Good afternoon, and welcome to Green Thumb's fourth quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the conclusion of formal remarks. During the question and answer session, we would ask for a limit for one question and one follow-up question per person. As a reminder, a live audio webcast of the call is available on the Investor Relations section of Green Thumb's website and will be archived for replay. I'd like to remind everyone that today's call is being recorded. I'll now turn the call over to Grace Bondy, Corporate Communications. Please go ahead.
Thanks, Anthony. Good morning, and welcome to Green Thumb's fourth quarter 2021 earnings call. I'm here today with Founder and CEO 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 earnings press release issued today, along with the reports filed with the United States Securities and Exchange Commission and Canadian securities regulators, including the annual report filed on Form 10-K, which we expect to file later today. This report, along with today's earnings 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. Now here's Ben.
Thank you, Grace. Good morning, everyone, and thank you for joining our fourth quarter and year-end 2021 earnings call. 2021 was a great year for Green Thumb. Our team's strong execution delivered results we are proud of. For the full year, revenue grew 61% to $894 million, and GAAP net income more than quadrupled to $75 million. Increased scale and operating leverage drove adjusted EBITDA growth of 71% to $308 million. Interestingly, we committed over $200 million in CapEx to invest ahead of a demand curve in the U.S. and by state that we can underwrite. We delivered our sixth consecutive quarter of positive GAAP net income and eighth consecutive quarter of positive cash flow from operations.
Beyond the numbers, we're grateful to our team, our customers, and our communities who supported us along the way, and we are all even more excited about the future. It can be difficult to avoid the noise in cannabis. Plenty of wormholes and dead ends of noisy chatter. I believe we have done an okay job filtering out that noise, focusing on where the puck is going, and studying the tremendous potential of the great American growth story. The growth trajectory may not be linear, but over the long term, we are quite confident it will be up and to the right. The timing of the rollout of adult use in various states is quite difficult to predict, but when it happens, we are confident that the demand is real.
While no company is immune to competitive pricing, we at Green Thumb have focused on premium cannabis and developing brands that are in high demand and less prone to pricing pressure, while at the same time investing in scaled production of certain items that will drive down the marginal cost per unit. As we've been saying for quite a while, our long-term adjusted EBITDA margin goal of more than 30% remains intact. It is worth noting that some state sales trends vary, and vary quite a bit month to month, and that is not surprising in this emerging industry, given what's going on. While Illinois saw sales volumes decrease in January, December was a record month. For the full year 2021, total sales grew 67% to $1.8 billion year-over-year. That's Illinois alone.
Overall, demand remains healthy, but the Illinois market is being artificially capped by the lack of progress in Springfield to issue social equity licenses and diversify the ownership base in the state away from what is really a white-dominated group of men. All is not lost for Illinois and social equity. One, we think the constructive conversations with the folks in power to resolve the issue would help. Two, Illinois will be a blueprint for how not to achieve any equity at or to how not to let anybody black or brown into the industry. This is actually quite a good thing in our opinion, because we believe we need to create a culture where it's okay to make mistakes, but it's not okay to learn from them.
We are seeing other states with equity provisions in their cannabis laws study Illinois as a cautionary tale, so we can all learn and we can all get better together. There's a lot of discussion about cannabis reforms and new laws at the federal level. While the market may be waiting with bated breath, we at Green Thumb are not. We think we are in an optimal position to take advantage of the changes that seem inevitable. I would repeat what I've said before, we operate our business without the need for federal change. As you can see, despite a wonky 280E structure, the business was able to generate over $132 million of cash flow from operations and over $75 million of GAAP net income. That's about $0.33 a share.
Until then, we'll be executing a plan that puts Green Thumb in position to win based on what we know now, not what may or may not happen sometime in the future. The core thing we know now is the American consumer is choosing cannabis for well-being. There are many hurdles in these emerging industries, especially those with decentralized regulatory structures. Our plan remains very simple, not easy. We want to execute the business plan to focus on the consumer and the product. Everything we've accomplished in 2021 was specifically designed to build long-term value for all of our stakeholders. Now I'll point out some of the major achievements in 2021 that reflect our Enter, Open, Scale strategy that has really been our North Star since inception. Starting with Enter.
We entered three new states in 2021, Virginia, Rhode Island and Minnesota. We entered Virginia through our acquisition of Dharma in July, when we acquired a production facility and one retail store. Since then, we've opened three additional retail locations, and we continue to bolster our position both on retail and production ahead of adult use sales in 2024, or maybe sooner. Rhode Island, while the smallest state by area, is actually the second most densely populated after New Jersey. We acquired one of three available state licenses in August, which came with a medical dispensary and a cultivation facility. Most recently in December, we're super excited as we entered Minnesota through our acquisition of LeafLine Industries, which is one of only two licensed cultivators in the Minnesota cannabis market.
As you know, Minnesota and Colorado have approximately the same population of 5.7 million people. With this transaction, we added five open medical dispensaries and a large cultivation production facility. Due to some of the details on the licensing and the medical program, Minnesota is really an underserved state, and we believe we can expand our capabilities to provide patients with greater access to well-being through cannabis. In fact, this week, maybe today, the first legal sales of flower are beginning, and our Minnesota stores are proud to offer several strains of flower to patients for the first time ever. Having done this a few times, I would encourage patience for the patients as the market begins to accelerate. We believe tomorrow it will only get better.
With Minnesota, we expanded our footprint to 15 states, and we love our 15-state market, especially considering that our cannabis operations now serve over 50% of the U.S. adult population. Furthermore, several of our states, it's really important to note, Virginia, New York, New Jersey and Connecticut have all passed adult use and it's on the near-term, medium-term horizon. Here at Green Thumb, we really like where our chips are on the board. The Open part of our strategy. In 2021, we made a lot of progress opening new stores. We added 22 stores to the family. We opened 10 and acquired 12 in various deals. I'll walk through a few. We ended the year with a store count of 73, and as of today, sit at 76.
