Ayr Wellness Inc.
Q3 2021 Earnings Call Transcript

Published: 22 Nov 2021

[Operator:]

Welcome to the Ayr Wellness Third Quarter 2021 Earnings Call. Joining us today are Ayr's CEO, Jonathan Sandelman; the company's CFO, Brad Asher; and the company's co-Chief Operating Officers, Jennifer Drake and Jason Griffith. The company will discuss forward-looking matters on this call, including targets for revenues and adjusted EBITDA. This forward-looking information is subject to the assumptions and risks as described in the company's management discussion and analysis for the quarter ended September 30, 2021. As well, we remind you that adjusted EBITDA is a non-GAAP measure. We refer you to the reconciliation to GAAP measures and other disclosure concerning non-GAAP measures contained in Ayr's management discussion and analysis for the quarter ended September 30, 2021. I will now turn the call over to Ayr's CEO, Jonathan Sandelman. Please go ahead.

[Jonathan Sandelman:]

Good morning, everyone and thank you for joining our conference call today. We have a lot to cover today in terms of our record results in our operations despite headwinds in some of our markets. Some very exciting milestones in our branded consumer business and our most recent acquisitions. We consistently see growing demand for cannabis but ebbs and flows in supply and demand create fluctuations in pricing. Taking a step back, increases in supply and cannabis are often responding to anticipated demand catalysts like adult use legalization or the timing of dispensary openings. Supply is there for good reason. But when supply outpaces demand, you could see near-term price fluctuations. We said again and again that we seek to be the largest scale cultivator of high-quality cannabis in the United States. First and foremost, we want to produce the best product for our customers because in cannabis, it's all about what's inside the box. We have seen a high-quality flower maintained price across the market. In our experience, quality serves as a mitigant to price volatility but it does not eliminate it. And across the history, brand loyalty is another way to mitigate price volatility. In our business, we have tried to carefully plan the timing of capacity additions in our key states to match the anticipated increases in demand from the broader market in our own stores. Vertical integration is a real benefit to help balance out ebbs and flows in the wholesale market as we can redirect products through our stores when the wholesale market is soft. The supply and demand imbalances that have recently impacted outsale prices may be transitory, where they may persist into next year. We want to emphasize again that supply exists for a reason. Adult use demand is around the corner in Pennsylvania, New Jersey, Greater Boston and Florida. Because of these temporary timing mismatches, prices may continue to be volatile this quarter and perhaps in '22. As we've said before, quality and branding mitigate these impacts which is why we are excited to introduce you today to an updated Ayr house of brands. The unveiling of our new corporate retail and CPG brands represent the next phase in the evolution of our company with brand design to represent the quality of what's inside the box. Our well-calibrated portfolio of power brands which consists of kind premium flower, origin extracts stick free roll company and levy and fuse felter reflects the very best of cannabis and are developed from data-driven, consumer-centric insights. They represent leading market categories for current and future consumers. Alongside being the highest quality which is why we have invested the bulk of our marketing and resources into building and scaling these brands across key markets. We are also unveiling a selection of core national brands to offer a variety in form, dose and experience. These core brands address large audiences in the same power categories but in a much broader facet. We are starting from an already strong foundation with strong existing wholesale businesses in Massachusetts and a growing business in Nevada, Pennsylvania and Arizona. We ended the third quarter with our products in over 350 doors, up from 100 at the beginning of the year. And while I'd love to walk you through the entire portfolio in this call that is more than we have time for this morning. So please have a look at our new website and an Investor deck which showcases the brand in detail. Last, we are unveiling today an updated Ayr retail concept and corporate brand. We've built this retail concept bring intentionally for the customer experience in our stores to reflect the quality of our products and our commitment to our local communities. At Ayr, we are committed to thinking long term. We understand that brand building in this industry is still in it's early stages but the reasons that we've committed to this path is because we know the great product and great brands, create their own categories and consumer segments. And we continue to invest in our quality, our brands going forward. With that, I'll turn it over to our Co-Chief Operating Officer; Jason Griffin, who will walk us through the details of how we are building the foundation for this new house of brand.

