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spk01: Good day and welcome to the first quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your touchtone telephone. If anyone should require assistance during the call, please press star then zero to reach an operator. As a reminder, this call may be recorded. I would like to turn the call over to Lee Evans, Senior Vice President of Capital Markets. You may begin.
spk06: Thank you, Operator. Good morning, and thank you for joining ColumbiaCare's first quarter 2022 earnings conference call. With me today are Nicholas Vita, our Chief Executive Officer, David Hart, our Chief Operating Officer, Derek Watson, our Chief Financial Officer, and Jessie Shannon, our Chief Growth Officer. Earlier this morning, we issued a press release reporting our first quarter 2022 results, which we also filed with applicable Canadian securities regulatory authorities on CDAR and the U.S. Securities and Exchange Commission on EDGAR. A copy of this release is available on the Investors section of our corporate website, where you will also be able to access a replay of this call for up to 30 days. Please note that the remarks we make today regarding future expectations, plans, and prospects for the company, including statements relating to the Cresco Labs transaction, constitute forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, which we disclose in more detail in the Risk Factors section of our annual Form 10-K, dated March 31, 2022, as filed with applicable regulatory authorities and in subsequent securities filings. We remind you that any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update any such forward-looking statements in the future, we specifically disclaim any obligation to do so except as otherwise required by applicable law. Also, please note that on today's call, we will refer to certain non-GAAP financial measures, such as adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. ColumbiaCare considers certain non-GAAP measures to be meaningful indicators of the performance of its business in addition to, but not as a substitute for, our GAAP results. A reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today. With that, I will turn the call over to Nicholas Vita to get us started. Nick?
spk04: Thank you, Lee, and good morning, everyone. I'd like to thank you all for joining us this morning to discuss our quarterly performance, macroeconomic and state-level dynamics, and the operational opportunities, strengths, and headwinds we are encountering as we continue to execute against our strategic objectives. Before we jump into the results of the first quarter, let me begin with a quick update on our planned combination with Cresco Labs. As you may have seen via press release this morning, we did not receive a second request for more information under the Hart-Scott-Rodino review. As the notice period expired this past Friday night, this is a significant milestone in our progress towards close, and we're very pleased that we can now move forward knowing that this has been cleared. We are currently working through the proxy circular clearance process with the SEC, and once completed, we will move forward with the shareholder approval process. Additionally, I am pleased to report that we have officially initiated the divestiture process in the markets where we have regulatory overlap. We're in the early stages of that process, but our the definitive leader in the cannabis industry. We will share any material updates from the divestiture process when appropriate to do so. In the meantime, we continue to operate as a standalone company and are managing the business with prioritized emphasis on driving profitability while we leverage the capital investments we've made to optimize the near-term growth opportunities materializing throughout ColumbiaCare's portfolio over the next 12 to 18 months. Turning to the results of the first quarter, along with updates on more recent developments in our mid-term strategy, we saw more than 43% growth in top-line year-over-year, and although we declined sequentially due to factors ranging from market cyclicality to inflationary pressures impacting the consumer's wallet, performance was good on a year-over-year comparison. As the largest operator in Colorado, consistent with Q1-21, the expected first quarter seasonal weakness was particularly in the wholesale market, followed by followed the relative strength of Q4-21 that drove significant wholesale revenue and gross margin expansion for ColumbiaCare. As David will discuss in more detail, our wholesale revenue fell sequentially and underperformed in comparison to our internal expectations driven mostly by the greater than expected magnitude of the markets of locality during Q1 in Colorado and the decision to retain all inventory in New Jersey as it became clear that adult use was being activated towards basically the second quarter. There were other decisions that we made in response to the ever-increasing state-level complexity in the pricing environment, but we are up year-over-year in several key metrics. As we have been shifting our operational emphasis from revenue growth to profitability, we remain focused on driving margin improvement and are seeing the impact of our strategic plan. Even in a declining top-line environment, we saw gross margin improvement of 150 basis points sequentially and nearly 700 basis points over the prior year. Adjusted EBITDA margin improved more than 930 basis points over company towards generating free cash flow to fund our growth, strategically using internally generated capital rather than external capital to capture the enormous opportunities ahead of us. Derek will provide more detail on the financial results of the first quarter and our outlook shortly. First, though, I would like to focus on our discussion on the milestones recently achieved, which give us continued confidence in our growth plan and execution. Despite the complicated environment, we are on our front foot and leaning into the markets that will propel growth. As I've discussed in the past, our first growth pillar is growing our retail network in key markets. Although we won't see a full quarter's impact of these openings until Q2, throughout Q1 we successfully executed five additional store openings, including four in West Virginia and one in Virginia, bringing our Virginia total to four as of today. In the first quarter, we also converted two dispensaries to the cannabis brand, bringing us to 31 total locations under the cannabis banner out of 84 active retail locations. David Hart will share more detail on these openings as well as our other significant capital investment initiatives in just a few moments. Another significant component of our growth strategy is positioning ColumbiaCare in key strategic markets ahead of adult use adoption. As you know, subsequent to the end of the first quarter, New Jersey transitioned to adult use on April 21st. We were thrilled to be part of the day one adult use sales in New Jersey with our cannabis stores in both Vineland and Deptford seeing exceptionally strong store traffic and fervent community support that continues today. As of Q1, Virginia overtook Ohio in spite of Ohio's strong performance and is now one of our top five markets for both revenue and adjusted EBITDA for the first time. We have eight additional locations in development in Virginia and are excited to see that market growth accelerate when the new patient registration process takes effect in July. Columbia Care is exceptionally well positioned in New Jersey and Virginia as well as New York ahead of the significant market shift that is expected there. Other notable achievements during the first quarter included continued improvement in both cultivation productivity and potency, as well as continued brand strength. Our ColumbiaCare brands, such as Classics, Seeds & Strain, 777, achieved a record percentage of total sales and helped drive the sequential improvement in gross margin. As you can see from these accomplishments, we remain on a path to execute our strategies, and today we reiterated our guidance for the full fiscal year. As Derek and David will share with you, the market environment driven by it Magnet consumer, labor costs and shortages, and supply chain disruptions remains very, very difficult. In fact, even more difficult than at the end of last quarter. But the Columbia Care team continues to execute. We are confident in the catalyst and growth trajectory for the rest of 2022 and remain excited about the Cresco transaction, which will position our companies to be the clear leader in cannabis. With that, let me turn the call over to Derek. Derek?