As always, when it comes to new store rollouts, we undergo a rigorous due diligence process, which includes determining the best use of capital to achieve the highest returns. We opened new stores in Nevada with RISE Reno, a third store in New Jersey, in Bloomfield, which we encourage you all to come to soon, and an additional store in Pennsylvania with RISE Warminster. In Massachusetts, a combination of acquisition and new store openings, we opened five new stores for a total of six, three adult use and three medical. We're excited about the most recent store, RISE Chelsea, just outside of Boston, which gives us a unique six-store footprint in the Commonwealth. We have four locations in Virginia. Two RISE stores in Salem and Abingdon. In February, we opened two more, RISE Christiansburg and RISE Lynchburg.
In Illinois, we expanded our RISE Mundelein store to enhance our guest experience with an on-site consumption lounge and private smokeasy. We also encourage all of you, if you're in Chicago, it's close to O'Hare, be in touch, make a reservation. We'd love to welcome you out there. Major hats off to our retail team for an extraordinarily productive year. If we look at the third part of the business plan, Scale. To position our company for sustainable, profitable growth, we must understand and operate with scale. Beyond scaling retail locations, it also requires investments in building the infrastructure to support growth. We have been building, expanding and improving several production cultivation facilities in places like Illinois, Ohio, Massachusetts, New York, New Jersey, Minnesota, Rhode Island and Virginia. That's where the CapEx is going that you see that we've spent.
Our end game is not only to stay ahead of the demand curve, especially in those states that pass adult-use legislation, but it is also to produce the highest quality and safest cannabis experiences for our consumers. All of these dots must be connected in order to achieve our ultimate goal, building brands at scale to satisfy the American consumer's growing demand for well-being through high-quality, safe and reliable cannabis products. We're very proud of our family of products and the early consumer relationships being formed with those brands. RYTHM, incredibles, Dogwalkers, Beboe, Dr. Solomon's, and now Good Green, have the brand cachet needed to build what we would like to see. The scale we have built, combined with the information edge we have developed, should set us up to make high-probability, well-informed decisions. While this may sound ambitious, it is not.
Each day, I'm reminded of the power of that special consumer connection with a brand that truly makes all of this possible. As you all know, listening to this call and following the space, cannabis is a complex business. Rest assured, you can count on us to thoughtfully execute our strategy that has been working since we started this incredible journey. We have accomplished a lot in a short period of time, but I truly believe this is just the beginning. There's a lot of opportunity ahead, but we will take it in chunkable bites that we can digest and that we can execute against. We like having the optionality that comes with positive free cash flow after tax and a strong balance sheet. We like growth, but not for growth's sake.
We're building Green Thumb to prosper over the long term so that all of our many stakeholders may also prosper. With that, I turn the call over to Anthony for his financial review.
Thanks, Ben, and good morning, everyone. Thank you for listening. As you just heard, the company closed out a strong 2021, generating $894 million of top line net revenue and $308 million of adjusted operating EBITDA. It's humbling to think how far we've come since going public in 2018, a year in which we generated $62 million of net revenue and $22 million of adjusted operating EBITDA. In just three years, our team has been able to drive current monthly financial performance that now exceeds the results for all of 2018. Other highlights in 2021 include the following. Year-over-year revenue growth of over 60%. Gross margins of approximately 55%. Adjusted EBITDA margins in excess of 34%. Six closed M&A transactions and entry into the Virginia, Rhode Island, and Minnesota markets.
Net team growth of approximately 1,500 team members. $128 million in cash taxes paid to our largest financial partner, the U.S. government. For those of you that read Buffett's annual letter this weekend, this comes out to approximately $350,000 in cash taxes per day. Said differently, the team had a hell of a year, and our 2021 gross CapEx spend of $229 million will set us up for 2022 and beyond. Turning to the fourth quarter, the company posted $244 million of top-line net revenue and $76 million of adjusted operating EBITDA. Total net revenue increased 4% over Q3, with gross CPG revenue growing 3% and gross retail revenue growing 8%.
Prior to accounting for intercompany revenue, this left our gross CPG to retail revenue breakdown at 42% and 58% respectively, about flat with last quarter. Consistent with previous periods, despite some headwinds experienced during the quarter, we attribute our top-line growth to solid execution, high-quality differentiated product, and continued strong demand within our respective markets. On the profitability front, the company generated gross margins of approximately 53%, a 260 basis point decline over Q3. The dip in gross margins was primarily attributable to moderate pricing pressure experienced on both the CPG and retail side of our business. At no point did we as a management team assume that our historical gross margin performance was repeatable into perpetuity.
However, we remain confident that our scale, diversified market base, and focus on premium products will help support our efforts in keeping this critical metric at or above 50%. On the SG&A side, excluding depreciation, amortization, one-time transaction costs, and stock-based comp, normalized operating costs approximated $57 million, a $5 million increase over the $52 million incurred in Q3. The lion's share of this quarter-over-quarter increase is both payroll and marketing related, principally reflecting our team expansion to close to 4,000 members. In 2022, we will continue to closely monitor our overall SG&A spend relative to our top-line growth and margin performance, with the goal of maintaining gross margins and adjusted operating EBITDA margins at or above 50% and 30% respectively.
[Other expenses] in the quarter approximated $4 million, which primarily reflects non-cash gains associated with our investment portfolio, as well as interest expense from our senior debt facility. Net of these expenses, the company generated $22.8 million in net income for $0.10 per share, our sixth consecutive quarter of positive earnings per share for the business. In addition, we generated adjusted operating EBITDA of $76 million, or 31% of revenue. Moving on to our balance sheet and cash flows, we ended the year with approximately $230 million of cash. During the quarter, Green Thumb made healthy tax payments to Uncle Sam, and we invested over $75 million in gross CapEx, when including the spend associated with our sale leasebacks.