[Jason Griffith:]

Thanks, John. With the rollout of our new national brands, executing against our goal of being the largest scale producer of high-quality cannabis flower in the United States is more important than ever. Consistent quality across markets is critical for brand building. We continue to make major investments in our cultivation, operations, facilities and talent to build that foundation for successful brands. We have several large capital projects ongoing in Massachusetts, New Jersey, Pennsylvania, Ohio, Arizona and Florida. All in, when these projects are complete, we will be doubling our cultivation and production square feet from 554,000 to 1.2 million square feet and tripling our biomass capacity from just under 100,000 pounds annually to over 300,000 pounds, all in support of our national brands. As you can imagine, given the ongoing supply and labor shortages, port delays and other factors, we have seen some projects delayed even beyond the cushion we previously factored in. In particular, our cultivation projects in Massachusetts, New Jersey and Ohio are likely to slip a quarter versus our prior plans but we are pushing to move them forward as quickly and efficiently as we can. We invested close to $27 million in the third quarter in CapEx and plan to spend another $125 million to $150 million over the next 12 months to complete these and other projects. Just as important, we hired several senior people in LEAN manufacturing, purchasing, production and quality control to lead this process. We have also centralized and created a national wholesale platform to streamline our sales efforts. I want to spend some time specifically on Florida since it is our largest cultivation and the one we get the most questions about. We continue to make steady progress on the cultivation there including physical improvements such as new lights and panels and process improvements like implementing our SOPs and quality controls. These improvements have resulted in increased yields and better quality flower in terms of THC content and terpene profiles. As you can imagine, summer is the hardest time to grow in hot humid Florida. So progress is not always in a straight line but the overall trend is up and we are now consistently harvesting 22 strains. This fall, we also planted our first 10 acres of hoop houses which will significantly increase our biomass production beginning in early 2022 and leave more of our hybrid greenhouse space available for premium flower cultivation. We have another 10 acres set to come online in mid-2022. This increase in supply is critical to bringing our product mix, inventory and retail productivity to a level we can be proud of which brings me to the retail business, where particularly in Florida, we continue to expand our footprint. Overall, we are now operating 65 dispensaries across our 8-state footprint, 42 of which are in Florida. We are targeting 50 Florida stores by January 2022 and have LOIs or leases on an additional 15 bringing us to at least 65 by the end of 2022. As we unify our retail stores under the new Ayr brand, we will be bringing the best retailing practices from across our markets to our full retail portfolio to drive improved store level productivity and margins. With five of our eight markets yet to convert to adult use, we see retail as a tremendous growth opportunity for years to come. In the near term, retail growth drivers will come from the launch of our flagship adult-use stores in Greater Boston early next year, followed by the adult use conversion in New Jersey. In Florida, while productivity per store is not yet where we'd like it to be given supply constraints, we know that it is only temporary. So securing the best locations now in this market before adult use is the priority. We will look to convert those 50-plus stores to Ayr branded stores in 2022. Now, I'd like to turn the call over to Brad to run through the third quarter financials.

[Brad Asher:]

