The Cannabist Company Holdings Inc. (CBSTQ) Earnings Call Transcript & Summary

Greetings, and welcome to Columbia Care Q2 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lee Ann Evans, Vice President, Investor Relations. Please go ahead.

Thanks, Hector. Good morning, and thank you for joining Columbia Care's second quarter 2021 earnings conference call. With me today are Nicholas Vita, our Chief Executive Officer; Lars Boesgaard, our Chief Financial Officer; and David Hart, our Chief Operating Officer. Earlier this morning, we issued a press release reporting our second quarter results, which we also filed with the applicable Canadian securities regulator authorities on SEDAR. A copy of this release is available on the Investors section of our corporate website where you'll 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 constitute forward-looking statements within the meaning of applicable Canadian 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 Information Form dated March 31, 2021, as filed with applicable regulatory authorities and posted on SEDAR. 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-IFRS financial measures, such as adjusted EBITDA and gross profit margin, excluding changes in fair value of biological assets. These measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. Columbia Care considers certain non-IFRS measures to be meaningful indicators of the performance of its business in addition to, but not as a substitute for, our IFRS results. A reconciliation of such non-IFRS financial measures to their nearest comparable IFRS measures is included in our press release issued earlier today. With that, I will turn the call over to Nick to get us started. Nick?

Thank you, Lee, and good morning, everyone. I'm extremely pleased to share the results of our second quarter with you as well as discuss key operational accomplishments and review our expectations for the back half of the year as we continue to build scale, enhance profitability, and develop brand equity across our national portfolio. For the second quarter, we once again achieved a new record, reporting approximately $110 million in combined revenue, up 232% year-over-year and 19% sequentially. Notably, both the year-over-year and sequential increases were higher growth rates than what we achieved in Q1. So we are achieving -- so we are growing at an accelerating pace, and that's driven by the close of the Green Leaf Medical or gLeaf acquisition. And although the acquisition closed towards the end of the quarter, we saw initial contribution driven by revenue and margin synergies created by the overlapping [ CC and GC ] facilities in PA, Maryland, Virginia and Ohio. We had standout results in markets such as Arizona, Florida and Illinois and strong organic growth across the national portfolio. Out of the 15 markets that are currently operational, 12 generated positive EBITDA and 11 markets generated positive cash flow from operations in Q2, excluding contribution from gLeaf. This performance drove total adjusted EBITDA for the quarter up to $16.4 million, an increase of over $21 million year-over-year and 58% sequentially. Combined adjusted gross margin for the quarter was over 43%, a 266 basis point improvement sequentially and more than 700 basis points higher than the second quarter last year. The sustained positive trend line in gross margin in Q2 was attributable to broad improvements across our markets, but with particular emphasis on the following: positive results in Florida, where new cultivation had its first harvest in June; newer markets that are ramping up, such as New Jersey, Utah and Virginia; as well as the early close of gLeaf with operations in Maryland, Ohio, Pennsylvania and Virginia. We also saw record cultivation yields in 7 markets, a testament to the harmonization of cultivation procedures and ongoing efforts to optimize efficiency throughout our cultivation portfolio. Including in-development facilities, we are now -- we now have more than 2 million square feet of cultivation and production capacity. With the addition of our Utah cannabis location and 4 incremental gLeaf dispensaries in the second quarter, we now have 73 active dispensaries across the national portfolio and a pro forma count of 99 dispensaries, including those in development. Just this week, on Tuesday, August 10, we were excited to commence adult-use sales at our downtown Boston location. Of our 73 active dispensaries, 36 are now adult use. We continue to make progress on our initiative to grow wholesale revenue contribution in Q2, which now represents 15% of revenue, up 200 basis points sequentially. As we have previously explained, we expect our newly acquired assets in Pennsylvania, Maryland and Virginia to be significant drivers of wholesale in the second half of the year, on top of the strong wholesale presence in markets like California, Colorado, Illinois and Ohio, with expanding wholesale capacity coming online in New York, New Jersey and Massachusetts. As David will discuss in more detail, we continue to advance our investments in the markets that are poised for growth, especially those transitioning to adult use, such as New Jersey, New York and Virginia. In Q2, we launched our new store front, Cannabist, which is now open in 5 locations: Springville, Utah; Tempe, Arizona; San Diego, California; Villa Park, Illinois; and Lowell, Massachusetts. We expect to convert additional locations in the near term, including all 14 of our Florida locations. We will open new Cannabist-branded dispensaries in New Jersey, Missouri, and Virginia later this year. In addition to building our nationwide retail brand, we are continuously innovating on product and service side of the business. In the second quarter, we launched nearly 140 new SKUs across 11 markets and saw great responses for the brands in new markets. For example, Massachusetts now has distribution of all of our national brands, including Seed & Strain, Triple Seven, Amber, Press and Plant Sugar edibles. I'm pleased to report that these brands are being met with significant demand that is driving an increase in average basket size. In addition to strong operating execution in our core business, we are also progressing on both the M&A front and in greenfield operations. As I mentioned a few moments ago, the gLeaf acquisition closed in June, and the integration is progressing smoothly. In June, we also signed an agreement to acquire Medicine Man, a widely acclaimed, vertically integrated operator with 4 dispensaries in the Denver metro area. In July, we completed the acquisition of 4 CannAscend dispensaries in Ohio. Early in Q2, we announced the acquisition of what will be the largest cultivation site in the entire East Coast located in New York. We have since received preliminary approval to begin cultivation operations and are still targeting an initial harvest for the New York medical program by the end of this year. Last month, we launched cultivation operations in West Virginia where we have 5 dispensaries under development. These significant strategic investments will enable us to scale up, improve efficiency, and solidify our market-leading position in key markets to drive shareholder value. Turning now to the back half of the year. We see continuing and accelerated momentum as we focus on execution of our priorities. As noted in today's press release, our outlook for the year is unchanged, with revenue expected to be between $500 million and $530 million. To achieve those results, we will need to continue our solid execution as we battle some headwinds, which we will discuss in more detail in a moment. That said, the opportunities are tremendous. There are a number of commercial and operational initiatives we are leveraging, including our retail brand and product rollouts, dispensary openings, improved cultivation yields and continued progress on integration efforts with an addressable market that keeps on expanding as the U.S. cannabis landscape evolves. We are executing against our strategic initiatives and remain confident in the momentum we are carrying into the back half of 2021 and onward into 2022. With that, let me turn the call over to Lars to give a more detailed recap of Q2 and our outlook for the remaining of the year. Lars?