On our last call, I communicated our plan to increase our investment in a number of key markets that we believe will help drive the next phase of growth for Green Thumb. Our balance sheet and positive cash flow from operations provides us substantial financial flexibility, and we remain bullish on our uses of capital and the cash-on-cash returns we can generate in this next phase of Prohibition 2.0. As we look ahead to 2022, I anticipate repeating the following same themes that you've heard previously. The star of the team is the team. Chase the truth, per Ray Dalio. Lead with the consumer in mind at every step of the way. Embrace our role and responsibility within the industry to continue to chip away at the wall of prohibition that has cost our country and its constituents countless lives, dollars, and opportunity.
We hope that you and your family stay safe during these uncertain times and hope you all are as excited as we are for what's to come. Back to you, Ben.
Thanks, Anthony. Chase the truth , eh? I like that. Yes, 2021 was indeed a productive and busy year. We accomplished a lot, delivering strong results and set ourselves up well for the future. Financially, we're in comfortable shape with positive cash flow and over $200 million in cash on the balance sheet. I'm proud that we earned the reputation for thoughtfully allocating capital, for focusing on strong execution, and most importantly, for doing what we say we are going to do. I'm also proud of our team's commitment to our core principles. They adhere to a standard of excellence that elevates a company's leadership position in an emerging industry. In a brand-new frontier, it is very important for us to stay grounded and to stay humble.
Giving back has been an important part of our mission since the beginning, and with every new store opening, we donate first-day profits to local organizations who are making a positive impact on their communities. We also believe it is our responsibility to help fix some of the problems created by the War on Drugs. Today, there are approximately 40,000 Americans still incarcerated for marijuana offenses. 40,000. Given the wide legalization of cannabis, the irony is beyond cruel. We strongly believe in the plant's potential to improve well-being, which is important work when considering that every year more than 95,000 Americans die from alcohol abuse and another 100,000 Americans die from opioid overdose. Those numbers are staggering to us. Social equity is also a very important concept for us, especially in the cannabis business.
Our LEAP program in Illinois was very successful at helping individuals apply for social equity licenses. We recently launched a sister program, LEAP Connecticut, in partnership with the NAACP Greater New Haven and Vicente Sederberg to promote social equity applicants with essential knowledge about how to apply for a cannabis license in Connecticut and tips for operating a successful cannabis business. I think this is incredibly value-add as we think the next chapter for cannabis in the U.S. could be about new wealth creation. Good Green, our line of cannabis products dedicated to creating opportunities for marginalized communities impacted by the War on Drugs, continues to support nonprofit organizations. In 2021, Green Thumb provided grants to three nonprofit organizations through its inaugural Good Green Grant Program.
Each organization fit one of Good Green's core principles, which are education, employment, and expungement, and are doing amazing work to create opportunity and change in black and brown communities. We encourage you to check them out on the website and get involved. We are currently in our second round of grant-making to qualified applicants. This work we do in our communities is part of our DNA and really inspires passion throughout our organization. I believe our commitment to the communities we serve positions us to attract top talent aligned with our core principles. With that in mind, we are very pleased to welcome Dorri McWhorter as she recently joined the board of directors. Dorri is currently the President and CEO of YMCA of Metropolitan Chicago and a lifelong advocate of bringing community leaders together to promote social equity and lasting change. Welcome, Dorri.
I'm excited you're here, and we're truly excited you're on the board. Stepping a little bit back, I would be remiss not to mention that our hearts and hopes go out to the brave people in Ukraine. Eradicating injustice has always been core to our mission and our values, and it's both painful and alarming to witness Russia's aggressions, aggression towards its neighbor, a sovereign state. Nothing could be more unjust than what we're watching happen, and along with the whole world, we are watching and praying for a peaceful resolution. Finally, back to the U.S. and cannabis. As I said many times before, we are still in the early innings of this great American cannabis growth story. The U.S. legal cannabis market is already a $24 billion industry, and we actually believe the market can more than triple over the next decade.
We think it's still day one for cannabis. It's definitely day one for Green Thumb, and the best is yet to come. Stay tuned. With that, Anthony and I welcome any and all of your questions.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask for a limit of one question and one follow-up question per person. At this time, we will pause momentarily to assemble our roster. Our first question comes from Vivien Azer with Cowen & Co . You may now go ahead.
Hi. Good morning.
Hi, Vivien.
My question is for Anthony. Thank you very much for the context around your aspirations to hold gross margins at or above 50% as well as the adjusted EBITDA margin at or above 30%. Just looking back to the sequential degradation that you saw in gross margin in particular in the fourth quarter, I was wondering if you could just unpack that a little bit. Is it product mix, geographic mix, a combination? If you could just you know maybe offer a gross margin bridge of some kind, that would be really helpful. Thank you.
Sure, Vivien, an excellent question. You know, let's zoom out a little bit. You know, obviously, throughout the year from each quarter, we saw you know a little bit of kind of growth within the gross margin line. You know, in the fourth quarter, what I explained in my prepared remarks is that we started to see some price settling that you know really rolled through both the retail and the CPG portions of the business.
That, you know, really the pricing was probably the biggest driver in terms of the quarter reported decline that we saw. You know, historically, gross margins on the retail side of the business remain relatively consistent. We did see some market kind of aberration in the fourth quarter. Obviously on the wholesale side of the business, given the verticality that we have within most of the markets that we operate in, we saw a similar kind of impact there. You know, there were some other things that kind of rolled through that line. You know, that's typical on a quarterly basis. There's gonna be a little bit of noise. You know, just zooming out, you know, really the biggest driver was just some of the price settling that we saw in a few of the markets.
Thank you.
Our next question is from Camilo Lyon with BTIG. You may now go ahead.
Thank you, congrats on just a remarkable amount of consistency that you're putting out quarter to quarter. You know, following up on the last question on gross margin, Anthony, you talked about some states showing that price compression. Can you tell us what states that is most impactful on the gross margin? How do you think about the levers that you have at your disposal to kind of alleviate those pricing pressures? Is it, you know, from a greater focus on some of your other, you know, key products and more of your premium end flower getting into the market? Is it some other mechanisms around marketing and positioning relative to the other brands?