Thanks, Jason and good morning, everyone. Q3 sales increased $4.9 million to $96.2 million, representing an increase of 111% over prior year and 5% over prior quarter. This was driven by organic growth as well as the 15-day contribution from the New Jersey acquisition which closed later than expected this quarter on September 15. When removing the New Jersey acquisition from our Q3 sales, we still recognize sequential growth in both wholesale and retail during the quarter that was largely flat based on available third-party data. Adjusted EBITDA for the quarter was $26 million representing a 40% increase over prior year on an apples-to-apples GAAP basis and a 5% decrease over prior quarter, driven by an increase in SG&A which I will get to in a bit. Adjusted gross profit increased to $56.6 million for the quarter compared to $28.6 million in prior year and $53.1 million in prior quarter. Adjusted gross profit margins of 59% represents a 70 basis point sequential increase from prior quarter. The increase was largely driven by the continuous improvement and automation on the COGS side, in addition to the normal course fluctuations based on inventory flow-through as well as product and market mix. Overall, we believe our consistency and adjusted gross margin percentages speaks for itself. And while we expect a minor dip over the next one to two quarters, we anticipate maintaining an attractive margin profile through '22, although we acknowledge this will be dependent on market dynamics. SG&A expense has a percentage of sales at 33.6% represents a sequential increase of 322 basis points from prior quarter. The increase was largely due to our continued investment in building out infrastructure, including the addition of approximately 300 employees, representing an increase of nearly 20% across our workforce during the quarter. While we expect operating expenses to increase on a dollar basis as we continue to expand our footprint, we anticipate a minor increase as a percentage of sales in Q4 of this year before this begins to decline gradually in '22 as we build more leverage throughout the year. The temporary increase is expected here ahead of increases in revenue as we continue to build scale and depth in our existing markets while expanding in new markets. Lastly, we ended the quarter with $94.4 million of cash on hand which is inclusive of $50.7 million of proceeds from the cash incentive on warrant exercises offered during the period but does not include the $150 million debt financing which closed earlier this month, further strengthening our capital position to fund our growth initiatives. In Q3, we had positive operating cash flow by managing working capital across operations. We will continue to make an investment in building up the inventory as our cultivation facilities and new stores come online throughout '22. We expect to consistently generate significant cash flow from operations once the cultivation facilities are online and contributing sales in '22. In Q3, we paid $76.2 million for investing activities which will drive future EBITDA. This comprised of $26.9 million of CapEx to advance our cultivation projects across nearly all key states, along with approximately $49 million paid in the quarter through New Jersey acquisition, inclusive of purchase consideration and bridge financing. The investment we are making in the business today, a way of technology, corporate infrastructure and compliance readiness will prepare us for the step function in revenue next year. We feel more prepared now than ever before and I'm excited to continue this once in a lifetime journey. With that, I'll hand it over to our Co-COO, Jennifer Drake.

[Jennifer Drake:]

Thanks, Brad. We've had an incredibly transformative last 12 months in terms of increasing our total footprint and growth. We've expanded from two states to eight, increased our retail presence from seven stores to 65 and tripled our cultivation capacity. Having recently added $200 million in cash to our balance sheet, $150 million from our senior notes and $50 million from the cash exercise of our warrants, we feel confident in our ability to continue our growth driven by investments in footprint, M&A and expansion projects. But the most important assets to drive this growth are our people. This year alone, our headcount has grown from 700 at the start of the year to over 2,000 people today. The hardest part of scaling any business is finding the right people to lead growth and improve the business with the right controls and standards in place. To that end, in the past six months, we've added over 20 senior people in operations, marketing, IT, HR and other corporate functions. Our corporate SG&A expense has increased as a result of these critical additions and ahead of major expansion projects coming online in the next few quarters. This is an investment well spent and necessary for long-term success. The operating leverage of our corporate SG&A will be evident in 2022 as our investments in footprint and brands supported by the corporate SG&A investments begin to generate material revenue. Looking at the fourth quarter, we anticipate top line growth of at least 10% sequentially, despite the supply/demand imbalances that John mentioned earlier, particularly in the Massachusetts and Pennsylvania wholesale markets. We continue investments in support behind our brands. And with that in mind, we expect fourth quarter adjusted EBITDA to remain relatively flat compared with the third quarter. Because this price and supply volatility may persist into 2022, we think it's prudent to introduce a range into next year's expectations for adjusted EBITDA. We are now forecasting 2022 adjusted EBITDA of $250 million to $300 million compared to our prior forecast of $300 million. This range also reflects the delays Jason mentioned earlier on some of our capital expansion projects, where it's important to highlight three things

[Jonathan Sandelman:]