Thank you, Nick, and good morning, everyone. I'll provide a brief summary of the key financial results for the second quarter as well as discuss our outlook for the back half of the year. Just as a reminder, our combined metrics do include our reported financials as well as the results from the 4 dispensaries operated by our partner in Ohio. But with our acquisition, as Nick mentioned, of these dispensaries closed on July 1, beginning with Q3, we'll no longer report combined metrics. As Nick mentioned, combined revenue in the second quarter was $110 million, which was an increase of 19% sequentially and 232% year-over-year. The sequential revenue growth was primarily driven by double-digit organic growth, with particular strength in Florida, as well as the addition of Green Leaf, reflecting the June 10 close of this acquisition. Combined adjusted gross profit for the second quarter rose 26% sequentially to $47.7 million, resulting in a gross margin of more than 43%, and that was a 266 basis point sequential improvement. Reporting operating expenses were $51.5 million in the second quarter as compared with $47.5 million in the first quarter and $29.6 million in the second quarter of 2020. Combined adjusted EBITDA improved almost 60% sequentially to $16.4 million. On a year-over-year basis, combined adjusted EBITDA increased $21.1 million when compared to the $4.7 million loss we incurred in the prior year period. Capital expenditures for the second quarter was approximately $25 million, largely driven by investments in our new markets of Missouri, New Jersey, Utah, Virginia and West Virginia, as well as improvements we're making to operations in California, Colorado and Ohio. The reported number also includes the acquisition of Project Cannabis properties in Los Angeles. As of June 30, 2021, our cash balance was $148.8 million as compared with $176.5 million at the end of the first quarter. We raised $74.5 million of 6% convertible notes maturing in June 2025, and these notes represent the lowest cost of capital in the company's history. Now turning to our outlook for the year. As Nick mentioned, we're maintaining our full year guidance of $500 million to $530 million in revenue, combined adjusted gross margin of 47%, and combined adjusted EBITDA between $95 million and $105 million. Over the first 6 months of the year, we've managed through regulatory approval processes in Boston and Chicago, among others. These opportunities, along with our confidence in ongoing commercial and operational initiatives that David will walk you through shortly, provide continued momentum for us in the back half of the year. However, we are mindful that the headwinds from COVID remain present and are fluid. In addition to the obvious concern that COVID variants will put a damper on consumer activity, we've also seen that COVID can slow us in other ways. For example, through regulatory delays because government agencies are operating at reduced capacity, as well as through delays in sourcing materials and equipment necessary to continue our expansion. Beyond COVID, in the second half of the year, we expect to continue to focus significant efforts on ensuring ongoing improvements to cultivation facilities in California and Colorado, which we expect will result in margin gains in those markets in the second half of the year. Before turning the call over to David, I also wanted to provide an update on our transition from IFRS to U.S. GAAP reporting. As we work to advance and complete many exciting strategic initiatives before the end of the year, we've decided to plan for a conversion to U.S. filer status and consequently GAAP accounting for financial reporting commencing next year of 2022. We believe this timing will be optimal for our investors and analysts and enable us to provide 2022 guidance at the appropriate time on a GAAP basis. With that, let me turn the call over to David to cover our operational highlights. David?