How do you view your optionality around kind of recapturing some of that pricing pressure that you felt in Q4?
Yeah, sure, Camilo . Let me unpack that quickly. Basically two questions there. First one is, okay, which markets did you really experience kind of the price settling that rolled through the gross margin line? And then second, you know, what kind of tools does the business have at its disposal to effectively counteract those? Going to the first question, you know, look, there is constant kind of price movement, you know, within all the markets that we operate in. These are nascent markets. You've got, you know, given the different kind of regulatory structures and the supply-demand kind of economics that are at play within each of these markets, you know, we do see kind of, you know, month to month and quarter to quarter swings.
In the fourth quarter, you know, and the state data really shows this. You know, Pennsylvania and Nevada overall were two of the markets where you saw some flattening on the total size of the market, and that you know effectively lack of growth kind of resulted in some price compression that took place at the competitive level. In terms of what we're doing within the business to counteract those, I mean, look, we've talked about this a few times. One, obviously it's scale within the business. We're leaning in there. We have a diversified kind of market base. It's one of the things we love about our business is just that, you know, we're not beholden on one or two markets.
At this point, we're operational in 15 markets. They're at different kind of stages within their kind of growth cycle. Last, we've said it before, but it's brands. You know, it's building, you know, effectively some pricing, the ability to kind of price our products given kind of the premium kind of focus that we have and having some real price control, instead of effectively letting market dictate price 100% of the time. You know, look, again, these markets are nascent. We're watching this closely. You know, we live this day to day, and it's something that we're gonna be navigating over the next few quarters.
That's great. Thanks for the color on that. If I could ask just a follow-up on the brand topic, Ben, now that you've had the brand portfolio really start to gain prominence in all of your states, to varying degrees, how do you view the buy versus build decision going forward with respect to your brand portfolio?
Yeah, thanks, Camilo. You know, we're trying to study and learn as much as we can all the time. Being close to the products and the consumer is helpful for us. You know, the hurdle is pretty high to buy, but if things make sense, you know, we're willing to do it. It's about looking at the portfolio composition broadly. It's about the pricing. Then it's really about capabilities. You know, one of the things is we're not gonna do everything forever. The business does a lot of different things, and I think specialization and focus is okay for us. We're constantly examining it. You know, the best place for us to be in the acquisition space in brands, just speaking candidly, is something that we don't do ourselves. Inventing and creating is harder.
That's what it is. We love the brands. We love the consumer's relationship with the product around the country, and we think there's some special things going on out there in our house of brands, the family of products and others. We know the consumer is developing a relationship with this product in a long-lasting, sticky way.
Got it. Thanks a lot, and good luck.
Sure. Thanks for the questions.
Our next question comes from Matt McGinley with Needham. You may now go ahead.
Thank you. The industry data would suggest that you did better than most in fourth quarter with your wholesale revenue, but it looks like the net revenue is actually still down $3 million sequentially. I guess, can you how should we think about that decline in the fourth quarter relative to the growth in the CPG segment? I think most of us would assume you would have into the first quarter through the duration of 2022. I think, Anthony, like relative to the commentary on gross margin, was that decline in wholesale revenue driven by pricing, or was there also something that happened in a specific market on the wholesale revenue? I'm assuming that's probably along the same lines what you know you gave in your remarks on gross margin.
Yeah, I mean, look, like I said, there was some movement in the fourth quarter just across the business, particularly now given the number of markets that we're operating in. I guess just kind of stepping back, though, again, as we kind of look at it, the markets where we're seeing kind of some of this activity, it's something we're watching closely. Obviously we're kind of leaning into the verticality of the business that we have.
One of the reasons why you saw the decline that you did was just the, you know, the company ended up, you know, effectively shipping more product to its own retail store base, you know, thereby creating more intercompany revenue for the quarter, which dropped that kind of net, you know, that net wholesale number that you referenced. Part of that was just supply driven. You know, again, within these markets, you know, our retail stores were big buyers of product. Sometimes if we cannot kind of fulfill the demand that we have at the retail level from third parties, we have no choice but to effectively divert product from our own facilities, from wholesale facilities to grow our retail stores.
In some ways, you know, really just the availability of product at each of the market levels is a big driver of that intercompany number. You know, in terms of where it's going, really hard to predict, like I said, because the supply and demand kind of dynamics within each respective market play a role in driving that kind of, that figure on a quarter-to-quarter basis.
Thank you. My second question is on inflation. Can you help us frame, you know, where you're seeing this occur right now or where we're likely to see inflationary pressure that would impact your P&L and balance sheet? What do you think the best tools are that you have at your disposal to attempt to offset those headwinds to cash flow and margins?
Yeah, look, I think, you know, this is something that I think all the operators in the space are navigating. You know, on the balance sheet side, it's really just on the capital projects that we have ongoing. You know, from that perspective, obviously, you're seeing an increase in both the labor cost of construction as well as, you know, raw material. A lot of the commodities obviously have seen a run up, and the supply chain shortages have just put additional pressure on that. Within the business, you know, look, we've got a lot of raw material coming in from overseas, primarily Asia. Seeing growth there.
The shipping rates, you know, just, you know, not a huge kind of number within the business, but in terms of the rate of growth that we've seen in terms of the cost to ship containers across the ocean have drastically kind of increased. Obviously kind of on the payroll front, you know, we've seen an increase there just, you know, in terms of staffing at the retail and wholesale kind of levels. Look, it's showing up. It's showing up on the balance sheet. It's gonna show up on the P&L. You know, we're not gonna make excuses. It's candidly just something that we're gonna have to kind of deal with and navigate through.
As we look ahead, it's something we're just gonna closely watch throughout 2022 and, you know, and just kind of make adjustments on the fly accordingly.
Okay. Thank you.
Our next question comes from Pablo Zuanic with Cantor Fitzgerald. You may now go ahead.
