significant point he was trying to make is that it is "just the start." Sales can double and maybe triple in the next 7-10 years. States like New York, Virginia, Connecticut, New Jersey are not even in the current numbers and will come online sometime in 2022. All the states coming online account for 10% of the US population and 12% of the adult population, which are potential cannabis consumers. If you want to think big and use $60-$80 billion, that means there's about $35-$55 billion more of legal sales to come online in the next decade. GTI's market cap to total US cannabis sales ratio is currently 2.1. Let’s go out seven years, assume legalization, and a similar price to total US sales ratio of 2x. For $65B of US cannabis sales, it puts the company market cap at $32.5 Billion, or up 190% from current levels.
FUNDAMENTALS RULE THE DAY
That success depends on fundamentals, and right now, GTI is set up to win. In 2Q21, GTI generated $222 million net revenue and $79 million of adjusted operating EBITDA. Total net revenue increased 14% over Q1, with gross CPG revenue growing 13% and gross retail revenue growing 15% (the difference between gross and the net is intercompany). The three primary revenue growth drivers are rising consumer demand, capital allocation, and execution. GTI focuses on "quality over quantity" and leading with the consumer. In addition, operational execution has been a focus since going public in 2018 and a strong focus on capital allocation.
The company generated gross margins of 55%, down slightly from 1Q21, due to the ramp-up costs related to the growing CPG business. However, the company is still maintaining the goal of keeping gross margins at or above 50%. On the SG&A side, excluding D&A and stock-based comp, normalized operating costs approximated $47 million, a $5 million increase over the $42 million in 1Q21, with the plan to accelerate investments in people and infrastructure. In Q2, total other income approximated $2.4 million, primarily driven by noncash gains and losses associated with the investment portfolio and the refinancing of the senior debt facility. As a result, the company generated over $79 million in adjusted operating EBITA, close to 36% of revenue and over $20 million in net income, our fourth consecutive quarter positive earnings per share.
STRONG BALANCE SHEET
GTI ended 2Q21 with approximately $360 million of cash, which increased by the $270 million increased debt raise completed in April 2012. The cash will be invested in several key markets. Increased consumer demand for Rhythm, Dogwalkers and Incredible, will address this need.
90 TO 0 AND GOOD GREEN
The company is investing in and developing a road map to advance racial equity by growing black talent and increasing capital to black businesses. With the support of leading CEOs from companies like Starbucks, Goldman Sachs, and the United Way and with the help of 2-time NBA MVP Step Curry, GTI is the first cannabis company to represent and driving change with 90 to 0. The company also recently announced the upcoming launch of a new brand called Good Green. The CEO said on the call, "To advance our mission of expanding access to well-being through cannabis, sales of Good Green products will fund grants to nonprofits that support the brand's three pillars: education, employment, and expungement."