Thank you, Lars. I will focus on important operational developments during the second quarter, particularly in our top markets. On a revenue basis, our top 5 markets alphabetically are California, Colorado, Massachusetts, Ohio and Pennsylvania. On an adjusted EBITDA basis, Illinois replaces California on a list of the top 5. In California, although we continue to face persistent COVID-19 restrictions, we posted a modest sequential increase of 4% revenue. We've completed the rebranding of the San Diego dispensary to the Cannabist brand and continued to invest in cultivation upgrades in our Los Angeles facility to increase yield and overall efficiency. In light of softening in the wholesale market we experienced in Q1, we opted to accelerate CapEx spend in California to ensure high-quality production, which has experienced less price compression in the wholesale market. In Colorado, we discussed at length in Q1, we are investing in cultivation improvements, primarily at our Steele, Colorado indoor grow facility. The initial trials of the upgraded system are encouraging as we saw a significant increase in quality, potency and yield. Colorado gross margin was stable quarter-over-quarter at 42%. And again, we anticipate the benefits of the improved cultivation to materialize in the second half of the year. We also are excited about the pending addition of the Medicine Man and canopy and dispensaries to our Colorado network, solidifying our position as the most scaled retailer, cultivator, and manufacturer in Colorado. Massachusetts also saw sequential revenue growth in the quarter of 6% and 85% over 2020. We're implementing automation for flower and pre-roll production to help improve yields in what remains a capacity-constrained flower market. Earlier this week, we opened our adult-use retail location in Boston with a full suite of Columbia Care products. We continue to improve the supply chain and are shifting the product mix towards in-demand, in-house brands. In Ohio, we continue to have steady progression in sequential revenue growth in this market with 18% growth in Q2. With strong transaction growth at retail, manufacturing expansion in Columbus, and strong wholesale sales, our product is in almost every dispensary in the state. With the completion of CannAscend and gLeaf acquisitions in Q2, we are now at the state maximum of 5 dispensaries and are expanding cultivation to capitalize on a growing wholesale opportunity. In Pennsylvania, gLeaf is one of the largest cultivators and processors with over 100,000 square feet of operational capacity and another 174,000 in development. gLeaf wholesales to more than 95% of the operating dispensaries in the state, including to the 3 existing Columbia Care dispensaries. The combination of the gLeaf and Columbia Care operations in the state offers us a significant opportunity to drive revenue and expand margins in both the retail and wholesale channels. Florida was a standout market in Q2 with 46% revenue growth sequentially and 335% year-over-year. We saw the first harvest out of our 38,000 square foot Alachua facility in June. We are focused on expanding product lines, increasing supply of edibles and other manufactured products across the retail footprint in 2H 2021. We also look forward to the upcoming rebrand of all Florida stores to Cannabist in the coming months. In July, we launched operations in West Virginia with the state's largest cultivation facility and 5 dispensaries under development. We're also very excited about the key growth markets of New York, New Jersey and Virginia, all of which will be transitioning to adult-use. In New York, we anticipate doubling our dispensary network from 4 to 8 locations, 3 of which will be co-located with adult-use. And as we've discussed, we have almost -- we have acquired almost 1 million square feet of cultivation and production capacity in Long Island. In New Jersey, revenue increased 20% sequentially, and we completed the first significant harvest from our Vineland cultivation facility in July. We expect to expand to the maximum of 3 dispensaries and add another cultivation facility to reach the maximum 150,000 square feet of canopy in advance of adult-use. And in Virginia, we have a solid position, together with gLeaf, as the largest cultivator in the state. We presently have 2 dispensaries in the state and are working to expand to 12 in total. In addition, we expect to have flower available in Virginia beginning next month. The Virginia market is still very new, but we're seeing tremendous growth, 227% from Q1 to Q2. With flower anticipated in September, we are building inventory and preparing for increased demand. As Nick mentioned earlier, we executed 11 new product brand launches during the quarter, 5 of our markets now have 2 Columbia Care flower brands and distribution, and 4 of our markets have launched their first Columbia Care branded products. In fact, all Columbia Care flower brands are available in each of our Cannabist locations across the country. Sales of our Seed & Strain doubled from Q1, driven by launches in New Jersey and Ohio and are continuing to grow and gain momentum. During the quarter, we also launched our Press, Amber and Plant Sugar brands in several markets and anticipate launching these brands as well as [ classics in addition ] states later this year. Now let me turn the call back to Nick to wrap up before we take your questions.

Thank you, David. Before taking questions, I wanted to take a moment to express my gratitude to Lars and thank him for his leadership and service to Columbia Care. As you may have seen in our press release, Lars is leaving Columbia Care at the end of the month to pursue an exciting opportunity in the European biotech sector. Lars has been an important member of our executive team, and we wish him well in his next role. As we also mentioned in this morning's press release, Mike Livingstone, the company's Vice President and Corporate Controller, will serve as interim CFO. A search for the permanent CFO is underway. In closing, to reiterate, the key themes we've discussed today. Columbia Care continues to see positive results from execution of our strategic priorities, building scale in our markets, enhancing profitability and developing brand equity and awareness across our vertically integrated portfolio. There is so much embedded potential in our portfolio, with an estimated total addressable market of more than $30 billion. We look forward to our ongoing execution, resulting in further growth and accelerating into the second half of 2021 and beyond. With that, I'd like to turn the call over for questions. Operator?

[Operator Instructions] Your first question comes from the line of Matt Bottomley with Canaccord Genuity.

Congrats on the quarter and congrats, Lars, on the next step. Good stuff. Just wanted to start with something that was directly related to the quarter but maybe getting your expectations if you can give us any more color on the Massachusetts market and particularly dispensary that you have in that very attractive location downtown. Obviously, one of your peers in Brookline for the last number of years, there's been a lot of speculation of just how well those types of stores are doing that are located in the heart of Boston, particularly where not a lot of stores are opening. So I imagine this could be not material to your company, but certainly material to what you do in that state. Just curious on your ability to facilitate demand there, more logistically, given that it's hard to get as many people in and out of the stores, which I've seen a lot of lineups prior to COVID and just overall expectations on that market in general.