Morning. Sorry, I joined the call late, so I'm sorry if this was asked already, but I'm very impressed with your recent deals in Rhode Island and Minnesota. I know they look like small states, but you know, there's only two licenses in Rhode Island, two in Minnesota and three in Rhode Island. Question is, do you have visibility in places like Virginia, Rhode Island, Minnesota, where you invested almost $500 million combined, that there will not be any new medical licenses issued for the next two or three years? Remind us in those three states if you have any caps on stores and cultivation. Thank you.
Great. Hey, Pablo. It's Ben. Thanks for the question. Yeah. Look, we love those states too. We're doing the same thing you are. We're not against new licenses coming into the various states. You know, net is two licenses enough to serve 6 million people? No. It's not gonna work great. It's about first mover, it's about scale, and, you know, there's a lot of nuances in each state. I think you asked how many stores are in each state. I can try to do it, but we can follow up on any details. Minnesota, we have five open, going to eight per the law now with those other three in various stages. Virginia, we have 4, like we mentioned, fifth coming soon, and a sixth. The sixth is on prem at the production.
Rhode Island is one store, one production. We'll invest a little bit to scale that up. Rec coming, not enough product from our own supply to supply ourselves. Small state, but the same math applies whether there's zeros or not. It's really the same game as to what's going on. Just big picture on new licenses in, we don't lose a lot of sleep on new licenses coming in. We like our product. We love first mover. We like having the lowest cost dollars out there to go do what we're gonna do. At the end of the day, we think consumers have a relationship with our brands, they're gonna want those. It's just so early in some of these markets. You can't even buy flower.
With what's going on in some of the markets, it's just early, and we know what that demand curve is gonna look like. That's what we're underwriting. Even if you double the licenses in each of the states, it doesn't make us really flinch either on price paid, on dollars being allocated, on demand curve or anything like that, because, you know, we think find your RYTHM and, you know, enjoy the journey with Dogwalkers and what Beboe can bring to people is pretty differentiated. We're excited about that.
Thanks. That's good color. Look, just a quick follow-up. Can you give an update in the case of New Jersey? I think you applied for two stores. When did you apply for the third store to go rec, if you have any visibility on that? Same thing with New York. You have four medical stores. So you can add four more, but do we know when you can start adding those four stores? Thanks.
Thanks, Pablo. Great questions. You know, the short version answer is no visibility and no answer on New York. So we have two. We're confident. New Jersey is learning as we go. We hope to partner with the state and help through this. It's going to turn on. I do not know when, and I have no offering of commentary about when, because it's a tricky process here as everybody learns it together. In New York, you know, hemp bill passes. We are active doing what we said we were going to do. We bought the prison in Warwick. Again, locking people up for marijuana, now we can employ people in marijuana. It's a major change into what's happening in society in the U.S., so we really want to put that on display.
Regardless of what else is going on in the state, there's 20 billion people, there's $5 billion of demand. We're not penciling out for $2 billion in sales out of the gate in any way, shape, or form. For us, we're putting in dollars where we can create amazing returns on those invested dollars at ridiculously low multiples of EBITDA out 24 months. That's great for stakeholders, shareholders, and actually it's great for consumers in the country. We're pumped about that. On timing or details of stores, nothing. I think we're kind of sitting behind, you know, many of the others that are going to come in, but the ROs do have a first spot here, and we're going to get going. I don't have a lot of clarity on the additional stores.
Got it. Thank you.
Sure.
Please limit yourself to one question so more questioners may ask their questions. Our next question comes from Eric Des Lauriers with Craig-Hallum. You may now go ahead.
Great. Thanks for taking my question. Congrats on another strong quarter here. Ben, a follow-up on the last question for me. So obviously, you know, the timing of New Jersey and New York adult-use sales beginning is out of your hands. But can you talk about when you expect your production operations to be sort of fully up and running? If we should expect a large wholesale presence out the gate, or if you guys will have more of a focus on vertical or intercompany sales. Thanks.
For New Jersey?
For both New Jersey and New York, if you can. Thanks.
Timing. You said timing on the rec or wholesale retail? We're gonna optimize the business like we always do. You know, capacity step up in New Jersey. We're in Paterson. I think we doubled the number of flower rooms. Obviously, there's a storm, there's a lot of different things, but that is online and coming together. We will have more product. We'll optimize with the operators in the state in order to best serve the consumers and keep the patients satisfied with the product, as that's the priority. I can't tell you where it's gonna go. I don't really know, but we're good at optimizing that. We like the two retail locations that'll be approved for rec, and that's gonna be strong. I have no total commentary on New York. This is early stage.
We're pretty head down building, doing what we say we're gonna do, which is just building this cultivation campus and getting things right in Warwick. You know, we'll come up for air. I don't know, one of the two or three conference calls ago, I think I threw out the date 1/1/2023 as rec in New York, which was very far away, which is obviously now less than 10 months after today. Seems very close. Amazing how that changes. You know, I think there'll be rec sale in New York in 2023. I think you know, I do believe that, but I have no real insight, actually.
Our next question.
No, go ahead.
Sorry. Our next question will come from Spence Hanus with Wolfe Research. You may now go ahead.
Good morning. Just to follow up on the price settling you guys saw in 4Q. Have you seen any improvement as you look to the first quarter? How did the promotional intensity in the lower end of the market compare to what you saw in some of the higher quality indoor product that you guys are selling as well?
Sure. Good question. You know, you know, I would say that we are not seeing kind of the rate of change that we saw in the fourth quarter at the current moment. You know, again, this is real time, and these markets move pretty quickly. Just what we're seeing, we are starting to see some kind of real settlement. You know, that relates to kind of the initial question. Do you mind just repeating the second one that you had?
Yeah. Could you just talk about how the promotional intensity in the lower end of the market compares to what you're seeing in the higher quality indoor flower you're selling?
Yeah. You know, look, we've talked about this, before, but obviously where we're seeing kind of the most, you know, the most, call it compression is really on the lower end of the market. It's kind of the, kind of low to mid kind of quality levels, across all the various categories. You know, in Pennsylvania, for example, given the lack of edibles, obviously then it just gets pushed into vape and flower. That's really just where it shows up, so it doesn't get spread out, across, you know, as many other categories as it does in, perhaps other markets. You know, net, that's really kind of what we're seeing. Like I said, it's real time and, something that we're watching closely on a, you know, day-to-day, week-to-week basis.