spk02: Thank you, Nick, and good morning, everyone. I'll provide a summary of the key financial results for the first quarter and briefly address status of the proposed transaction with Cresco. As a reminder, all results are now in U.S. GAAP and due to the close of our Ohio transaction effective July 1st, 2021, starting in Q3 of 21, we no longer report quarterly combined metrics. So to begin with our results, revenue in the first quarter was $123.1 million, a decrease of 11.6% sequentially, and an increase of 43% year-over-year when compared with our results from Q1 of 21. The sequential decline was driven primarily by a shortfall in wholesale revenue, which was down 36% quarter-over-quarter, by far the key contributor being from our largest market in Colorado, and some seasonal aspects that we'll get into further. On the retail side, retail revenue was down 6% quarter over quarter, a mix of lower average transaction volumes and a slightly lower average basket size in a number of our markets. We anticipated much of this retail softness in Q1 and were encouraged by a number of positive signs in the quarter. Retail revenue that was up quarter over quarter in markets like New Jersey and California, benefits from our five new store openings towards the end of the quarter in Virginia and West Virginia, and an increase in average basket size in places like Florida and Colorado. Adjusted gross profit for the first quarter decreased sequentially by approximately $5 million to $57 million, resulting in a gross margin of 46%, up 1.5 percentage points from the adjusted gross margin in the fourth quarter. Despite the overall revenue decline, our increase in gross margin reflects execution on our profit improvement initiatives, including continued cultivation efficiencies and increasing share of our higher-margin in-house retail brands. Reported operating expenses were $71 million in the first quarter, essentially flat with the fourth quarter of 21, once our year-end impairment charges removed. Non-GAAP adjusted EBITDA for the quarter was $17 million, or 14% of revenue, down just one percentage point from Q4, despite the revenue decline. This was 10 percentage points higher when compared with Q1 of 21, again reflecting solid execution on our longer-term profit initiative and continued leveraging of our investments in corporate overhead. As we've alluded to, the main impact on revenue in Q1 with wholesale. Wholesale represented approximately 14% of revenue in Q1, down from 19% of revenue in Q4. and largely due to a tough comparison in Colorado when we best benefited from a record harvest at our outdoor facility. A Q1 seasonal decline in Colorado is somewhat normal as the market works through extra supply generated from outdoor harvests in the fall.
spk01: Ladies and gentlemen, please stand by.
spk02: Good morning again. Sorry for the interruption. So I'll continue where I left off with Colorado. So again, a Q1 seasonal decline in Colorado was somewhat normal as the market worked through extra supply generated from outdoor harvests in the fall. So we didn't see the usual quarter and wholesale transactions materialize as they normally would in Colorado or in some of the other markets. This was the main driver of the 36% sequential drop in wholesale quarter over quarter. At the end of March, with the prospect of adult use in New Jersey more imminent, we also withheld some wholesale product prior to the start of adult use. In terms of cash balances, in February, we completed a private placement of $185 million in 9.5% senior notes due 2026. With another quarter of positive results in cash management, our quarter-end cash balance reached a healthy $168 million. We've shored up our capital structure prior to the recent market volatility and rising interest rate environment, and also renegotiated the lower cost of capital for any of our capital lease transactions going forward. We will continue to focus on our liquidity profile and efficient capital deployment as we work through the rest of the year. Capital expenses in the first quarter were $29.5 million down compared to the $45 million of capex in the fourth quarter of 2021. We've already made early and significant investments in our growth markets, including New Jersey, West Virginia, Virginia, and New York, in addition to the expansion of other cultivation sites, including Pennsylvania. Although there's continued uncertainty in the consumer discretionary segment and the economy more broadly, We've been encouraged by revenue increases we're seeing in Q2, the impact of our five new stores opened in Q1, further store openings planned later in the year in Virginia, West Virginia, and New Jersey, and increased retail sales in New Jersey after the commencement of adult use in late April. The U.S. economic outlook for the second half of the year in particular remains uncertain given high inflation and federal monetary tightening. We'll continue to assess and incorporate market data as it becomes available. but based on current trends, we're maintaining our guidance for the full year, being $625 to $675 million in revenue and $120 to $135 million in adjusted EBITDA. As a reminder, our full-year outlook does not include any contribution or deduction from future acquisitions or divestitures, nor does it include any further changes in the regulatory environment. Lastly, I'd like to quickly address the CRESCO transaction, And as you've heard, we're progressing through the anticipated regulatory steps. We cleared the initial federal antitrust review process last week, have kicked off for the vestiture process in those states where we have regulatory overlap, and are now working towards our shareholder vote to approve the transaction. There's obviously still a lot of work to do, but based on the anticipated timing of close around the end of 2022, we'll be working with the Cresco team to develop a thoughtful approach to our integration and how we execute against this post-closing of the transactions. With that, let me turn the call over to David to cover our operational highlights. David.
spk05: Thank you, Derek, and good morning, everyone. I will focus on important operational developments during the first quarter, particularly in our top markets. On a revenue basis, our top five markets alphabetically were California, Colorado, Massachusetts, Pennsylvania, and Virginia, with Virginia replacing Ohio from Q4. On an adjusted EBITDA basis, the top five markets alphabetically were Colorado, Maryland, Massachusetts, Pennsylvania, and Virginia, consistent with Q4. Retail grew its contribution to revenue reaching 86 percent in Q1, up from 81 percent in Q4. This is evidenced by our five new retail locations that opened in Q1, bringing our total store count to 84. We also completed cultivation capital projects in Ohio and Virginia, as well as our manufacturing capital projects in Delaware and Illinois to meet demand. Further, we are allocating resources to markets where we expect to see adult use sales authorized soon so that we can hit the ground running. In California, we added additional store hours to our retail locations to increase transaction volume, which led to top-line growth year-over-year and an increase in transaction volume quarter-over-quarter. We also invested in upgrades in our cultivation facility, which resulted in an improvement in usable flour that we realized in Q1. In Colorado, we had better-than-expected yields, which led to improved cash flows from operations. Gross margin increased by mid-single digits and the adjusted EBITDA margin increased by 15 percent sequentially. Transaction volume was up quarter over quarter, as was usable flour per square foot. Average basket size grew 1% quarter over quarter as well. We completed upgrades at our steel facility in our first harvest since the upgrade had a significantly greater yield year over year. Further, we are realizing the benefits of the investments we made in automating our manufacturing and packaging facilities throughout Colorado, evidenced by the outsized gains in margin. As Nick and Derek mentioned, wholesale revenue in Colorado was down sequentially following a record wholesale performance in the fourth quarter as a result of our outdoor harvest. As in other markets, Colorado did not experience the typical wholesale push at the end of the quarter. As we look ahead in Colorado, we are excited about the recent launches of our in-house brands, Classics and Seed & Strain, earlier this month. In Massachusetts, we had a strong quarter where accelerating adoption of company best practices led to improved results. We achieved improvements in gross and EBITDA margins in the quarter, Transaction