Thanks, Matt. So let me start off with a very high level couple of comments, and then I'll turn it over to David and Jesse to sort of share their insights as well. As you know, we've spent a long time trying to get through the process in Boston. We are now the only downtown dispensary, which is great. The Downtown Crossing area is a fantastic area to be located in. We've gone through a fairly substantial kind of redesign internally to accommodate both the medical and adult-use programs in Massachusetts. And so we have pretty high expectations for not only the Massachusetts market continue to be sort of a driver of value for shareholders going forward, but in particular, the transition in Boston to adult use. That will become a Cannabist location, which is a very big deal as we see in other markets the ability to kind of rebrand and actually consolidate the sort of storefront nationally is something that we've looked forward to for quite some time. But David, why don't you share some of the insights you have sort of on those 2 sort of points that Matt's raising, and then we can turn it over to Jesse as well.

Sure. Yes, we're certainly -- we do have high expectations for Boston, and I think we've done a fair amount on the infrastructure development side for that facility to increase throughput. So it's definitely the sales floor as a percentage of the total facility is significantly higher than it was before we prepared for adult-use. And I think most importantly, we've prepared to bring a significant amount of technology to drive throughput, and that's where Jesse, I think, and his team has spent a lot of time. So I don't want to waste too much time on the infrastructure bill, which is just incremental point-of-sale stations. But Jesse, why don't you highlight what we've done in anticipation of driving significant throughput in Boston.

Yes. So for Boston, we specifically launched a series of new technology integrations in order to try to increase that throughput. We have placed our Lightboxes, which is our touchscreen hardware partnership, complete with all of our menu, self-service, in-store, pre-order, express and our forage system are all fully integrated into those systems. The other thing that we've done is we launched the brand-new mobile-optimized reservation system that's available for walk-ins to quickly schedule appointments and/or people to schedule appointments before they arrive. And those come complete with a suite of notifications and reminder sets. And those, again, are all fully integrated into those in-store interactive systems. We believe that the combination of those things, combined with the infrastructure improvements and the expansion and point-of-sale, will create significant opportunities for throughput. And through the initial sort of soft opening of the space, we're already seeing those systems working very well in concert with each other. So I think it's an exciting blueprint for things to come as far as ways that we can ultimately leverage technology to increase throughput.

Great. That's helpful. And then I just wanted to pivot over to top line results. Obviously, very strong sequential growth, but no pro formas given on the Green Leaf Medical side of things. So I just wanted to see if we could kind of try and triangulate based on what has been publicly said, whether it's on the deal multiples or in prior calls. So is it fair to say that the Colorado acquisition, Medicine Man, is about a $30 million annualized business, at least that's what I kind of derived from the purchase multiple. And Green Leaf Medical, I think the adjusted EBITDA expectations was historically given about $50 million for the year -- for the 12-month year. So putting some margin assumptions on there, that might be a $30 million, $35 million business quarterly. Just trying to assess if those are reasonable estimations of what those companies might have done in the period that weren't reported in the results.

Sure. Why don't I turn it over to Lars for that question.

Sorry, I believe you referred to me, Nick. I think you cut out there for a second.

Yes.

You're right, Matt. I think you're reading our signaling that we've done in the past in both the acquisition announcements as well as when we talked about gLeaf in the past. And you're right, I think we previously did talk about gLeaf being about just shy of $30 million in revenue in the first quarter. And I can tell you, gLeaf continued to experience growth in the second quarter. So I think you're spot on in your approximate numbers there.

Okay. And just one last housekeeping item just quickly, and then I'll get back in queue. Any commentary you can provide on kind of directionally, how this ramp to 47% gross margins at the end of the year will likely flow? Obviously, a lot of infrastructure coming online and some full periods of Green Leaf coming in next quarter. So just -- I know it's only 2 quarters, but is that going to be a smooth kind of linearly direction up? Or is there anything we should keep in mind with how those margins might progress in the next couple quarters here?

Let me sort of share some high-level thoughts with you, and then David and Lars, you guys can weigh in as well. I think there are 3 things you need to keep in mind. Number one, we have in 2 of our largest markets, California and Colorado, we're basically going through a supply chain restructuring, if you will, because several facilities are being upgraded to really improve throughput, and that will have a material impact on gross margin. The second thing is we're expanding materially into the wholesale market, especially being driven by the gLeaf acquisition. And so you're going to see sort of a different mix of revenue coming in for the first time that I think will be very positive from a gross margin perspective. And the third thing is you're seeing a lot of scale come online. And so you take markets like Virginia and New Jersey where we have been making investments and where we do see that scale beginning to materialize, those are capital projects that are basically lagging indicators after we've made the investment, and we've actually brought on these new [ faces ]. And I would say Florida is the same way. So we have significant capacity coming online to satisfy a lot of the need that we just haven't been able to satisfy in the marketplace. And so with all of that, when you layer on top of it, you've got sort of new markets opening up and actually transitioning from basically no revenue to gross margin positive to, obviously, at some point, EBITDA positive. And then you have all of the new products and SKUs coming out, I think you have a really sort of balanced mix of catalysts that will have a fairly material impact on gross margin sort of moving in that direction. So let me turn it over to David, though and see, David, if you have some specifics you'd like to share.