Got it. That's helpful. Whether the industry can convert to brands is gonna have a big impact on where our margins settle over the long run. How do you think GTI and the broader industry can just pull forward the shift in mindset for consumers to shift to purchase by brands versus the current convention out there of really THC per dollar?
Just trust, responsibility. You know, consistent product that delivers on its promise will develop that relationship with the consumer. I think to the last question, the premium flower is, you know, essentially the most resilient. High quality flower drives the business, drives people into the store, core consumer, and that's a key core product. That's important.
Great. Thank you.
Sure.
Our next question comes from Aaron Grey with Alliance. You may now go ahead.
Hi. Thank you for the question, and congrats on the quarter. A question for me. Retail, you know, up sequentially, talked about acquired stores as well as traffic being called out in the press release. Just want to know if you could speak to average basket. You know, same-store sales down 1% sequentially. Since you guys called out traffic, that implies, you know, a lower average basket. Just wanted to know whether or not you could speak to, you know, how much of that might have been the pricing pressure that you've spoken to, but also, you know, the broader consumer and the wallet being impacted by inflation. Any color on the basket and health of the consumer would be appreciated. Thank you.
Yeah. Good question. You know, really what we saw, look, the average ticket has continued to slightly kind of come down. Now, I will say that, you know, that's largely because of effectively some of the pricing pressure that we did see. Units per transaction is really not moving much, but you know, the ADT is did come down a bit. Look, it's come down since it peaked during COVID, really just kind of in a more normalized state today. You know, the quarter-over-quarter decrease that we did see in ADT was just directly correlated really to some of the price declines that we saw in a few of the markets. Units per transaction was relatively consistent.
We anticipate that that'll probably stay the same. Our guess is that, you know, we're in a more normalized state than we were, call it, you know, three quarters, three to four quarters ago during the peak of COVID.
Okay, great. Thanks for that color. Appreciate it.
Sure.
Our next question comes from Michael Lavery with Piper Sandler. You may now go ahead.
Thank you. Good morning.
Hey, Michael.
Can you just update us on the capacity outlook and, you know, obviously partly just helping us think about that as we model the wholesale line. I know you touched on some of the shifts to selling to your own stores and maybe a little bit of a, you know, pricing pressure. I know that's a factor for probably, what, the next maybe couple quarters. Should we still expect a capacity step-up in the second half? What's the right way to just think about how that unfolds?
Yeah. I mean, look, it better. We're spending a lot of CapEx. If we don't turn on anything, it will not have been a good use of funds.
I guess specifically just maybe how much can you pinpoint the timing is what I was getting at.
Not much. We shied away from making predictions and then walking it back and changing things. I don't know when New Jersey's gonna turn on rec. I don't know when Connecticut's gonna turn on rec. I don't know when New York's gonna turn on rec. Basically, our CapEx projects are essentially on time, on budget. There's some delays through the supply chain, but Anthony and team and all the way down have done just an amazing job sourcing these things. You know, I will tell you places like Ohio, Maryland, and New Jersey, just off the top of my head, have new rooms planted that have not yet hit revenue. Therefore, within the next six months, roughly, those have to come on. They're not $100 million CapEx spends, but they're material for those markets.
Again, just Ohio, New Jersey, Maryland, all states we like, all with demand coming and, you know, pretty strong setup. But I think just zooming out, you said, how should we think about it? Yeah, continued investment. I would take the year. The money goes in, a year later, the project's there, and six months to grow the plants.
That's helpful color.
The core business. Sorry, Michael, just one other thing just to make sure everybody understands. Very important. We've scaled, and Anthony mentioned this in his pre-comments. Everybody's talking about the margin, which is not something we run the business on, by the way. We run the business on the free cash flow and the sustainability of the cash. If we spend $200 million last year in CapEx, we're underwriting more revenue coming out of that CapEx. Otherwise, why would we have spent it? We do not need the same kind of SG&A scale that we've had before. If you think through the percentages and the 2,000 basis points to 20% from 50% to 30%, and what that is getting scaled over, essentially we've already taken the weight by putting on the SG&A spend before the revenue is hit.
All three of those markets have materially increased spend and not yet flown through. It's kind of important to see out. I think people are very quarter-to-quarter basis-based. I get everybody's got their own business and their own lens. We're building the business for shareholders for the long term, and we believe in the capital spend that we're doing on where the industry is going to be in three to five years. We have a lot of conviction on that. We're not as concerned in the short term. Everything we said applies to the medium and long term, and we like where the business is going to be because those states, and I'm just writing it down. It's Virginia, New York, New Jersey, Connecticut. It's 41 million Americans that have legalized cannabis coming their way, where 24 months ago, they were essentially in the desert, literally.
That's not even including some of the other states going. It feels to us like the industry is digesting on this growth. We look at the industry quarter-to-quarter numbers and see the whole thing. We don't think in three years the U.S. is only a $25 billion industry. If it was, it wouldn't make a lot of sense to spend the way we are. We think it's gonna go up and to the right. I just thought at would be a little helpful as you think about the spend and the growth and all this stuff. It's not a quarter-to-quarter play over here. As you know, it's hard to hire the right people. We're building a major team. I'd rather bring somebody in the door now to say, "Hey, here's how to get prepared for 2024.
You know, you got 18 months." That's how we're trying to build and set up the business.
No, really helpful. Thanks for all that.
Sure.
Our next question comes from Andrew Partheniou with Stifel . You may now go ahead.
Hi, good morning, and thank you for taking my question. Just to start off with a housekeeping item, could you talk a little bit about what that $4.5 million one-time charge added into the Q4 EBITDA is? For my actual question, it's more of a follow-up as to what you just discussed. You had, you know, negative operating leverage in Q4, lots of headcount that you talked about. Could you discuss what we should expect going forward? You are investing across your platform. You continue to integrate the acquisitions. You know, at what point could we see this reverse to positive operating leverage?