Thanks, Jen. We have built our company from day one to withstand headwinds. We have extremely strong foundations in our team, our culture, our systems and controls and now our brand. We are ready to launch the next phase of the evolution of our company. Building leading CPG brands is not easy work and this is not a task we have taken on lightly. Quality at scale is what we've built this company's infrastructure to deliver and now we're building the brands to put that quality in the box for our consumers to enjoy. We put a lot of thought, research, investment and effort into our decisions around branding to ensure we have the right products and assets to lead Ayr into the future as a leading cannabis CPG company. We will capitalize on the current market volatility and take the opportunity and expand our footprint as we announced today with two great new stores in Chicago. Consolidation within the cannabis industry, we believe, is being pulled forward. Companies like Ayr, with the resources to be the buyer of great assets in this environment are extremely well positioned to lead the industry into the future. In the cannabis business, conditions change day by day. The good news is, at Ayr, we have the people, the systems, the financial strength to pivot where needed and that when it benefits us and continues to drive exceptional growth and return for our shareholders. With that, I'd like to open it up to questions.

[Operator:]

Our first question comes from Owen Bennett of Jefferies. Please go ahead.

[Owen Bennett:]

Good morning, guys. I hope all's well. And I actually had a couple of questions. So First one is just on the pricing pressures you've been seeing in some of your markets. Can you maybe give some indication, please, of how much pricing is being pressured at wholesale. I know you said you think it may continue into 2022 but do you think the pricing could get even worse? That's the first question.

[Jonathan Sandelman:]

What isn't Jason, why don't you address that question, please?

[Jason Griffith:]

Owen, thanks for the question. So in terms of pricing pressure, we're seeing downdrafts certainly in Massachusetts, Pennsylvania and Nevada as well. I think what we've seen is a significant increase of supply coming into the market and we've seen customer -- or competitors start to really push that pricing lower as they're trying to move more products. So we've seen in the neighborhood of 10% to 20% decreases. And it really depends supplier by supplier. And it appears to us that it really is more of a company-by-company occurrence. And this may continue, in our opinion, throughout the first quarter potentially a bit longer. But we see it potentially abiding towards later in the year.

[Jonathan Sandelman:]

So Owen, this is Jon Sandelman. Let me follow up with saying -- We're -- in my view, what we're seeing is a temporary supply and demand imbalance. We're choosing in the fourth quarter instead of participating to what we think is a temporary rational behavior but to take our new power brands and the quality that we strive to grow and produce and simply hold that supply that we have into the first quarter when we'll have nine stores in Pennsylvania and adult-use stores in Massachusetts. And so we made a business choice. We have the ability to sell it through retail in the first quarter or participate in the rational temporary behavior of some of our competitors.

[Owen Bennett:]

Okay, very clear. And that just takes me on to the next question around the new brand portfolio to the power brands and the core brands. Just on the power brands, how much of a premium generally will they be priced versus the core brands. And do you plan to have the entire portfolio of power brands in every state you are in?

[Jonathan Sandelman:]

So the answer is that we'll have our power brands in every state we participate. You can see in our numbers. From the beginning of the year, we were in 100 stores and now we're in 350 stores. So the power brands will be, not only in the Ayr stores but will be in our wholesale customer stores. The second part of your question, I'm sorry?

[Owen Bennett:]

I was just wondering then you're obviously going to have the core brands as well. I mean, what's generally going to be the pricing difference between the power brands which are probably at the premium space or the core brands more value-focused or they sort of mid-price focused does it depend on which state.

[Jonathan Sandelman:]

So what we said on the call and what we see every day that quality in our power brands speak to the quality of the flower that we grow, right and the products we make. Premium products, premium flower in every market that we participate in is a price mitigant to pricing volatility. So the best quality products in every market we participate have been able to maintain and command a premium. That premium is different in each marketplace. So I don't have a general overall percentage for you but that is true in every market that we ever had.

[Owen Bennett:]

Great. That was very helpful. Thanks, guys.

[Operator:]

Our next question comes from Matt McGinley of Needham. Please go ahead.

[Matthew McGinley:]

Great, thank you. So on the fourth quarter guidance, I'm a little bit surprised the top line guidance only calls for 10% top line growth given you've already added the three very high-volume dispensaries in Pennsylvania and you have that full quarter benefit from the asset acquired in New Jersey, will the revenue actually be down in some of your core states like Massachusetts and Nevada in the fourth quarter.