Yes. Nick, I think you answered it. The only thing I would highlight, just to echo what you said, there's -- we're making significant investments and improvements in cultivation in Colorado and California. And so that is likely a step function between now and the end of the year as throughput directly correlates into gross margin enhancement. So we're excited about what we're seeing. But again, we need to continue to execute to see that, but those 2 will have a material impact on gross margin for the company in the balance of the year.

Next question comes from the line of Vivien Azer with Cowen and Company.

Great. Congrats on a strong quarter. This is Harrison Vivas on for Vivien today. So just first, in California, there's been a lot of discussion of price deflation in the wholesale market. So can you offer some color on the magnitude of the price deflation between indoor greenhouse and outdoor? And can you comment on how that price deflation is sort of impacting retail pricing? And I just have one follow-up after that.

Sure. I'm going to turn it over to David. David, you can share some thoughts.

Sure. We've definitely seen price compression in the wholesale market for flower and flower derivatives, but the price decline curves, as you alluded to, have been more dramatic in the outdoor and greenhouse relative to indoor growth. So high-quality indoor flower has not seen the price compression that the other growing methods have experienced. And so that's why we've continued to make improvements in our indoor grow. It has translated into softness on the pricing for wholesale. At the retail level, there's still a significant demand for high-quality indoor grow material. So again, we continue to bring that in and source that for all of our retail stores. So I think it's been more outdoor and greenhouse-related price compression that's had a material impact for operators in California relative to indoor grow. So while it is across the board, it's significantly more pronounced in the outdoor and greenhouse spaces.

And any comment on how that's flowing through to retail pricing?

We haven't seen much -- I mean, again, what we're retailing is high-quality indoor flower predominantly, and we haven't seen much, if any, price compression from our stores in the quarter.

Great. And then just pivoting to Arizona. So inventory tightness was clearly a benefit to you there, as you noted. So can you just comment on what measures you can pursue to retain the market share that you've had there, especially as supply normalizes?

Sure. I mean I think that the trend -- from a very high level before I hand it back over to David, I think the transition to the Cannabist has been important because it's helped us really kind of redefine our position in the marketplace and change the expectations for our customer journey. A lot of the infrastructure we compete against in Arizona is very old and dated. And that's sort of one of the opportunities that we've looked to take advantage of, especially on the technology side, through some of the things and some of the innovation that [ Ford ] just brought into sort of the limelight. But in addition, sort of the introduction of new products, from a branding perspective as well as SKUs is very important, right, and it really helps to offset not only the price decline curves that I think you will see in a hypercompetitive market, but also from the standpoint of really customer retention and building sort of, let's call it, new pockets of loyalty within specific demographics, because each new product isn't simply just being rolled out because it's a new product. It's being rolled out attack a very particular part of the marketplace. And so I think the combination of those things in addition to additional capacity coming online from a wholesale and the supply chain perspective is only helpful. But let me turn it over to David. Maybe you can share some additional thoughts.

Yes. We've got low-cost production in our greenhouse facility in Chino Valley. We're actually making some investments in Q2 and Q3 to improve the light quality on a year-over-year basis to avoid some seasonal depression from a light perspective. So we're going to continue to make modest investments where we think it justifies from an ROI perspective. And I think we've got right now 2 great locations from a retail perspective that we're very happy with, and the rebranding in Tempe has, obviously, been very successful for us. So we continue to try to, just like in other markets. We haven't necessarily chased the discounting activity that we've seen in Q2 and has continued into Q3. And we're also under construction in Tempe for a manufacturing facility. So we'll begin to introduce not just flower and flower derivatives, but concentrates and edibles as well. So we continue to invest in our assets. We always look -- we're always looking on the M&A front in a market like Arizona, but we've been well-positioned heading into adult-use with the assets we have. And are sort of looking opportunistically where we want to deploy capital in the market if we think it makes sense.

Your next question comes from the line of Andrew Semple with Echelon Wealth Partners.

Congrats on the solid quarter. So we saw some good momentum in Florida in the first half of this year. I'm just looking for your thoughts on growing -- potentially growing the store count in that state. With the first harvest from the new facility in June, is that kind of a signal that you could begin resuming store openings within the Florida market?

I think it's -- again, I'll probably ask David to weigh in on this one. For me, I would -- the way I see the landscape, I think there's room to run in the existing infrastructure, meaning, it's not about having the most stores. It's about having the right stores at the right places and then optimizing the value of each of those stores. We've always been a very good fast follower, particularly in Florida. And what I would expect to see happen is that as the supply chain begins to evolve, and as you've seen, we've made investment in that, it opens the door for us to begin looking for new locations. But at the same time, we also want to rebrand, right. We want to go through the Cannabist conversion. And I would actually argue that that's going to be more important than simply opening new doors. Because I think there are a lot of people that are doing that, and I think that's helpful. But the statistics that we're seeing from -- on a per mg basis or a per gram basis that we're actually able to sell through. Our retail storefronts are putting us in a very, very advantageous position. And so once we hit that critical mass, once we hit sort of the KPIs we typically target from an efficiency perspective, that's the point at which we will begin to look beyond the sort of the existing 4-wall structure that we have in place. But David, maybe you have some additional thoughts to share there.