volume was down quarter of a quarter, but up significantly year over year. We had a substantial increase in foot traffic at our Boston cannabis location. One of our key focus areas in Q1 was institutionalizing the supply chain, and to that end, we implemented automation across our cultivation facility, which led to the increase in usable flour per square foot basis year over year. In Pennsylvania, we saw a slight rebound in Q1 from the overall market softness and reduced wholesale opportunities in Pennsylvania during Q4 of last year. Gross profit and EBITDA were ahead of our expectations. Average basket size increased quarter over quarter, though transaction volume was down sequentially. We are progressing with the Saxton Cultivation Location Capital Expenditure Project, which has more than 250,000 square feet of cultivation manufacturing capacity. We expect phase one of that expansion to be operational later in Q2, increasing canopy by nearly 200%. In Virginia, we had record gross margin, pre-cash flow, and EBITDA margin in Q1. Transaction volume was also record high, and Virginia is now among our top five markets in both revenue and EBITDA. We further expanded our cultivation center to meet the demand of adult use sales, which we anticipate will begin in 2023. We opened a new dispensary in Virginia in Q1, with eight more currently in development. We focused on integrating GLEAF operations, and we worked with all licensed operators in Virginia to continue to drive our wholesale business. Construction of our Portsmouth Grow facility is nearly complete, and we expect to populate it with plants in Q2 of this year. Now to turn to a market that is not currently but should be a top market in the future, New Jersey. We launched adult use sales on April 21, 2022, at our two existing cannabis dispensaries in the state. We are still operating with limited adult use hours but plan to expand to full hours in the next few weeks. We are nearing final approval of the second cultivation facility in Vineland, which will add more than 250,000 square feet of production capacity. In the short term, this will triple our canopy and provide packaged products for the wholesale market. We have signed a lease on a property for our third dispensary in the state, which we are working to operationalize as soon as possible. In sum, we are thrilled with the transition to adult use thus far and are poised to bring on additional much-needed supply in the near term. On CapEx, our Q1 CapEx spend was 1%. split nearly evenly between projects started in 2021 and projects started in Q1 of 2022. Our capex spend for Q1 was $29.5 million, down from $45 million in Q4. We increased canopy cultivation, both canopy and cultivation, in Ohio, Virginia, and in Florida, where we are doubling canopy in our existing cultivation facility. Looking forward to next quarter and the rest of the year, we will continue to execute against our four North Stars by improving margins, expanding our brands, strengthening our operational competitive advantages, and using data to ensure customer loyalty. I will now turn the call back to Nick for closing remarks before we take questions.
spk04: Thank you, David. I want to reiterate that we are encouraged by the margin expansion we were able to achieve in Q1, which was the result of broad-based efficiency gains throughout the portfolio. We are still facing macro and market headwinds from inflation supply chain constraints, but we continue to make operational improvements that will make our business more efficient. We are focused on driving efficiency, profitability, and cash flow as we look ahead to the catalysts in the second half of the year. Furthermore, we are pleased with the progress to date in the Cresco transaction and look forward to updating the market with more details in the future. With that, we'll open it up for questions. Operator?
spk01: As a reminder, to ask a question, please press star then 1. If your question hasn't answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from Aaron Gray. with Alliance Global Partners. Your line is open.
spk11: Hi, good morning, Anna. Thank you for the question. So first question for me, just on the top line. So I can definitely appreciate some uncertainty in terms of, you know, market dynamics, but, you know, we guys reported the third week of March, you know, flat to down, you know, came in down a little more material than that. So I just want to know in terms of the wholesale transactions, well, I know it can come in late in the quarter. What type of visibility do you have in terms of measuring the market dynamics to better anticipate how much demand there might be for the quarter end on a wholesale side, just given the 4Q earnings came so late? And then how does that give you confidence in terms of the remainder of the year for 2022 where you held guidance? And that implies some pretty notable sequential gains. Thanks.
spk04: Sure. Thanks, Aaron. So I'll give a very high-level overview, and then I'll turn it over to David and Derek to weigh in as well. I think that the single biggest contributor to the wholesale sort of shortfall was really in the Colorado market, and we always see some seasonality there. The seasonality was exacerbated by, frankly, some of the macroeconomic headwinds. When we see sort of, let's call it, demand or ASB, any of those sort of metrics on the retail side soften up in our network of retail, it generally hits the entire market. And so there was sort of an element of cyclicality that was exacerbated by the current market dynamics. And I think that was something that had caught us by surprise, candidly. Another kind of component of it was, frankly, decision-making, right? I mean, we wanted to stockpile inventory in the quarter to be ready for adult use. And, you know, as David alluded to and as David stated, we're not operating full hours in New Jersey yet because we want to make sure we always have products on our shelves. But in order to do that, we had to make some very sort of important last-minute decisions on the wholesale side that definitively had an impact both on our top line and, frankly, on our wholesale, on our EBITDA margin, because that's really driven in large part by our wholesale revenue. And so there were things that we did intentionally to slow things down, and there were things that I would say caught us by surprise that were an order of magnitude more sort of impactful than we had expected. But In terms of the second half of the year, we did a lot of soul searching to sort of think about what's happening for the rest of the year. And there are things in markets that are, you know, everyone knows at this point what the lifestyle looks like in markets, right? The newer markets generally have stronger margin profiles and they have higher growth profiles. We happen to have a lot of exposure to those markets like Virginia, West Virginia, New Jersey. And so, you know, when you think about what we're planning on, seeing materialize. It's really a byproduct of the investment we've already made. So, for example, the expansion and cultivation in Ohio. It's a byproduct of legislation that has already passed. For example, the patient access changes that are going to dramatically improve the Virginia market, in our opinion. And then, frankly, the capital investment that we've made. And so we've got new dispensaries coming online in Virginia. We've got new dispensaries that just came online in one queue in West Virginia. And then you've got sort of market dynamics that we would expect to see continue to improve in a range of other states. So the things that are driving our growth have already happened and have already been, let's call it, validated, but there's always a ramp associated with that. And that's why we feel comfortable where we are. From the standpoint of how we expected the quarter to materialize, we could have done more, to sort of improve the top line and to sort of close that gap. But that would have involved either remaining flat from a gross margin perspective or not preparing properly for New Jersey or, frankly, sort of acting in a way that we think long-term would have been more disruptive than productive. So we don't really – I think that we continue to look at – But the fact of the matter is that the things that are going to be driving our growth and, frankly, should also benefit our margin profile because the scale is already built out from a capital perspective and a CapEx perspective. These are things that are just happening that, you know, are really independent of the macroeconomic environment or the sector. But, David, let me turn it over to you to see if you have anything to add.