[Jennifer Drake:]

Matt, thanks. So what Jon had said before, we'll just reiterate we are making a choice regarding whether we want to participate in the wholesale market at some of these lower price points or whether we'd rather hold our brands for what we see as increased demand, whether it's more stores in Pennsylvania in Q1 as we get to nine or adult-use stores in Massachusetts, for example. So we are having less wholesale revenue but modest same-store sales growth in retail and obviously, some acquisitions.

[Jonathan Sandelman:]

So Matt, it's Jon. If you think about our business plan in Massachusetts previously, we had a significant wholesale business because we didn't frankly have adult-used stores. But we do today, we will, in the first quarter, have adult-use stores. So now instead of having one major channel to sell our products in which was wholesale; we now have two. And so simply, we can asset allocate in a way Ayr has never been able to do before. So again, what I said is we can participate today in what we think is irrational behavior by a few or simply hold that inventory of quality products. And pulled a level we never had before which is simply selling into our adult-use stores which we expect the volume to go up exponentially. And it's a rational business case; this is a long-term business. I could do something to participate irrationally or I can simply take that product and sell it a major premium one month later or two months later.

[Matthew McGinley:]

Okay. I appreciate that. And then I guess my second question is on the '22 guidance. I appreciate that you guys even give '22 guidance but you stated that the wholesale price volatility will be a factor in the lower EBITDA guidance but why wouldn't that also impact revenues, I guess, or just with all the other projects you have coming online and the incremental M&A, did that make up for any softness you might see within that -- within the wholesale business? And I guess on top of that, do you still think that you could have six states with $100 million in revenue in '22? Or are some of these delayed cultivation projects in New Jersey and Arizona are likely to keep that number under the $100 million mark into next year?

[Jennifer Drake:]

There are a number of things going on in revenue that keep us comfortable -- that keep us comfortable in that with the 800. For example, we've added more stores in Florida than we initially expected with respect to the initial guidance that we put out some time ago to give people a sense of the earnings power of our business which really is the point of our guidance because our business has gone, as I said on the call, there's such a transition over the last 12 months, we really thought it was important to give people a sense of what not meant in terms of numbers. So in terms of revenue, the things that keep us comfortable with the initial guidance that we provided are we have added a lot more stores in Florida than we initially expected. We've added additional croup health capability in Florida which we did not initially expect. We've added more non-vertically integrated stores -- offered stores in Illinois. All of those things add more to revenue related to EBITDA because as you know, our Florida business is still kind of ramping up. Those four wall stores have a little bit lower four-wall EBITDA than an average across the platform and things that serve non-vertically as great as retail stores in Illinois also lower EBITDA margins that are contributing more to revenue and to EBITDA. And the other thing to remember is when we have these delays in our paid capital expansion project, we're going to be buying at wholesale for longer and selling that to our retail stores and now contribute to revenue and be less contributing to EBITDA.

[Matthew McGinley:]

Great, that's very helpful. Thank you.

[Operator:]

Our next question comes from Russell Stanley of Beacon Securities. Please go ahead.

[Russell Stanley:]

Good morning and thank you for taking my question. Just wanted to dive in a little more on Massachusetts, you're now on 137 shelves there with Milford expansion coming online. I just I just wanted to get a sense, I understand the decision to hold off focusing on wholesale into early next year with the expected your own retail going to . I just want to get a sense as the expected market reception for that additional expansion in Milford and the extent to which you pre-marketed that capacity and how you plan to bring it online once construction is complete, do you anticipate phasing in that production? Or do you have demand or anticipate demand to take all of it?