Yes. I just like what you said, we have room to run in our existing infrastructure. We want to continue to perfect our cultivation in the new facility in Alachua in particular. We've got a number of new product and brand launches coming to Florida as well. So I think we will begin to look opportunistically. There could be opportunities to find locations where either populations are underserved or previously were not allowing a dispensary to operate in the jurisdiction, we could be opportunistic in that front. But for 2021, what we've looked to do is within the existing asset base that we have. So I think it will be opportunistic, but probably towards the end of the year, we'll start to look. But right now, we've got room to run and continue to take market share with the existing assets.

Got it. Okay. And just switching gears to New York. I see for the New York production facility, you're still expecting your first harvest there in Q4 of this year. I guess just given the evolving political situation in that state, are you still confident that, that initial harvest will be cleared for sale and will be available for sale in the medical market by Q4 of that year? Or do you think there's a risk to some delay in the New York market?

I would say that there's always a risk, but I don't think it's regulatory in nature, meaning anytime you have your first harvest, you always try to make sure that you have all the variables dialed in and you go through the sort of the review and approval process. That should be a fairly straightforward process. But I think one of the things that sort of when you read through the subtext of what Lars said earlier, we run into backups because facilities close, right. The testing facilities literally do not open. And there's always been a bottleneck from a testing perspective. So once New York State gave us permission to operate, I think that, that sort of opens the door for us to operate on a normal course basis because we're already an operator there. But there's always a risk. So I would say that's not something that I would discount to zero. But I think the big hurdle was making sure we actually have permission to begin growing plants. And so I think from a political perspective, it will be very interesting to see how Lieutenant Governor who's, let's call it, I don't know what the right title is here actually. But the new Governor, when she takes office, she's always been a very strong proponent of this issue. And so I would -- I'd like to believe that there will be a door opening that will allow her to really begin to accelerate this program and not only from a medical perspective but from adult-use perspective. So knock on wood, we're cautiously optimistic. Volatility isn't necessarily a bad thing in some circumstances. And this one with the new Governor coming in, we know that historically, she's been a very, very strong proponent of a strong medical and adult-use program. So knock on wood, if all that goes well, we should see New York sort of take -- over the next, let's call it, 24 months take the position as one of, if not, the fastest-growing market in the country.

Understood. A -- one last question, if I may. Just looking at the Arizona market, I believe you signaled there's some incremental upgrades to the cultivation facility within that state. Could you perhaps just quantify the extent of the expansion projects underway within that market?

Sure. David, you want to take that one?

Yes, sure. We're technically expanding some bench space in our existing facility, but it's not a material expansion. It's around the edges, and it's going to be because of the environmental and lighting upgrades that we're making to that facility. So we will squeeze more plant count out of that facility, but it's also going to be higher quality based on what we've done in other markets with environmental controls and lighting. So it's really about sort of infrastructure upgrades to that facility. We have the ability to expand incremental canopy. The first step we wanted to take based on what we see in the marketplace is just improving the seasonal dips, if you will, for that facility as a first step, in addition to opening up a manufacturing facility in Tempe. So that's sort of step one, and we'll continue to evaluate whether we're going to make a material investment in the expansion of canopy in Arizona probably later this year.

Our next question comes from the line of Aaron Grey with Alliance Global Partners.

And Lars, I'll echo my congrats and best of luck for your future endeavors. So on that, Lars, I would love to dive back into a question earlier on gross margins, but more specifically on Colorado. So 42% this quarter, kind of in line sequentially. But I believe Colorado was closer to 47% 4Q '20. So I know you talked about some of the improvements with the Steele indoor cultivation coming online with a big harvest in 3Q, 4Q. I just wanted to get some more color in terms of whether or not you believe that will get you back to maybe the high 40s gross margin maybe in the back half of the year, or maybe help us give some color in terms of what you believe will be going on within that market on the wholesale side, in the retail side with the margins in the back half of the year?

Yes. Sure. I'll be happy to give you a few thoughts, and then I can definitely ask David to also jump in on some of the operational activities we're undertaking in Colorado. So you're right, we did see a bit of a dip in the first half of the year. We've undergone and are continuing to undergo significant improvements in the Colorado market. Now some of these things, as you probably know, are going to take a little bit of time as you implement changes to the garden. But I definitely see the beginning signs of improved margins in Colorado. Now as we implement those, you're probably going to start seeing that materialize more in the fourth quarter than the third quarter in Colorado. But like I said, we're seeing the trend that's beginning to form in Colorado. So I feel -- I don't want to put necessarily specific numbers on the gross margin coming out of the year in Colorado, but I can say that we're trending -- we're definitely trending up versus the 42% that we've realized in Q2.

This is David. I was going to say, I was just going to add -- I would just want to underscore the material improvements we're making to the infrastructure in the 5-tier indoor grow. It is a significant effort which is nearly complete with lighting upgrade, environmental controls, which will have a significant impact on what is one large systemically controlled indoor grow. And we've made sizable investments to improve our speed to harvest in our outdoor grow, which will have a pretty pronounced impact on the quality of the material we take out of Trinidad. Now it's an outdoor growth so, knock on wood, everybody's going to be watching the weather. But this year, unlike years before, we will have the ability to take that harvest down in very short order if we need to based on weather and our drying and processing automation that we've brought to Trinidad will have an impact. So to your point, there were strong margins in Q4, and a lot of that does have to do with the size and the quality of the material we take out of Trinidad in the outdoor grow, which occurs obviously starting in late September and into October and we start to realize those opportunities through the balance of Q4.