I'll start then hand it to Anthony on the non-operating and the four-in, four -out front. I think the pace of spend on the SG&A will slow because what we decided to do is instead of being behind, scale it in advance. Then a couple of the states didn't turn on exactly when we thought, but I didn't want to be super late. We're very comfortable with what we have here. Business will slow from a, like, a slope standpoint on the biz because the infrastructure here should support hundreds of millions of dollars or more revenue, said another way, right? If we get scale, I think 20% of revenue, right, that's 50% to 30% , you should see scale in the business as hundreds of millions or more of revenue come on over time.
That's where we see it. You know, the SG&A has all the labor for retail, so that's not so scalable. The EBITDA essentially has, you know, the cost that it has. It's really the production facilities and all this CapEx spend that takes a while to hit the revenue line that then doesn't increase the spend and then flows through. Do you want to hit the other income item?
Yeah. I think, Andrew, you know, you referenced the $4.5 million adjustment. You know, look, GAAP's an interesting animal. You know, the adjustment you're referencing was non-operating, non-cash. You know, just giving the GAAP nature of our P&L. You know, we've got a number of things that roll through there in terms of contingent liabilities, you know, as well as just other business items that, like I said, are not operating and non-cash related, that roll through that other income expense line item. You know, our footnotes will have additional detail, and you'll be able to track it. You know, I mean, look, we're a bit old school in this.
We look at our adjusted operating EBITDA. We look at cash flows from operations. You know, I think anyone that's kind of, you know, going through this knows that unfortunately GAAP is not always kind of the best metric to use when assessing kind of the financial performance of the business. You know, that $4.5 you referenced was non-cash, non-operating.
Thanks for taking my question.
Thanks.
Our next question comes from Ty Collin with Eight Capital. You may now go ahead.
Hey, Ben. Thanks for taking my question. I'm just wondering if you could talk a little more about the opportunity you see in Minnesota and the thinking behind the acquisition there. I mean, is that primarily to get in ahead of a potential flip to adult use, or does Minnesota's medical market kind of stand up by itself, with flower and edibles coming online later this year? Like, how good is the return profile in Minnesota, even absent adult use? Thanks.
Great. Great question. You know, excellent, and then it could be even better. We underwrite it as simply as what's the demand, what's the supply? Supply, demand. You know, what's our edge? What's the product? You know, all the other sort of, like, competitive setups here. But even if there's more operators in the state, we think that for six million people's demand now, to your point, is it rec or medical? Without any political insight, rec is coming. Why would it not? It doesn't make any sense to us for it not to. Now, you need political will, and you need several other things, but Illinois is gonna collect $500 million in taxes. There's hundreds of millions of dollars being spent in places like Ohio, Virginia, Illinois. It's quite a good economic stimulus program. It provides a lot of jobs.
There's a lot of organized labor that can come in and construct these facilities. We're not underwriting it based on which session or which politician. We're underwriting it based on the U.S. consumer wants cannabis for well-being. People want to sleep better. People want more well-being. Everybody hates being hungover. It's just, like, so obvious. We think that it continues. In order for the $25 billion to get to $75 billion, somewhere, some of the states like Minnesota, New York, New Jersey, Virginia, all these have to actually turn on and go forward. We think it goes up and to the right over time. We're in no rush. We've got a lot of work to do. We bought a facility, thought it the exact way that we would run it. Things are upgrading. Flower's hitting the market this week, we're very excited about.
There's a lot of work to do. We see unbelievably attractive return on invested capital, even incremental capital into the Minnesota market out into the short and medium term. Why would we not? How big is the market there gonna be if Colorado's $2 billion? There's a lot of operators in Colorado. Pricing is different, but something pretty big. Does that make sense?
Yeah. Thanks, Ben. Yep, yep. Appreciate that. Thank you.
Great. Again, flower hitting the market is a big deal when six million people have never been able to buy flower, and now you can buy flower. I just, I wanna reiterate, that's a big deal.
Our next question comes from Andrew Semple with Echelon Capital Markets. You may now go ahead.
Great. Good morning, everyone, and congrats on the solid quarter. You know, appropriately timed question here. I wanna follow up on that, dried flower, comment. We've seen regulatory approvals for dried flower occurring in several of your medical markets, including Virginia and New York late last year, Minnesota today. Just want to, you know, gauge how the patient response has been to dried flower in Virginia and New York so far. Are you seeing the same level of uptake in those two markets that we've seen, you know, in some of the other markets across the U.S., such as Illinois, Pennsylvania, and Florida? Do you have any early indications for Minnesota, as to the demand there? Has there been any sort of early registrations or, you know, patients signing up in queue this morning?
Any color there would be helpful.
Yeah. Good question. There's anomalies within all the markets that you just kind of referenced. Let's start with New York. You asked if we saw, you know, an inflection effect when flower went live. What's unique about the New York market is that there was a quasi flower product in advance, available in advance of whole flower. We did see kind of a pickup in the retail side of the business. You know, it wasn't as dramatic as we've seen in other markets like we did in California and Pennsylvania when that went live. That was just because, like I said, there was like a quasi flower product already. Minnesota, I mean, literally today is day one, call it, or, you know, I guess technically there was, you know, yesterday.
TBD, very early to kind of state there. I guess we'll get a read probably by, you know, within the next hour or two on how things are going. You know, then in Virginia, you know, look, we did see a pickup. You know, one of the issues in Virginia is that the patients, there's a number of patients, I think close to 8,000 now that have applied for their medical card, but have not yet received their medical card. That's really kind of the glut in the system right now. It's just an administrative kind of work that needs to kind of work through.
You know, my guess is once we see kind of a more normalized patient count, we'll actually see kind of the true impact of flower, which is given kind of a muted patient base. It's difficult to draw kind of meaningful conclsions there. Again, you know, eight million-person state, very bullish on the long term, you know, and excited about where things are going there.