spk05: The only thing I would add here is as we've continued to build out our wholesale capabilities The wholesale revenue cyclicality or seasonality quarter over quarter and quarter is certainly higher than our traditional legacy retail business. And as a consequence, I think to your point, we have improved our ability to understand the demand, the supply-demand dynamics in each one of our markets throughout the quarter. As Nick mentioned, we could have probably chased incremental wholesale in a number of markets, including Colorado, but we wanted to remain price disciplined in Q1 for all the reasons that Nick mentioned. So I think on a go-forward basis, and again, I think this is the reason that underscores the transaction with Cresco, given their capabilities in the wholesale market, we're going to continue to try to remain somewhat price disciplined relative to others for their transaction volumes. until we have a better understanding of the outlook on a quarter-over-quarter basis, whether it's an adult use pending change or it's the seasonality, particularly in Colorado. We are the only MSO that's got the exposure in Colorado on a vertically integrated basis, and there is more seasonality in that market than any other market that we're in across the country. There are – there's a lot of dynamics going on in the Colorado market year over year, both on the retail and the wholesale side, and we're trying to remain price-disciplined in that market as we – as I think you'll see over the next subsequent three quarters, we'll start to really leverage the vertical integration that we've got in Colorado to really drive the incremental biomass that we now have coming off of both the outdoor and our steel indoor growth.
spk04: Aaron, just one point about that cyclicality. It kind of cuts both ways. I think in the fourth quarter, we were sort of a standout from a top-line growth perspective, and that was largely driven by what we saw in Colorado. The first quarter, we were probably a little light on the top line, and we made the decision not to erode margin, to chase revenue, because we just didn't think it was in our own best interest. It was not in the interest of the brand-building exercises. And, you know, candidly, when we look at sort of the next three quarters, we actually see a number of things that have a fairly significant impact on both our margin profile and our top line growth rate.
spk11: All right, great. Thanks a lot for that color and detail. Same question for me. Just turning to New York, it's one of the markets you mentioned about leaning into in the press release and prepared remarks. So could you just remind us about how you're thinking about investments in the state and as there likely needs to be some level of divestiture needed for the Cresco merger. So how you're looking to operate in the state as a standalone Columbia Care company today while also potentially looking towards the future for a Columbia Care-Cresco combined company where there might be some divestiture. So just a reminder of how you're looking to balance the two would be great. Thank you.
spk04: Certainly is. So we can't really comment on the divestiture process, but what I can say is that both Cresco and ColumbiaCare have an ambition to be the market leader in New York. At ColumbiaCare, we made investments in New York State on cultivation that are really beginning to sort of, let's call it, show benefit. And we would expect some of the first harvests have come out of Riverhead. We're expecting that to be a major part of the wholesale supply chain. You know, we've obviously been doing everything we can to roll out products and form factors to really drive value from sort of a Columbia Care perspective. But that's not dissimilar to what Cresco intends to do. I think that what you would expect to see from us, because we do have the benefit of a fairly long lead time to consolidate these businesses and to plan out the gesture processes, is a very thoughtful approach where we're going to wind up with a portfolio of dispensaries that we're very happy with, and we're going to end up with sort of the right cultivation and manufacturing facilities relative to the longer-term strategy. that sort of I think presumes that we're doing it in a kind of a methodical way, not sort of a knee-jerk reaction way, where we can manage the process both from a people and a continuity perspective and really continue to position ourselves well. I don't, you know, everything that I've seen is that the two companies are working very well together. The teams are working very well together. We're both very proud of everything we've built independent of one another. And I think the question is how do we make sure that from a shareholder perspective and from an organizational perspective, we come out of the combination and come out of this sort of what's called limited restructuring to really drive value in the mid and long term. And so I, you know, we're not at the point where we're commenting on which specific assets are going to stay and which ones are going to go. But what we can say is, you know, heads we win, tails we win. So it's not really something that, you know, just like we're quietly confident about HSR, we're quietly confident about the way the integration and the asset selection process will work, not only to optimize the value through the assets and tails, but also to make sure that we've got the best business going forward.
spk11: All right, thanks very much for the call, and I'll jump back in the queue.
spk01: Our next question comes from Vivian Aza with Cowan. Your line is open.
spk07: Great. This is Harrison on for Vivian. Thanks so much for taking the questions. Just first on Virginia, obviously solid performance here, given it knocked out Ohio in the top five. So we'd just love some more color in terms of your mix in the state, and if you could offer maybe more broadly just detail around the competitive dynamics within the wholesale market in that state. Thanks.
spk04: Why don't I turn it over to David to give some of those details? I mean, I think what I can start us off with at a very high level is that We have a number of very high-quality operators in Virginia, all of which are producing great products, and they're able to compete effectively. They have deep balance sheets. And so Virginia is a market where, gratefully, we haven't had to go through a lot of growing pains like some other markets have, where you have operators that are unable to really sort of jump right in to the deep end headfirst. And I think that's very good because it allows us to focus on the things that we're best at. But the GLEAF and Columbia Care combination continues to move forward very well. All of the assets on both sides of that equation are performing well, and they continue to sort of improve in terms of not only the brands and the diversity of products, but the quality of the products that are coming out. And then obviously the rollout of the dispensaries is going to be, you know, I think a real game changer. But let me turn it over to David, and he can provide some specifics.
spk05: Yeah, I think it remains a strong wholesale market. We've got good relationships across all the operators in that market. Clearly, there was an anticipated adult use framework that was going to come sooner rather than later this year. Obviously, that's not happening. We anticipate it happening in 2023. But there is some regulatory relief coming in the middle of the year with respect to patient registrations. And there's a significant backlog of patients waiting to become formally registered and to get their cards. And so that's probably the next regulatory milestone that we're looking at in Virginia. We also anticipated during the potential implementation of adult use, we'd get additional clarity to perfect setback requirements for dispensaries. We don't have perfection, and so we are being very thoughtful and doing a ton of diligence, frankly, for the outstanding eight locations that are under development. We haven't disclosed, but we have signed a number of leases, and we are in development. So we're trying to optimally position those dispensaries for both the current medical program, but also once adult use comes next year. In addition, I do think that we've done a good job of increasing yields and potency in our gardens, which has been well received by both our wholesale partners and patients in the state. Continued product innovation where we can based on the regulations is something we continue to do. So it's a strong market for us. I think there's going to be a nice uptick in patient growth in the back half of the year. And obviously everything outside of addressing the back half of the year medical program is anticipation of preparing for adult use that we think is coming sometime next year.
spk07: Great, great. I appreciate the color. Second one from me, just apologies for the baseball reference here, but what inning would you say you're in in terms of making operational improvements across your existing cultivation footprints?
spk04: So assuming we don't – I think we're probably in the third inning, and I say that because we are learning more about the way to do things better every day, and we're learning more about how to optimize every day. I'm curious. No one's ever asked us that question before, so I'm curious, David, how you feel. You may think we're a little bit ahead. I mean, I think that the one thing I would say is I'd say the third inning, but, you know, we've made such incredible strides over the past 18 months that I have an expectation that we will continue to make the same sort of level of performance improvement. And so it's a little bit of a moving target, right? So instead of saying that we have, you know, a normal number of innings, I actually think that, you know, that number continues to change because of the way in which we can optimize not only in terms of strain selection, it starts everything from the sort of genetics of the plant's through the infrastructure and goes right into manufacturing. So I think that there are real improvements that can be made, particularly through the combination. But David, maybe you have something to add.
spk05: Yeah, I mean, we can maybe debate the top and the bottom of the third, but I think that's not an unreasonable place to start. I think we've actually done a fair amount in terms of SOP adherence throughout the organization, where if you look across the ColumbiaCare cultivation facility portfolio, the majority of our indoor grows outside of Colorado look and feel the same. And so that allows us, I think, to continue to refine not only our SOPs but the adherence of SOPs. So people are as important as the actual facility in the process, and I think we've come a long ways with that regard. I do think, you know, genetic optimization, yields, and potency are all important. But I think where we've probably not spent enough time, frankly, if you think about the beginning of the cultivation process all the way through to manufacturing, We started 18 months ago or so focusing on cultivation from the beginning, working our way through. I think on the post-harvest basis, we're now spending a lot of time making sure we can optimize the material post-harvest for potency and yields because all you can do essentially after you harvest is deteriorate your product. Again, that's something that I know Cresco has actually done a pretty fantastic job doing in terms of the quantification of post-harvest. I did think that's one of the opportunities post-close for us to work together. I think third-inning is probably appropriate. It's also probably appropriate for this industry because I think there's continued innovation, whether it's nutrients, whether it's lighting, whether it's environmental controls, broadly speaking. I think there's going to be continued innovation. So you get to a point where you think you've maximized your grants per square foot and your potencies, and then you have a facility like West Virginia that we just commercialized and we hit new highs. So we continue to try to improve even on the infrastructure side. Yeah, third ending, I'd say maybe the bottom of the third seems reasonable.
spk07: Great. I appreciate the color. I'll pass it on. Thanks.
spk01: Our next question comes from Owen Bennett with Jefferies. Your line is open.
spk09: Morning, Jen. Hope all well. First question is just on the cannabis rebranding. So quite far along with the changes there, have you seen Any material changing trends in these stores since you changed the branding and also introduced forage? And then just linked to that, how are you thinking now about continued rebranding given the pending Cresco deal? And obviously, they've got a very strong brand in Sunnyside as well. Thank you.
spk04: So what I'd like to do is I'll give a very high level overview. And then, Jesse, maybe I can turn it over to you. And then, David, you can follow up. I would say that where we have made the cannabis branding change from Columbia Care, and you have to take this from the person who came up with the name Columbia Care, right? So I have the ability to sort of be very candid about it. Cannabis is a far better name. It is a far more recognizable name. I mean, it's very, very clear what it is, and I think that that's had an impact significantly. on an anecdotal basis of increasing the aperture of the population that we draw into our facility. So when people drive by, they know exactly what they're looking for. They know exactly what they're driving by, and they know when they want to come in and what they're looking for. And so that has all been very powerful. It's improved loyalty rates. It's improved, you know, we believe it's had an impact on revenue growth. a revenue performance, and therefore, you know, obviously the profitability coming out of the facilities, we're working to quantify exactly what that is because each market has so much noise, both at the local and state level, it's very hard to kind of isolate the signal appropriately. But what I can say is that in an environment like this where you have such significant economic headwinds, It's interesting that we're seeing basket sizes increase, but we're seeing basket sizes decrease, but foot traffic increase, particularly in the facilities that have converted to cannabis. So I would make the argument that there is a correlation there that we need to prove out. In terms of forage, we continue to be amazed at the amount of data and information we get from it, but rather than taking Jesse's thunder, let me ask Jesse to weigh in.
spk03: No, that's great. Thanks so much, Nick. You know, the one thing that I would add, and I think Nick made the point, you know, it's very difficult sometimes to isolate the individual sort of upticks that we see in the markets, especially location specific with regards to the rebrand due to so many of the other variables that we're dealing with in sort of these individual markets. But one of the sort of increased performances that we've been very happy with is the efficiency when we're deploying capital from an advertising point of view. So conversion costs, CPA, CPDs, all these numbers have been, you know, moved in the right direction as we've continued to do the rebrand, which I think speaks to Nick's point around what we're seeing with regards to the name, the recall, and sort of the immediate reaction from the consumers to that brand. With regards to forage and the data, We were incredibly excited a couple of months ago to kick off a large-scale project and starting to really dive into and digest a lot of those data sets that we've been aggregating since the launch of the Forge application. We continue to see an increase in number of sessions in user adoption as we continue to spread the infrastructure in our partnership with 916, the hardware provider for the in-store experience. It's continuing to provide us with a lot of that transparency and into the top of funnel activities for consumers, especially newer consumers to the market, and what it is that ultimately they're looking for, and the process that they're going through with regards to discovery, not only at the product level, but also how they're drawn to certain brands and willing to sort of add additional items when they're searching for sort of that first staple. So we're excited to continue to dive into that and start to really harness the power of that data and some of the merchandising and product assortment decisioning moving forward. And we think it's going to give us a really interesting advantage in some of these markets, especially a market like New Jersey, as we move through the back half of the year.
spk05: Dave, do you have anything to add to that? No, I think you and Jesse covered that one.
spk09: Okay, and then just, I mean, any update in terms of the pace of that rebranding? Has that changed potentially with the pending Cresco deal?
spk04: Yeah, it's something we're looking at. And, you know, I think what's one of the, I think, the best indicators of how things are going with the Cresco sort of conversation, dialogue, and integration thought process, you know, we've approached this from a perspective of a whiteboard. And so what Cresco is focused on and what ColumbiaCare is focused on is really finding the best-in-class approach to every market to make sure we optimize what our retail footprint looks like. We've been very impressed with what they have at Sunnyside. I think they've been very happy with what they've seen at Cannabis. But ultimately, it's going to be driven by the data. And if we can prove what we think we're seeing isn't sort of a false positive, then I think that that probably pushes the scales in one way. If we can't, it pushes the scale in another way. One thing that we're certain is that whether it's ColumbiaCare or Cannabis, Cannabis is better than ColumbiaCare. Our goal for this year is to drive value as much as we possibly can going into the combination and the closure of the Cresco transaction. We want to make sure that our retail channel is as strong as possible so that everybody hits the ground running and we show up in 2023 with a definitive tailwind behind us, which I think will be unique in the marketplace. We haven't made any decisions yet, but I think it's going to be a very thoughtful process wherever we end up.
spk09: Great. Thanks, guys. And just one quick follow-up. You mentioned New York cultivation coming on the line there, so it should be a contributor to sales in the second half. Are you talking there specifically just a pickup on the medical side, or are you assuming anything for potential recreational contribution this year?
spk04: Well, I'll hand it over to David, but I think from my perspective, the way I thought about it is that We have new supply chain coming on with very high-quality product. It's going to be at a more attractive price than I think what people have seen in the New York market, and I think that's going to be something that will be well-received by the entire, let's call it, community of ROs on the medical side. It's unclear how to measure when the opportunity sort of evolves into our sphere for the adult-use conversion, but we will be ready to support the adult-use rollout whenever that happens. And so I think it's sort of obviously one is seismic in nature and the other one I think is more of a step change, but they're both very important sort of let's call them measures of the evolution in New York State. But, David, maybe you have something to add in color.