[Jonathan Sandelman:]

So thanks for the question, Russ. I talked about in my opening remarks about what we feel is a temporary imbalance between supply and demand in the industry. But the reality is at Ayr, we're actually short product. So we've managed our supply demand imbalance. If we didn't bring on M3 and the adult-use stores came in, it would in fact eat into our wholesale revenues because we wouldn't have enough supply. In Pennsylvania, we are short supply with nine stores in the state and looking at the potential in 2023 of adult-use. In Florida, today, we don't have enough product, we're building capacity and efficiencies to supply the increases we are achieving in the retail opening. So yes, we talk about a temporary supply and demand imbalance in the industry because you have to build supply ahead of the catalyst which is adult-use happening in several of our states in five of the eight states that we're in. We have managed that supply and demand very carefully so that we can maintain the pricing on our premium brands. Why spend the money in time building brands to simply discount them as soon as you build it. And when I talked about the new brands we've built and delaying by several weeks selling those brands that we built as premium as discounted brands in the fourth quarter by simply moving them out in a few weeks. Ayr achieves higher revenue, higher EBITDA. But most importantly, for the long term, we maintain the franchise value in those brands that we've worked so hard to create.

[Russell Stanley:]

Great. Maybe if I can move on to Ohio. I think this is one of your more overlooked markets but you've got multiple utilization efforts underway and a bill that would expand the medical program substantially. I'm just wondering, is this market becoming more of a priority than active on M&A in Illinois but on Ohio, just wondering what the opportunities are there, if you can say, speak to your participation in the licensing round and/or what you're seeing on the M&A front given this market's potential growth?

[Jonathan Sandelman:]

So I'll start off and then Jen can add some comments. Ohio, while we always had a high expectation for this data has 11 million people, was a conservative state in terms of it's regulatory restrictions. That has changed recently and it has changed rapidly. The per square foot that's going to be permissible in cultivation is expected to increase. We've seen this in many medical markets. They start off conservatively. And when they add chronic pain as one of the elements, then the market tends to really increase in size. Yes, we are participating in the licensing round because we've always said we will be vertical in every state we participate because we care about the quality of the products we put in our box and we can only ensure that to the consumer when we control the entire process. Jen?

[Jennifer Drake:]

I think Jon hit on most of the things that I was going to highlight. We've always think it's going to -- thought it's going to be a great statement a little bit slower. I mean it's the same population as Pennsylvania essentially. And as the legislature becomes more open to cannabis, things may move faster. So 100% participating in some of the conversations with the legislature very involved as one of the few Tier 1 cultivation license holders. So it's definitely a state we're focused on. And as you will lead to us, it may move faster than previously expected which is great.

[Russell Stanley:]

Excellent. Thanks for the color. I'll get back in the queue.

[Operator:]

Our next question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.

[Matt Bottomley:]

Good morning, everyone. Thanks for all of the color and commentary this morning. Just wanted to go back to one of the comments and questions that Matt had a couple of comments to go just on the revenue guidance of $800 million. Just looking at your run rate exiting the year, using your Q4 guidance is about $420 million or somewhere around there. So I'm just curious if we can get any more commentary on elements within your forecast that maybe are -- that are independent of your own execution and are in your control. So when New Jersey ultimately turns online, the first sales out of your Massachusetts developed used stores, just things that might be more material to the assumptions that go into that $800 million versus what's open and operating already today.

[Jennifer Drake:]

So the biggest drivers in our 2022 have always been our cultivation pipelines coming online according to our time frame which we've discussed the turning on of adult-use in Massachusetts and Pennsylvania which were sorry, I said Massachusetts and Pennsylvania, I meant Massachusetts and New Jersey -- sorry, in Massachusetts and New Jersey. In Massachusetts, our timeframes are two stores in Q1 as we've talked about many times, there's no change to that. And this third store is a little bit more uncertain up in the air and Somerville as I think every analyst on this call has had a conversation with us about. So there's really no change to our expectations in Massachusetts. And in New Jersey, we still expect sometime early in Q2 with respect to adult-use. Brad, do you want to add something?

[Brad Asher:]

I want to add something. Well, Jen's talking about the third store, that store has a run rate of a medical store of $20 million. So in -- versus most adult-use stores in this date, it's outperforming at a medical store versus their adult-use stores and versus adult-use stores around the United States, a $20 million run rate is superior. So I'm less concerned about the third store because of it's absolute performance. The big kick here is the Boylston store and Watertown stores.