Great. That's helpful on the dynamics. Thank you, Anthony.
Our next question comes from Scott Fortune with ROTH Capital Partners. You may now go ahead.
Hey, good morning. This is Nick stepping in for Scott. I was just wondering if you could provide a little more color around the recent industry-wide vape recall in Pennsylvania and kind of the state department's process there. It looks like your competitors were disproportionately more affected than you were, which may have opened up some additional market share opportunities for GTI. Any update there would be helpful. Thank you.
Sure. For everyone's benefit, you know, what we're referring to here is there was a vape recall in Pennsylvania. Zooming out, you know, we produced really two lines of vape out of our wholesale facility. We have our RYTHM full spectrum CO2 vape pen that's been on the market since really inception. We also have a new line, our &Shine distillate line. That was very new. You know, that effectively has been on the market for less than a month. It's the &Shine distillate line that was impacted by the recall. It was relatively nominal in nature. You know, I think really just luck would have it, we just started to kind of ramp production on that.
In terms of what we've seen, I mean, look, obviously a lot of people have kind of scrambled to kind of satisfy the market needs. We're one of them. The team is doing a great job of just kind of adjusting real-time, working to kind of increase throughput, just given some of the short-term kind of supply challenges that we're seeing given the number of products that got pulled off the market.
I think it's premature to kind of say, "Hey, are we gonna be able to grab share in this kind of situation?" I think right now what we're trying to do is really just service the market, kind of help out our partnerships across the retail store base there, and just make sure we've got a healthy chunk of vape on the market for all the PA vape consumers. Stay tuned. We'll see what happens and if this thing kind of shakes its way through and if there's kind of a you know an amicable resolution. In the meantime, we're gonna continue to kind of you know really diversify and focus on our RYTHM vape line. It continues to perform exceptionally well, and we've got big expectations for the current year.
Great. Thank you. I appreciate that color.
Our next question comes from Mike Hickey with The Benchmark Company. You may now go ahead.
Hey, Ben and team. Congrats on the quarter, guys, on revenue. Just curious on, I guess your updated view of the beverage category. I think it's been about a year since you initially sort of introduced us that you'd be going into the category. Obviously, you've done a lot since then. Curious your learnings so far, the relevance of the category and sort of the maybe the price margin mix as it becomes, you know, a bigger piece of your business. Thanks, guys.
Sure. Thanks for the question. This is Ben. Just before I address your question, just on the PA vape ban to the last question. You know, the strategy and the thinking is kind of we're all in this together. This is not an opportunity for Green Thumb to step ahead of somebody or something like that. Nobody likes a surprise. We're all trying to serve patients who wanna feel better. This is crazy to happen like this, but everybody's dealing with it together. We really are in partnership with the industry to sort of fill the stores, make sure patients get what they need, and sort of continue to adjust. This is not a dog eat dog and pound on our friends situation. Everybody wants safe, healthy vaping, and consumers tell you what they like.
This caught us a little bit by surprise around here, to be candid. In terms of beverage, still a very small part of the category mix, the basket, you know, 1%-ish. Some markets it'll creep higher. To the last point, you know, when does it become part of the business to actually think about its impact in the P&L? Doesn't. However, I think it's a very unique product from a who the consumer is that uses it, what the use case is, what it can substitute against, and what it does for on-prem and social consumption. We continue to invest, watch, study, be close to the consumer. I mentioned the on-prem, we'll have more of those opening up. We believe cannabis is an experience business, and we continue to invest in that.
The dollars and cents of can or any other beverage in the business or even in the industry is not yet super material, but you never really know. We view it as a bet on the future and an understanding of who the consumer is, how, why, where, and the experience is quite good. Again, I still haven't found anybody who likes to be hungover, and this can offer a lot of some of the benefits without a lot of the downsides.
Nice. Thanks, man. Obviously, you guys are pretty focused here, but you do have a lot of retail. You're national. You serve a lot of markets. You've scaled in manufacturing. I mean, do you sort of look at or at some point look at products potentially outside of cannabis, something ancillary to drive growth? Thanks, guys.
We try to stick to our niche, do what we know, which is cannabis product, branded cannabis products. If something makes a lot of sense, we'll look at it. That's what we got.
Thank you.
Our last question comes from [Devin Doyle] with Clover Investments. You may now go ahead.
Hey, Ben. I understand where we are, you know, with the state-by-state issues and the competitiveness, also where we are in the consolidation cycle. I just wanted to know if you could give me some more color on the vision of the wholesale operation once we see legalization and interstate commerce. I just want to know, do you have the cultivation capabilities to provide for the nation, and do you intend to export in the future to other countries? Thank you.
Sure. Thanks. Yeah. Good opportunity to just reiterate. What we do on the flower side is high-end indoor premium flower. We don't view ourselves as a, you know, supplier of commodity cannabis to input to the market. So no, I mean, if all of a sudden 300 million Americans could buy our product, we don't have enough product for the states we're in. We don't have excess inventory. I want to back to one of the questions, really, like, I think it's up to all of us to examine the inventory line items here and see what's going on. But if you think something's up here, let me know, but we're double, triple, quadruple-checking. We don't think there's an inventory issue. Therefore, no. If all of a sudden you can sell our flower, RYTHM to the country, there's not nearly enough.
That's not what we're up to. We don't see that coming today or tomorrow. That doesn't really bother us too much. Agai n, high-end indoor premium flower, we don't go top-down and say, "Here's how much the market needs, and here's how much we need to grow." We say, "Here's what $20 million can get us. Here's what $80 million can get us. Here's what $180 million can get us." What makes sense based on that market, the operators, the timing, the product, all of the other factors. We don't do things like supply the whole country. We do things like what's the return on invested capital based on the demand?
This concludes our question and answer session. I would like to turn the comments back over to Ben Kovler for any closing remarks.
Sure. Thank you. Thanks, everybody, for joining us. We'll be back with first quarter results in May. I hope everybody has a nice spring season. Thank you.
This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.