spk05: Yeah, the only thing I would add is our canopy in Riverhead relative to our legacy is canopy up in Rochester is significantly larger. And so we now have that product on our shelves and available in the wholesale market, which we think is higher quality, fresher flower, solid potencies. And so we remain excited about what's coming out of Riverhead. We're looking forward to going through a full four seasons in that facility to optimize the SOPs to get the best plant biomass out of that facility over the course of a year or so. team is excited about what they've done thus far in the early days of the harvest. And we continue to expect to see the medical program expand a bit as higher quality flour comes into the market between now and the end of the year. And obviously, as Nick mentioned, shake the crystal ball in terms of timing for adult use in New York. But rest assured, it's a mandate for our team in New York to be prepared for day one adult use sale in New York whenever we're given the opportunity.
spk09: Great, thanks, Dan. It's very helpful. Appreciate it.
spk05: Sure.
spk01: Our next question comes from Kendrick Teague with ATB Capital Markets. Your line is open.
spk12: Thank you, and good morning. Nick, I wonder if you could remind us, just on the relative scale of your outdoor versus indoor in Colorado, just memory serves, last year you did partially take offline your indoor facility in this quarter. So if you could just frame that up for us. And then separately, but just sticking with Colorado, Can you speak to Medicine Man separately? This was your first full quarter contribution from Medicine Man, and recognizing there's some seasonality in that equation, it's still roughly a $9 million in EBITDA business, or at least that's sort of what the math was on the multiple at the time of the acquisition. Any additional color, that'd be great. Thank you.
spk04: So to put it in scale, you know, and David, I'll probably ask you to weigh in with some of the details here. Our steel facility, which is the most important indoor facility we have in Colorado, is about 75,000 square feet on the ground, but it goes up, I think, it's a five-stack facility. So you obviously have significant scale leverage by just going vertically. That facility has really begun to sort of, I would say, hit its stride towards the end of the fourth quarter, and really in this quarter we're seeing significant improvements in not only output but the quality of that output. And I think that that investment has really paid off and will continue to pay off. But by way of comparison, the outdoor grow, gosh, how many acres did we actually harvest at the end of last year in Trinidad? We have up to 140. I don't think we disclosed how many acres. Yeah, we did disclose how many, but it was considerable. We have up to 140 acres to develop. But suffice it to say, it was the single largest harvest in the history of the company. It was substantial, and it was obviously very cost-effective, and it was surprisingly high quality relative to what people generally expect from a tax perspective and from a testing perspective. What was the second part of your question?
spk12: Medicine 9, Nick, the full quarter contribution just given to that implied run rate on acquisition of roughly 9 million EBITDA a quarter.
spk04: So at Medicine Man, we haven't really disclosed the breakout of Medicine Man, but what I can say is that Colorado, when you see that cyclicality in Colorado, you see the cyclicality in all assets in Colorado. So it's not unique to any one particular operator. I think it's broad-based. But Medicine Man has always had a history of being more of a, let's call it a closed-loop cycle because they have their own grow and they have their own dispensing activities. But, you know, it was helpful, but the order of magnitude and the size of the business in Colorado, you know, I don't know how... how I would characterize the meaningfulness of EVA.contribution 1Q, considering how many other things have been going on in that market in a very positive direction.
spk05: But, David, maybe you want to give some – Yeah, the one data point I think we put in the materials is our indoor grow at steel year-over-year usable flour was up 52% year-over-year. So to Nick's point, we've increased not only the yields but the potency out of that facility on a year-over-year basis. because of the investment we made. And we did have to take it down for a period of time to make sure we got all the upgrades fully completed in a timely manner. With respect to the outdoor grow, it was a good season in aggregate for those that had an outdoor grow because of the weather. That's typically the number one issue for all outdoor grows in Colorado is when does the snow come and how quickly do you have to take material off the fields. And, you know, basically no snow came. So most outdoor grows were allowed to keep material out longer, which obviously is beneficial. That's a once-in-a-year cycle for us. And given where we see steel trending in terms of its output productivity and where we see the wholesale market, that's going to be the driver for us going forward. And I think what you're going to see from us between now and the balance of this year, I think I mentioned in my initial remarks, is we're going to leverage the vertical integration nature of our business in Colorado to really drive the business. The wholesale market is wildly volatile and cyclical throughout the year and seasonal. And we want to put our heads down for a period of time and actually close our doors in Colorado, not only the TGS doors, but the Medicine Man's doors. So, you know, we're basically at an inflection point operationally with the amount of biomass that we now have available for us to achieve. We've done a lot on the retail side, which I think we'll speak more to in the coming quarters about the SKU optimization and pricing strategies that we're deploying. But significant year-over-year productivity out of steel, which helped drive margins in Colorado in Q1 on a year-over-year and sequential basis.
spk12: Great. Thanks very much, Jensen. If I could just quickly cover to New Jersey. Could you provide some insight as to where your cultivation throughput was in quarter versus your internal expectations ahead of adult use? And then separately to your comment on limited hours in the second quarter, How much of that is just simply a function of a number of your competitors also looking to fall into a better term, reserve cultivation or inventory for their own needs? Just trying to understand the puts and takes and supply sensitivities in that market, both in quarter for you in terms of your decision to hold back on wholesale, but also looking to the Q2 and beyond.
spk05: Sure. This is David. On the cultivation side, we have the inspection for our second location, cultivation location in the next week and a half or so. So we're in line with our expectations as of the most recent budgeting process for 2022. We've done everything we can to optimize plant material in our Vineland 1 facility to move it over upon approval. So we're really excited about that. Most importantly, right out of the gate, we expect to have, when we get authorization in Vineland 2, is the post-harvest automated equipment that is ready to go. And so we've got material to run through that so we can actually expand the retail hours in our stores and also hit the ground running on the wholesale side for adult use. With your second point, we've tried to be as practical as possible with the adult use hours out of the gate to make sure that we were living up to the mandate from the regulator about servicing the medical program responsibly. And I think we've done that. We're expanding hours essentially on a weekly basis to move towards full hours as quickly as we can, being thoughtful and responsible partners in the program. And there was, leading up to the day one sales, the clarification for testing requirements for material required basically everybody to go out and get tested, get material tested, which created a bit of a backlog from a testing perspective. So as we're getting incremental material back, tested product back, we're putting it on our shelves and making it available in the wholesale market. We're aligned with where we expect it to be with respect to turning on our cultivation in 2022, and I think we've got a history of actually commercializing cultivation facilities successfully now over the last two years, and so we're excited about it. And we continue to see strong demand in our doors, even with the limited hours that we have, so we anticipate that to continue. I think we've got two terrific locations that are already open, and the third that we've got secured is is arguably the best of the three. So we're really excited about New Jersey in the second half of the year.
spk12: Great. Thank you. I'll get back to you.
spk01: Our next question comes from Matt Bottomley with Canaccord Genuity. Your line is open.
spk08: Good morning, everyone. Hope you're all doing well. Just wanted to pivot back to the outlook for 2022. So reiterated once again, and I'm just curious if you could give any color. I know it's a bit intangible and there's a lot of moving parts, but if you kind of run right where you are today. you know, somewhere around $500 million, understanding that's from a seasonally low base and some of the headwinds that have been baked into it. But, you know, that additional sort of $125 to $175 million of run rate that's going to be coming in over the next month, can you give any clarity as to what factors are out of your control with respect to potentially reaching that, so regulatory delays, You know, if New Jersey, for whatever reason, doesn't really open up or approve more retail stores to increase wholesale contribution, just things that, although you're set up well with respect to your own infrastructure, things that are maybe out of your control that could pose a risk to hitting those numbers?
spk04: Yeah, I mean, let me give these. I'll start off, then I'll turn it over to David. I would say that certainly the expansion in New Jersey, you know, that would be a pressure point for us. Our inability to execute on the rollout of Vineland 2, which is our significant increase in cultivation capacity, I think that would be a concern. You know, the supply chain disruptions, if they become exacerbated in Virginia as we build out the remaining dispensaries, that could be problematic. But I think the supply chain there, at least from the cultivation manufacturing perspective, seems to be in pretty good order. West Virginia, it's really a question of patient registration and adoption. So if the program expands quickly, as we hope it will, we expect that to be a real driver of value. In Ohio, obviously with the new dispensaries coming online, that will be a meaningful source of demand for our increased supply in that facility. And then I would just say the single greatest thing that's out of our control, we're seeing unprecedented inflation across the board. It's not just labor shortages and pricing of labor. It's every single element of expenditure where you see prices going up. And I think we've done a fairly good job of managing the business to control our costs in light of those accelerating sort of headwinds. but it is real, and that's one of the reasons why we have continued to sort of redirect our efforts towards profitability, because we have plenty of growth embedded in the portfolio, but what we really need to do is drive cash flow, because we're going to see volatility in the market, and we want to be able to employ that capital in a number of very productive ways as we look forward over the next 12 months. David, maybe you want to weigh in here, too.
spk05: Yeah, I think the only thing I would add is, in addition to the inflation, it's just the pricing dynamics in the marketplace, both at the wholesale and the retail level. There are a number of markets that Nick mentioned where we anticipate new operators opening doors, which would drive opportunity for our wholesale business, which is meaningful and part of our budget for the second half of 2022. And then in Colorado, I think you're going to see some things from us that will drive that business Again, using our doors and the biomass that we have to make an impact in that market that people will notice. To me, there are some regulatory issues that we need to get through from a timeline perspective. I think Nick highlighted those. I do think there's a significant contribution coming from our wholesale business in the second half of the year. The biomass, the brand development, the yields and the potency, that's up to us. But the pricing discipline across each of these states with our competitors is something that we have to try to manage through. I think we understand what the outlook looks like, but you never know in any individual market how pricing is going to move up or down depending on what people are bringing to market.
spk08: Got it. Appreciate all that. And then just one other follow-up for me, just on the M&A side. So not really discussing anything specific to the deal with Cresco. I know you guys can't, but maybe just at a higher level than that, what you're seeing in terms of the trends in the market, are potential buyers really pegging everything to what's happening in the equity market, which I think many believe obviously isn't really fundamentally driven for the most part in terms of what we've seen in valuation declines? Any sort of anecdotes to what's going on, particularly on the private side, with anticipated or expected M&A?
spk04: So I would like – I think that the – obviously, I'm limited in what I can say, but one of the things I have observed is the – the breadth of interest, meaning it's a lot more than the usual suspects that we see coming into this market. And the sources of capital are much broader than anything I've seen historically. And what I find to be incredibly interesting is the way that, let's call it the capital markets, particularly the private capital markets, Think about creating long-term value versus the way the public markets have really sort of applied valuations to the publicly traded companies. There seems to be an appropriate disconnect, meaning if you have the luxury of time rather than marking your book day to day, you have the ability to look for incredibly valuable assets at fairly attractive prices. And I just don't see another opportunity for where anybody can go in and actually capture functioning, high-quality turnkey assets in some of the most attractive markets. And thankfully, I'm not the only person who sees the world through that lens. I mean, this is a huge, huge, huge market. The question is, is it huge in 24 months or 36 months? That's really sort of an arbitrary assignment of timing and policy change that I don't know if anyone really has the answer to. But one thing you can be sure of is that if you can build your footprint in advance of that, you can really create an enormous amount of shareholder value and, you know, outsize rates of return, especially in this environment. And that's the philosophy and that's the sort of the sort of approach that we're seeing a lot of people taking to build that critical mass. So, you know, I, you know, from an M&A perspective, I've been surprised at the upside. And, you know, obviously we've mild to build before we sleep, but it's a, It's a combination of things, but the volatility is what it is. The headwinds are what they are. People have capital they want to deploy, and they're interested in the sector. I think that because you finally have a portfolio of assets that are not only very high quality, but positioned in the best markets, you're seeing people begin to transition away from that historical concern. Historically, they've prioritized regulatory concerns over financial outcomes, and I think that that change has now really shifted towards financial outcomes rather than just focusing on the obvious, I would argue, outdated concerns over regulatory.
spk08: Great. Thanks for all that.
spk01: Our next question comes from Scott Fortune with Ross Capital Partners. Your line is open.
spk13: Good morning, and thanks for the question. Real quick, you haven't mentioned California much, but just to update on the California market footprint there, you called out, obviously, Colorado seasonality, but how is California in that regard, and can you provide a little more color on your potential increased efficiencies and margins there? This is Philip Popper, I'm going to be a driver for you, but, you know, the margin potential there in the challenging California market that it represents right now.
spk04: I'll start off with something very high level and turn it over to David. California, you know, I think our team executed quite well relative to the market conditions. You're seeing, you know, it continues to be a very challenging market environment. And then, candidly, if you think about, you know, one of the benefits of the combination with Cresco, that's, you know, refining and expanding our supply chain is, I think, arguably one of the biggest benefits of being able to combine our portfolios out there. But it's a tough market, and it continues to be a tough market. for different reasons all the time, right? I mean, California, if you had to pick one or two states where, you know, the political class loves to get in the way of business performing well, I'd say California wins a Nobel Prize, you know, five times in a row. They've mastered that art. And so we're in an environment where we can really, I think that, you know, if the team continues to execute and we continue to see those comps evolve, hopefully the the voters in California will catch up and begin to elect officials that really push the market in a more constructive way, or at least the existing elected officials begin to recognize the value that could be created by really supporting the industry rather than trying to undermine the industry. And that, to me, is sort of a lightning strike in a very positive direction if any of that happens. But in the meantime, we continue to show improvements, and the team continues to adjust. And, frankly, we continue to sort of evolve our tactics to really – you know, position ourselves in areas of the marketplace where no one else seems to be playing as effectively as we are. But, David, maybe you have some additional thoughts.
spk05: Yeah, I would just highlight that we've, you know, we've seen an improvement in our retail profile financially year over year, in large part to some restructuring in terms of SOPs and talent in the stores, repositioning of our internal products, a change to our branding strategies at the retail level, Those have all been successful. I think the wholesale market continues to be soft. Those are well-publicized numbers year over year, the pricing environment for Colorado. There are a number of what look like to be pretty distressed cultivation operators, both indoor, greenhouse, and outdoor, that I think will continue to struggle for the foreseeable future to the balance of this season, at least. And so we're trying to remain disciplined, manage costs, and, again, trying to leverage the vertical markets vertical assets we have to try to drive any incremental margin or margin neutrality that we can in 2022.
spk13: I appreciate the color. And I wanted a quick follow-up from me, you know, provide a little more color on the CapEx outlook here and priorities for 2022 from different states, you know, executing, going deeper, build scale in those key states. I know you called out Virginia, West Virginia, and New Jersey. They added color for projected CapEx for the rest of the year. And I think you're calling for eight new stores in development to be added in 2022. Just update there. Sure.
spk04: Why don't I turn that over to Derek?
spk02: Thank you, Nick. Yeah, so we do not provide CapEx guidance for the year, but I will say, consistent with the comments we've made already, our investments have been fantastic. front-loaded in anticipation of growth. And then the additional growth we have coming for the balance of the year, there's more limited capex needed because we made those investments deeply and early.
spk13: Any color on new stores additions into 2022 here? We're in development for eight, I believe.
spk05: David, why don't you? Do you want me to take that one?
spk02: Yeah, go ahead.
spk05: So on the retail front, it's really around between now and the balance of the year. It's Virginia and one store in West Virginia. We continue to diligence on the New York side as we think about adult use and the opportunities. There's still some regulatory clarity that needs to come to where we can put those locations. But on the retail front, what's pressing and what is top of mind is The stores in Virginia, one remaining in West Virginia and the third location in New Jersey. Those are the retail CapEx projects right in front of us.
spk13: Thanks. I appreciate it, Culler, and I'll jump back in with you.
spk01: Our next question comes from Matt McKinley with Needham. Your line is open.
spk10: Thank you. You noted the improving trends in the second quarter relative to the first, but can you get back to a fourth quarter level of revenue in the second quarter given New Jersey's open, or is that just hard to predict at this point given the wholesale revenue, as you noted, doesn't really materialize until late in the quarter? I'm sure that New Jersey is a positive catalyst, but the consumer and macro issues that Nick discussed didn't just evaporate into the current quarter, and I'm not sure what the message is on the second quarter relative to what happened in the first or your ability to hit that full year guide.
spk04: So, look, Matt, we don't give quarterly guidance because there is cyclicality in some of our markets, and we've always shied away from sort of trying to predict when regulatory change happens. But what I can say is if we felt that based on everything we're seeing in the second quarter, that we wouldn't be able to hit our guidance and that the catalysts that we're expecting to materialize had some degree of – of a failure rate that we haven't built into our model already. I think you would have heard us come out and sort of suggest that, you know, we would reset expectations. But, you know, opening up eight more dispensaries in Virginia is something that's in our control. We think we can do that quite well. You know, New Jersey has already turned adult use. Now it's just a question of getting that final approval in our second Vineland cultivation facility and really optimizing that. And that's something we know how to do pretty well. You know, West Virginia, the patient registration process continues to move ahead, and the state of West Virginia continues to want to see that program expand. And that's very good. You know, Virginia, the governor signed that piece of legislation into law to make it easier for people to register. So those things that are going to be driving our business, you know, let's call it from this point on, are happening right now. And I think that we've made the capital investment to prepare for those moments in time. And thankfully, you know, many of the things that had to happen from a regulatory perspective have basically already happened or are actually happening faster than would be expected. You know, we reserve the right to sort of, you know, update people if we see something happening that contradicts our current view or that causes us to rethink our existing view. But the cyclicality in 1Q22 in Colorado was pretty much the same type of phenomena that we saw in 1Q21. And, you know, I think that the improvements we're seeing out of steel, the improvements we're seeing out of, you know, different markets, all of those things in aggregate are actually quite consistent. And so I think if there's one thing I wish we had the ability to do more proactively, it's actually provide quarterly guidance. The markets are just not stable enough for us to do that right now, which is why we feel very comfortable with the annual guidance. So what we're effectively saying is that you're going to see a ramp in growth as the year goes on, and that is not atypical for what we've seen in the past, and I think it's pretty consistent with all the catalysts we see coming, but we're just not in a position to – I think Lee and all of us will try to do a better job of providing more – more complete, I'm not saying more complete, but a more detailed picture so that people can sort of refine their assumptions to understand what that annual quarter over quarter sort of ramp looks like. But the number one thing that I would highlight, you know, is that we wanted to continue to push on gross margin, and that's precisely what we did. And so, you know, whether we made decisions to slow down wholesale in the first quarter or not, whether or not there was cyclicality, that doesn't change the way we see the year unfolding as time goes on.
spk10: And my second question is, we don't have the full cash flow reconciliation from you yet, but the cash burn rate increased in the quarter. How much of the sequential change in that cash generation was driven by working capital investment or something that could reverse in the second quarter, or will you need to continue to invest to grow that top line through 22 and the cash flow situation may not look as good as the year progresses?
spk04: So what I'm going to do is turn it over to Derek and let Derek respond. What I would say is we did build inventory in a number of markets, so that's obviously going to impact our working capital. And I think what you're seeing is that what you're hearing from us is that we anticipate CapEx actually moderating as the year goes on. But let me turn it over to Derek.
spk02: Thank you, Nick, and echo those thoughts. The cash balance at the end of Q1, again, $168 million, a very healthy cash balance we have. That does include some investments in working capital. So with wholesale transactions at the end of the quarter not being as strong as we thought, we do have investment in inventory as a result of that. So we've got some healthy inventory that we can work through now going through the balance of the year and into the second quarter. We also just note the CapEx number. Again, we had a $29.5 million investment in CapEx. not a working capital impact, but obviously a cash impact where we've made early and big investments and what we need to invest for the balance of the year as well. Great.
spk08: Thank you. Thank you.
spk01: There are no further questions. I'd like to turn the call back over to Nick Vita for any closing remarks.
spk04: Great. Well, thank you, everybody. We really appreciate your consideration and support. And if you have any follow-up questions, don't hesitate to reach out to us. We look forward to catching up with everybody soon. Thank you.
spk01: This concludes the program. You may now disconnect. Everyone, have a great day.
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