[Matt Bottomley:]

Okay, great. That's all great details. And then just my second question here, just sort of more from the philosophy of management here when it comes M&A. So clearly, you have a very attractive portfolio here and materially different from where you were a year ago. So just in terms of spending time focusing on integrating and growing what you have versus more M&A opportunities. I'm just curious what we might anticipate from you guys going forward here. Clearly, you've gone deeper in Pennsylvania and then this morning in Illinois. Are you looking to kind of round out where you are already? Or are there additional markets in the next quarters or year here that we might expect you to enter?

[Brad Asher:]

So what I've always said from day one is that we are going to run the most operationally efficient business. And that doesn't necessarily mean to be in every state in the United States. We've always taken a very focused approach on share of wallet. And we've said in the past, 12 states roughly will represent 80% of the consumer wallet and we want to be in those states. So are there more revenue -- or sorry, M&A opportunities within the states we are in today. The answer is in some, yes. Are there more M&A opportunities available in other states since we're only eight states. The answer is yes.

[Matt Bottomley:]

Okay. Thanks, again, all.

[Operator:]

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

[Andrew Semple:]

Good morning and congrats on the third quarter results. First question here would just be on the EBITDA margins. Your guidance towards higher sales in Q4 but flat EBITDA sequentially, implying some pressure on the EBITDA margin profile. Just want to get a sense of what's the bigger driver there. Are you seeing any pressure on gross margins given the pricing environment or is it more on the OpEx side related to the investments you're making into the business?

[Jonathan Sandelman:]

Yes, thank you for the question. So looking at the margins, I think it's important to also recognize the contribution from retail and wholesale in each of those quarters. So for Q4, our retail contribution is actually increasing, mostly that as well in Q1. It's not until Q2 and Q3 when our cultivation capacity comes online that you actually have that massive benefit to margin. I think it's important to understand the magnitude of the cultivation capacity. So Jason mentioned going from 100,000 pounds to 300,000 and that really drives margins through the business.

[Andrew Semple:]

Right. So just to clarify there, it's your retail store running ahead of the cultivation capacity coming online.

[Jonathan Sandelman:]

Correct.

[Brad Asher:]

And having to buy in the hotel market instead of being vertically integrated.

[Andrew Semple:]

Got you. Great, that's helpful. Second question here. I appreciate the color in the prepared remarks on the supply chain challenges impacting the CapEx projects underway. Just wondering if there's any of the facility build-outs in particular that have seen setbacks or are you generally experiencing this across all of your CapEx projects underway.

[Jennifer Drake:]

I would say there's no -- it's a little bit across the board. It's not as if there's one project that's materially delayed. And as we said, we really do look to build cushion into these projects. And it's just as everyone in the country and everyone in the world has experienced, they're just things that push things back a month, a month, a month and then at some point, you get to the end of your cushion. And so we wanted to just let people know where we were and the expectations change.

[Andrew Semple:]

Understood. Appreciate the color. Thanks for taking my questions.

[Operator:]

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

[Scott Fortune:]

Good morning. Thanks for the questions. You mentioned New Jersey is a key state; can you provide a little color? I know you have timing coming on board 2Q '22 here. But for that market, kind of the sell-through currently, the product with the three stores currently in place and the mix of wholesale. And then how do you -- are you starting to build inventory ahead of logos? How can we look at New Jersey, you fell through currently with wholesale coming on board more in Q2 '22 here.

[Jonathan Sandelman:]

Yes. So in terms of our mix today, we do not currently have a wholesale business in New Jersey. It's 100% feeding our stores and we're going to have that temporary period where we're going to have to buy in the market until our cultivation capacity comes online when starts. So until that happens, we're going to -- we're not going to have a wholesale business until that cultivation capacity comes online which is Q2.

[Scott Fortune:]

Okay, I appreciate that. And then looking at West, the Western State Development in Arizona, we've seen a lot of pricing pressures there. What are you seeing from the data, the volumes and transactions? Are those holding up despite the pricing How you guys kind of look at those markets going into 4Q and then keep here the softness of pricing is more transitory here. Just kind of more color on the volume and transactions you think from that standpoint.