And then second question for me. Just kind of on overall M&A. Congrats on the gLeaf closure and the announced Medicine Man dispensaries in Colorado. One thing we talked about in the past is the fact you guys outside of just looking at some of the limited license market states, you've also looked at some of the more mature states such as Colorado and also your focus on California. So some of your peers have been talking about how the private markets are a little bit slower to react to valuation changes, obviously, compared to the public market. So just would love to get some commentary from you guys. We're also looking at some of those more mature markets in terms of how you're seeing the M&A landscape with where your stock is now and whether or not you're seeing those prices maybe change a little bit more differently in the private market for the mature states? And just any kind of commentary on how you see that M&A potentially in the back half of the year or the next 18 months?

Sure. So I can take that one. We continue to use M&A as a tool in our toolkit. The goal that we had for ourselves to really complete the portfolio and be fully integrated in each market, I think, was achieved once we closed the gLeaf transaction. Anything we can do to add scale in markets or add markets that already have scale through acquisition, there's things that we look at. We don't love the fact that our stock trades at a discount on a multiple basis, but we've also been, I would argue, one of the, if not the most, disciplined buyer of businesses. And so we've been able to find the right partners and the right acquisitions at the right prices. So we haven't had to pay up the same way others have. And candidly, that's been one of sort of the most attractive aspects about partnering with Columbia Care because everybody in the industry knows that we trade at a discount. Everybody in the industry knows we've got great operations, and everybody in the industry knows that if you're going to take somebody's stock and chances are if you're going through an M&A process as a seller, you're going to be taking stock, Columbia Care is probably the right stock to own. So it kind of cuts both ways, but we're very mindful of sort of the dynamics. But the fact is that the markets are -- they may be slightly less or more robust or more sensitive depending upon which market you're talking about. But for us, our processes typically take a pretty long time. We're very thoughtful about the due diligence. And we're not really out there looking with a shotgun. We're more looking for the right assets in the right markets for the right reasons. So it's -- I'd say there's probably been less of that dynamic that you were just referring to for us than maybe others that are more reliant on M&A because they don't already have an existing portfolio the way we do.

Your next question comes from the line of Scott Fortune with ROTH Capital Partners.

I wanted to focus on Capex kind of the outlook for the second half here and then kind of focus on allocating the capital kind of were calling out the new states or opportunities that you see with that CapEx to kind of go deeper in states or expand in kind of the new states coming on board here?

So let me give you kind of a very high-level thought process and then turn it over to David and Lars. I would say CapEx for us is, first and foremost, focusing on making sure we have the right assets in the right markets that are developed, so our existing portfolio. We have more markets that are transitioning from medical to adult-use than I think almost any other operator, if not any other operator. So in order for us to be the market leader in New York and a market leader in New Jersey and the market leader in Virginia, we just have to make these investments and that's what we've been doing. By the same token, we have a very strong footprint in Ohio and Pennsylvania. Those have been historically strong markets for us. We want to continue to perform in those markets and drive efficiency. So having those incremental investments show an immediate ROI and rate of return. But then at the same time, we're also constantly looking at new markets. So West Virginia is an example, Missouri is an example, Utah is an example, where we have an opportunity to really drive growth. And so it's not just about scale, it's not just about existing markets, and it's not just about new markets. It's sort of all of the above. And it's making sure that even in a market like Colorado where we acquired a great business, the fact is that there were opportunities to improve that business and to make it even more efficient. And so our perspective is definitively longer term than immediate because we recognize that the markets are going to continue to become more efficient. They're going to continue to have more licensees. And that's not just in the unlimited license market. That's across the country. And so we want to make sure that we're well positioned for all those dynamics. But let me turn it over to David.

Yes, Nick, I don't have much to add. I do think we're -- we don't have a shortlist of things that we can do from a CapEx perspective. And so we do try to prioritize to the immediate and midterm TAM. So the markets on the East Coast that everyone, I think, is focused on, New York, New Jersey and Virginia are top of mind for us. And solidifying and bolstering our position in Colorado and California I think also justify making investments there. I will say the one thing that I'd like to highlight is from a procurement perspective, we have done a fantastic job over the last 6 months, bringing down our cost of CapEx on a per square foot basis, whether it's national contracting for lighting, for benching system, et cetera. We've really tried to leverage how much CapEx we're actually spending now and in the future to get best-in-class pricing across these things because that does have an impact when you look at the totality of CapEx opportunities we have in front of us.

And then just really -- so kind of from a cadence standpoint for Capex, kind of the same outlook for the second half as we've seen with the first half of building out these states that you've highlighted here from that standpoint. Is that kind of how we should best look at it from a housekeeping standpoint?

I would argue -- I think the second half you'll actually see an acceleration in CapEx because of the number of projects that we're looking at right now and the number of markets that we're looking to open and really optimize. But I think if you look historically over the past several years, what you'd see is a pattern where you see the CapEx curve creep up and then shortly thereafter you see sort of a margin pop and that's really driven by the efficiencies that we are able to introduce into those markets. So in order for us to hit the long-term margin profile that we expect to hit, we really not only want to make these investments, but I think we need to make these investments. And that -- but the return on that capital is quite extraordinary. So that's not going to be a permanent sort of tactical decision, but it will be a decision that we're making in the near term to really sort of drive value in the existing portfolio and then the portfolio that's coming online.