[Jennifer Drake:]

Sure, sure. In Nevada, we're a net buyer because our retail stores are so productive. So we see both sides of that and our Nevada business continues to be such an engine for us overall. So I would say we're -- our Nevada business has -- is a perfect example of that balance that Jon mentioned earlier, where we have both -- we have both the capabilities to go into the wholesale market and sell in wholesale, if that's a better option for our capacity and that capacity by the way, is going to increase very shortly, materially by adding Tahoe Hydro which should close beginning, we think, early next year. So that's great and only increases our flexibility and we can go -- and we can go into our retail market as well which is, as you know, excellent, excellent, excellent Nevada.

[Jonathan Sandelman:]

So I want to add to that. The Nevada question is an interesting question, right? So we talk about quality flower in every market we participate is a price mitigant because price quality sells at a premium, right? So when you think about what we sell into the wholesale market when we sell our flower, we sell all our Kynd flower which trades today at about a 25% premium to the current market wholesale market. So again, we grow quality, we sell it at a premium. That's our wholesale business there, okay, when it comes to Flowers. Tahoe Hydro, the acquisition that we made is considered one or the premium flower in the state which consistently sells at a premium. I'll say one more time, premium is a price mitigant, premium quality, trades at premium price. And now in Arizona, we introduced Kynd flower. And that also today, in a very competitive market is selling at a premium to the current wholesale prices.

[Scott Fortune:]

Okay. Thanks for the color. I'll jump back in the queue.

[Operator:]

Our next question comes from Howard Penney of Hedgeye. Please go ahead.

[Howard Penney:]

Thank you very much for the questions. I wanted to play Devil's Advocate for a second on your guidance; I think if I understood it correctly for the 2022 G&A leverage. I'm making the assumption that the investments that you're making which are necessary to this year, you get leverage in 2022 but you also have $200 million or thereabouts of cash on the balance sheet which means you're going to continue to invest in the business and geographic expansion which also suggests further investments in the business. So I was just -- maybe you can run through sort of the future growth of the company expansion in future states and leverage with G&A knowing that you need to make continue to make investments in the business to grow . I don't know if I said that correctly but anyway, I hope you understand.

[Jennifer Drake:]

Yes. We certainly expect to be investing in the business going forward in what we generally think of as footprint which means M&A expansion and capital projects. So that's deepening our presence in existing markets, it means expanding to new markets that we find attractive. So all of those investments in the business will absolutely have returns. And so that's why when we suggested that when we widened our band for our EBITDA guidance for 2022. That's why we said, while we want to be measured and prudent, we also see a very achievable path to the $300 million that we had previously guided to.

[Jonathan Sandelman:]

Howard, it's Jon. I'm not sure I understand your question but I'm going to try to answer it and it's not -- go ahead.

[Howard Penney:]

No. So I'm trying to -- this is a bigger picture question, right? You grew from three states to eight states in 2021, right? You're going to grow probably three more states in 2022 and those states will require further investments yet you're guiding to leverage on the G&A line. So I'm trying to balance the investments required in the business, the growth in geographic and the guidance for leverage on the G&A line. Does that clarify?

[Jonathan Sandelman:]

Yes. So Howard, the assets that we have today, we've talked about the CapEx and that's in the range of $250 million to $300 million, right. If your question is, "Hey, Jon, you have all this cash on your balance sheet. You've just told the growth that you're going to be in more states. How are you not including that in your EBITDA going forward?" Well, that's just not the way we forecast -- If the question is, will you be in more states? Obviously, we've stated yes. Do we have the capital to do it, yes. Will that drive EBITDA in the future, well, we like to think that we buy things at good prices that are going to create shareholder value. So the answer is yes, also. And of course, if it's something we haven't signed or already agreed to buy, we're not going to be included in the EBITDA at this point. But there should be an expectation that we will grow our footprint in '22.

[Howard Penney:]

Thanks . I appreciate it.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.