Your next question comes from the line of Glenn Mattson with Ladenburg.

So just curious, a couple times you mentioned -- talked about the headwinds that COVID could present between supply chain issues maybe for capital equipment or for regulatory approval stuff. I just -- I'm not sure if I recall that language in prior calls. And I was curious, is that kind of boilerplate risk statements, or is there something specific you want to call out and bring to people's attention with regards to something you're seeing in one of your markets in terms of ramping and hitting your goals in the second half?

So look, I think it's a bit of both, meaning we fully expect -- we wouldn't be reaffirming our guidance if we didn't feel comfortable with it based on what we're seeing today. But I think the fact is that COVID and the way COVID is handled at the local and state level is a dynamic that's very hard to predict. If you have -- if you're in line to receive an HVAC to upgrade a major facility in one of your markets, and that state has some form of a lockdown, right, that can create real problems because you can't -- you actually can't finish the project that you've slated to fill, right. And so you do see delays for things like that. And it's not uncommon. And 9 times out of 10, it's really because the supply chain is either compromised or because the people who are actually supposed to be making the stuff for you can't find people to come in because half their workforce is receiving stimulus checks. So look, it's not something that has enough of an impact for us to change our outlook, but it's something that I think everybody should keep in mind, especially for a company that has an above-average growth rate when you look at the rest of the market, right. We just happen to have a lot of different markets that required CapEx and investment and that that investment is core to sort of seizing on the opportunities that we see. But it's not something that's unique to us. So I think if you listen to earnings calls from any other industry, they're seeing similar things that that they really have to sort of front run and be on top of. I don't know, Dave, if you have any other sort of specifics that you'd want to highlight.

No. I think in the last 45 days or so, there's definitely been a heightened sense of COVID impact similar to last year, whether it's -- we've got people that are actually testing positive, and you got to go through contact tracing, both in our facilities and also with contractors and their teams. So I think it's a mix of both, as you mentioned. But it seems to be ramping up versus ramping down like we saw in Q1. So we've continued to try to prioritize all of the material spend to get it where we think we can accelerate construction time lines, but it is fending off delays across the board which we're just trying to mitigate.

And then just last one for me. This question I think has been asked before, but just to get an update. You're obviously getting bigger in Pennsylvania, ramping cultivation there to the size where you're going to be one of the biggest. Is there any thoughts to your outlook currently for, say, back half of this year, first half of next year, or when New Jersey turns on to adult rec, if you expect any softness, especially as so many people are ramping in Pennsylvania? Just your latest thoughts on that. And that's it for me.

Sure. David, do you want to take that?

Yes. I think there's -- I think there continues to be new dispensaries opening up throughout Pennsylvania. And I think large-scale wholesalers have an opportunity to continue to put products on the shelf for those new stores. We've seen increased competition in our market, which we've been seeing for the last year in Pennsylvania. I think we've done a great job of fending them off and keeping market share without necessarily chasing price on a discounting perspective. In New Jersey, I think it's -- I think if you shake the crystal ball, it's coming in 2022, and we're doing everything we can from an infrastructure build perspective to prepare for it. So as I mentioned, we are first harvest in our Vineland facility. We just started not just flower production, but pre-roll production. And we're under construction in our second cultivation location. We're completing through construction for our second facility dispensary in New Jersey and working through the time lines to have that open hopefully this month, and the third location is under construction down in the southern part of New Jersey for us to be able to be prepared for what is likely a large adult-use opportunity in 2022. The exact timing of it, I think anybody can venture a guess on what that looks like, but we're doing everything we can in real time to prepare for it knowing that this is going to be a market that probably looks similar to in Illinois or Massachusetts in terms of a medical to adult-use conversion ratio, which is different than what we saw -- I think everybody's seen in Arizona. So we still think it's a significant opportunity and want to be prepared for it. So everybody knows the time lines for construction of canopy is not short. and the ultimate first harvest in the facility is even longer. So we're doing everything we can to prepare for it in New Jersey.

The only thing I would add is, I think that one of the things that New Jersey has been waiting for in order to transition is the availability of products so that the medical program isn't compromised because so much demand goes directly towards the satisfying of the adult-use program. And so it is very important to the state that operators like us are, actually, sort of fulfilling their obligation to make sure there's adequate supply chain for both the medical and the adult-use consumer. And so that's, I think, as we come online and as others come online, that to me is a very important thing. But as David said, in Pennsylvania, the fact is that more dispensaries are coming online all the time. And having scale and having efficiency in that market is going to be -- is really going to matter.

Ladies and gentlemen, this does conclude the question-and-answer period of the call. And I'll now turn the call back to Nicholas Vita for closing remarks.

Great. Thank you, operator. Well, we're very pleased with the results this quarter, and we're very excited about what we're seeing in the third quarter. So I'm sure we'll have conversations with many of you later on throughout the date. But if you have questions, let us know. In the meantime, thank you all very much for your support, and have a great day.

This does conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation.