CCHWF - Columbia Care Inc. (CCHWF) Q4 2022 Earnings Call Transcript

2023-03-29 14:22:02 ET

Columbia Care Inc. (CCHWF)

Q4 2022 Earnings Conference Call

March 29, 2023 08:00 ET

Company Participants

Lee Ann Evans - Senior Vice President of Capital Markets

Nicholas Vita - Chief Executive Officer

Derek Watson - Chief Financial Officer

David Hart - Chief Operating Officer

Conference Call Participants

Aaron Grey - Alliance Global Partners

Scott Fortune - ROTH MKM

Glenn Mattson - Ladenburg Thalmann

Matt Bottomley - Canaccord Genuity

Matt McGinley - Needham

Presentation

Operator

Good day and welcome to Columbia Care's Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to turn the call over to Lee Ann Evans, Senior Vice President of Capital Markets. You may begin.

Lee Ann Evans

Thank you, operator. Good morning and thank you for joining Columbia Care's fourth quarter and full year 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 Jesse Channon, our Chief Growth Officer.

Earlier this morning, we issued a press release reporting our fourth quarter and full year 2022 results which we will also file with applicable Canadian securities regulatory authorities on SEDAR 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 disclosed in more detail in the Risk Factors section of our annual Form 10-K for the year ended December 31, 2022 which we will file with applicable regulatory authorities and also 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 EBITDA and 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. Columbia Care 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?

Nicholas Vita

Thank you, Lee. Good morning and thank you all for joining our call. It shouldn't surprise anyone to hear that 2022, in particular, the fourth quarter was a difficult operating environment due to economic headwinds. It was against that backdrop that we announced Columbia Care's merger with Cresco Labs at the end of the first quarter. To begin, let me start off by stating that the strategic merits underpinning the combination with Cresco remain compelling and we continue moving forward on this path. The ongoing integration and market disposition process has been enlightening, informative and exciting. However, even without the challenges of economic backdrop, post announcement, pre-closing M&A periods are exceptionally complicated and bring unique complexities to come -- that become more pronounced as time passes.

To navigate this period successfully, we've done our best to balance the competing shareholder priorities of driving the business forward as an independent market leader, while pursuing our combination with Cresco in partnership. Without constant attention, circumstances as fluid as this one is the one we have been facing to lead to organizational uncertainty and malaise. In spite of the long time lines, many of which are regulatory and beyond our control, our team has remained decisive and focused on our efforts over the past 12 months on making Columbia Care more efficient, more focused and better prepared to succeed financially, operationally and culturally. We never stopped pushing ourselves and as a result, even though we have never faced such a challenging culmination of cross currents over such a prolonged period of time, we've never looked out at the horizon and seen so much untapped opportunity and promise embedded in our organization and our markets.

It's through this complex period that our cultural North Star has made all the difference. We doubled down on our organizational values by rooting our internal discourse and communications in our foundational belief that our people and the communities we serve are at the heart of everything we do. In the face of atypically public, strategic and regulatory processes and an exceptionally long integration time line, 12 months and still going, Columbia Care maintained the continuity of its leadership team. We worked collaboratively with brand partners to ensure seamless transitions. We took steps to improve the quality of our service and products to benefit our guests and we balanced the M&A priorities and processes against the need to continue building a better Columbia Care.

Living up to those competing priorities required extraordinary professionalism, thoughtfulness and dedication from our entire organization. To every 1 of my colleagues, I'm immensely proud of how you managed every aspect of our business and never lost sight of what matters most to us to deliver on our community promise and improve the business to drive shareholder value. Thank you all.

As you can tell, especially in light of the macroeconomic and industry-wide challenges that seem to have peaked in 4Q, I'm proud that we achieved record top line revenue and improved our adjusted gross profit and adjusted EBITDA margin over 2021. We've continued to press our scale and sustainable advantages by opening new stores in strategic markets like Virginia. On a parallel path and in recognition of the constantly evolving cannabis landscape, we have also continued to expand our award-winning cannabis retail footprint as more adult-use consumers and regulators expand our markets for medical to include adult use. We continue to innovate and to perfect our national product offering by launching new brand architectures such as Hedy Edibles and Press 2.0 cannabis tablets as well as developing new SKUs and form factors that speak to our customers and patients.

With a leading presence in so many markets, we are standardizing our baseline product offerings in each market, thereby enhancing our competitiveness in both the wholesale and retail settings. We continue to leverage our unique approach to implementing novel customer engagement and retention technologies with the launch of our Stash Cash Loyalty app in Q4 2022 which provides us with insight into customer behaviors and preferences, especially when combined with the use of our proprietary cannabis discovery tool, Forage. Knowing more about our end consumer has been invaluable and will continue to be a significant competitive advantage, particularly in an environment where retail is driving consumer and corporate behavior more than ever.

In a period where our team and partners were facing potentially significant change, we have used this moment to reexamine and reassess the strengths and weaknesses of our internal organization. We listen to our investors and couple that feedback with our own organizational assessment and aspirations to drive cash flow and we initiated a line-by-line, market-by-market review of the business to find every opportunity to optimize our existing asset base. Beginning with SG&A, we evaluated our operating and overhead costs and took steps to reduce expense and exit unprofitable businesses. We streamlined our retail and cultivation portfolio into a leaner, more efficient coiled spring that is ready to take advantage of the growth opportunities ahead and, in the process, have reduced the burden of underperforming functional areas and operations. Simply said, with an unwavering commitment to invest in our business and to drive growth and profitability, we made decisions to materially lean in the things that work and reduce exposure to the things that don't.

In doing so, we expect to generate approximately $35 million in annual savings from our existing cost structure without compromising our ability to capitalize upon our growth prospects. We expect to see the bulk of those cost reductions generate impact throughout the remainder of 2023.

Having exited the CBD market, Europe and Puerto Rico during 2022 and most recently, Missouri, we are now in 16 markets across the U.S., including high growth rate -- high-growth markets on the East Coast. With the first phase of the restructuring complete, we now look forward to realizing the benefits of these changes. In addition to exiting unprofitable markets as part of the recent corporate restructuring, we also closed several unprofitable retail locations and consolidated cultivation operations in several material markets, including Colorado, California and Pennsylvania. Today, we have 83 active retail locations and more than 2 million square feet of cultivation and production capacity. As we look ahead, we have -- the completion of the gLeaf integration beginning on July 1. And in the meantime, our goal is to announce creative partnerships and strategies to utilize every square foot of cultivation and manufacturing space as we turn our focus to improving our gross margin as a mean to leverage the improvements we have already implemented to reduce our SG&A and drive EBITDA margin improvements.

These reductions in our operating and overhead costs are just beginning to flow through our financial results and aren't expected to show a full quarter's benefit until the end of 2Q. In spite of the complications that come with having 6 of our markets involved in the divestiture process related to the Cresco transaction, all of which are regulatory -- subject to regulatory approval, we closed in 2022 with over $511 million in revenue, an 11% increase over 2021 and drove a 16.5% year-over-year increase in adjusted EBITDA. Considering the significant and unrelenting inflationary pressures on our -- on consumer wallets, combined with industry-wide wholesale pricing weakness in the second half of 2022, we were pleased with this outcome but have taken material steps to accelerate these trend lines. Business will perform better in 2023 than it did in 2022 and we have a clear road map on what to focus on next to drive shareholder value.

In addition to optimizing our portfolio to focus on markets where we have sustainable strategic advantages and scale and to improve our operating efficiency and profitability, we've also taken steps to manage our liquidity, allowing us to leverage our balance sheet as effectively as possible. As we announced yesterday, we exercised our option to extend the maturity of our 13% senior secured notes by 12 months to May 2024. This costless extension enhances our overall liquidity position, eliminates any near-term debt maturities or the need to redirect resources to repay indebtedness and provides us with a significant runway to build cash as our cost reductions and working capital initiatives take root.

We are monetizing our working capital. We have no significant CapEx needs to satisfy our growth aspirations and we have no material debt maturities until May 2024. In short, we are confident in our liquidity position. Moreover, we are confident that we have the tools and resources needed to drive the business and achieve our goals for 2023 without needing to access the capital markets on unattractive terms. Derek will provide more detail on the financial results from the fourth quarter as well as some insight into what we're seeing thus far in 2023 shortly.

With that, let's turn our discussion to look forward at what lies ahead for Columbia Care. We now believe that more than ever, Columbia Care's best days are ahead of us. The company is well positioned with strong, sustainable, differentiated advantages. The footprint and asset base that we've built in preparation for this moment is prime for the environment we're facing as well as the years ahead. First, we have the best embedded -- we have embedded best-in-class growth potential. We have leadership and scale in the most attractive growth markets like New Jersey, Virginia, West Virginia, where we have fully built out our cultivation and manufacturing capabilities but we still have additional dispensaries to build as the market grows. In addition, we have significant call optionality in the next round of markets set to convert to adult use, such as Maryland the Summer, New York and eventually states like Ohio, Delaware and Pennsylvania.

Second, we have limited capital needs to execute on our plan as we have completed the vast majority of the CapEx required for every market, with the ability to operationalize and scale up our cultivation and manufacturing capacity when warranted. We've already built the infrastructure we need to be scaled in the markets where we'll see growth, now we will execute. With CapEx behind us, we expect to see an improvement in gross margin in the long term as we focus on leveraging our leading retail channel and untapped wholesale opportunities.

Third, we have the right positioning for these market conditions, with 83 active locations and 11 in development. We are 1 of the largest retail networks in the industry. This provides us with the ability to maintain margin and leverage wholesale relationships more effectively while operating retail stores that are positioned in the right local markets, isolated away from border market conversions in states like Pennsylvania and Illinois.

And fourth, we continue to leverage technology to make our business better. We are innovators at our core and are utilizing technology and data to improve every aspect of our business from customer-facing innovations like Stash Cash and Forage, standardized systems in our cultivation operations such as in Colorado, where we have reduced headcount, improved automation and now garner better data and insights to improve production and quality.

With that background, I'd like to take a moment to share why I have such confidence in our ability to capitalize on our unique position. First, we will accelerate growth by opening the remaining dispensaries in Virginia, West Virginia, New Jersey and Maryland. Our cultivation and manufacturing is already scalable to capture wholesale opportunities and we have expanded the capabilities in every market to produce concentrates, edibles and higher-margin branded products that our customers and patients want. Every wholesaler needs access to retailers. We can provide that access and intend to do so in an equitable manner that allows us to sell our full suite of products and brands into other retailers in order to develop brand leadership positions around the country over time.

Second, we have implemented 60% of our restructuring plan with the remaining cost reductions and operational synergies coming later this year. This gives us line of sight on EBITDA margin improvement and lays the foundation for the next phase of our plan to drive cash flow, recapturing gross margin points over the next 24 months by leveraging the scale of our cultivation and manufacturing assets around the country. Third, we believe we have the potential to drive adjusted EBITDA margin higher in the midterm as the business operates with the new cost structure. There is additional opportunity for improvement upon further optimization of cultivation. This includes utilizing available square footage, launching improved products, brands and SKUs into the wholesale market and leveraging our expanding retail channel as well as implementing better system to improve quality and reduce the absorbed costs on every gram sold.

And fourth, we have retained a talented professional team that operates with integrity and is passionate about the opportunities that lay ahead in cannabis at Columbia Care. The leadership team has taken the past 12 months to review and assess every aspect of our business. In spite of the headwinds, our market continues to grow. My enthusiasm is a reflection of the entire team's perspective. As we pursue a pathway to a transaction with Cresco, we look forward to executing on our potential and delivering the most attractive platform in the sector to all of our partners and investors. Columbia Care is uniquely positioned with embedded best-in-class growth, the right positioning for our market conditions and high potential for margin improvement. We are excited for the road ahead and the opportunity to build substantial shareholder value.

With that, I will turn over the call over to Derek to review our financial results and outlook in more detail. Derek?

Derek Watson

Thank you, Nick and good morning, everyone. I'll provide a summary of the key financial results for the fourth quarter and the full year of 2022, discuss the key trends we're seeing in our markets and comment on the pending Cresco transaction. For the full year, we achieved a record $512 million in revenue, representing growth of 11% over 2021. Revenue in the fourth quarter was $126 million, a decrease of 5% sequentially versus Q3. The decline over Q3 was driven almost entirely by wholesale pricing in a challenged environment that all MSOs exposed to wholesale have been experiencing recently. Our retail revenue was flat quarter-over-quarter despite continued pricing and discounting pressures in certain markets and reflected another quarter of solid retail transaction growth.

In the fourth quarter, we added a net 1 new retail store, with 2 new store openings in Virginia and 1 closure in Colorado as part of our broader restructuring efforts. More about that in a moment. In Q4, our retail revenue was flat sequentially, while wholesale revenue declined 30% sequentially and represented just 12% of total revenue in the quarter. Average basket size which is a combined measure of pricing, discounts and share of wallet from customers at our retail stores decreased quarter-over-quarter but at a slower rate than we experienced in Q3. As we've talked about before, 2022 was a challenging year for consumer spending, with pricing down in a number of key markets and inflationary pressures resulting in a lower share of wallet available to spend in cannabis stores. The industry continued to grow in 2022 but at a slower pace than anticipated at the beginning of the year. Despite that, the long-term fundamentals of the industry remains strong.

Once again, we saw continued growth in our emerging markets like New Jersey and Virginia, with Virginia now joining Colorado as 1 of our markets contributing over 10% of revenue during the year. Pennsylvania, California and Colorado continued to be challenged and declined again sequentially but we've started to see stabilization.

Adjusted gross profit for the fourth quarter decreased sequentially to $47.2 million, down from $56.9 million in Q3, resulting in an adjusted gross margin of 37.4%, also down from Q3. Our Q4 gross margin was impacted by lower pricing, particularly in wholesale and also due to unfavorable absorption at underutilized cultivation sites that require us to expense cultivation overhead costs rather than capitalizing them into inventory.

For the full year, our gross margin was 39.3%, with an adjusted gross margin of 42.4%. The difference primarily being inventory write-offs at facilities we closed in Colorado as part of our restructuring. Our canopy reduction will continue to generate cash savings but will also create an unfavorable impact on gross margin in the short term while these assets are underutilized.

Adjusted EBITDA for 2022 was $67.4 million, bringing our full year adjusted EBITDA margin to 13% and up 60 basis points from 2021. Adjusted EBITDA was $17.4 million in the fourth quarter or 14% of revenue. Despite an adjusted gross margin decline in the quarter of 5.5 percentage points, EBITDA was only down 2 percentage points as our restructuring initiatives continue to lower SG&A.

To expand on the topic of restructuring, we took early and meaningful steps throughout 2022 with 3 separate rounds of initiatives. Our latest cost-saving initiative announced in early January reduced or exited cultivation operations in 6 of our markets, closed 4 unprofitable retail stores in Colorado and California and eliminated approximately 25% of our corporate overhead position. This latest initiative is anticipated to generate a net $35 million in annualized savings alone.

On to our liquidity. We ended the year with more than $48 million in cash, having burned less than $2 million in the fourth quarter, a result of cost savings, lower CapEx and improved working capital management. Capital expenditures in the fourth quarter were approximately $3.4 million, down from $11.9 million in the third quarter. For the full year, CapEx was $73.8 million.

During the fourth quarter, we generated $5.2 million in positive cash flow from operations. A number of other liquidity initiatives are also worth noting. As we announced yesterday, we've extended the maturity on all $38.2 million of our 13% notes which are now due in May of 2024. This extension was done under the existing indenture agreement and did not require consent or fees. There are no additional maturities in the short term until December 2023 when less than $6 million of our convertible notes become due. As a reminder, we also have capacity under our existing indenture that would allow for additional senior secured financing should we need it.

During 2022 and as disclosed in our 10-K filing, we reduced our overall cost of capital on our senior and commercial debt positions in a year when interest rates were rising. In 2022, we also negotiated a lower interest rate on any future capital lease needs and reduced the finance lease obligations disclosed on our balance sheet by over $18 million. We've not taken on any significant liabilities since announcing the Cresco transaction.

In summary, we took early and meaningful actions to strengthen our balance sheet and make operating adjustments necessary in the current environment. This has created a clear path to positive free cash flow, building on the positive operating cash flow we achieved during Q4. So far in 2023, we've taken further steps to optimize our asset base. As Nick mentioned earlier this month, we signed a definitive agreement to divest our interest in the Missouri market, 1 dispensary and 1 processing center for a total consideration of $6.9 million, $3.5 million of this has already been paid on signing of the agreement in March.

As we're well into the first quarter of 2023, we can say we expect the revenue to be slightly down sequentially from Q4 which is consistent with normal seasonality and would represent low single-digit growth when compared to the first quarter of 2022. We're maintaining our focus on cost management discipline, preserving cash and deploying capital efficiently. In Q4, the majority of CapEx supported store openings and cultivation projects in growth markets and we'll continue spending on similar priorities in 2023 to support continued growth. As we've mentioned and as you heard on the Cresco earnings call, we continue to support Cresco as we move towards closing of the transaction and we look forward to the growth that Columbia Care's portfolio will bring to the combined company. Despite the delayed timing of the Cresco transaction and as you've heard today, we've independently taken actions to make Columbia Care stronger and we'll continue to execute on initiatives to strengthen our business through closing.

With that, let me turn the call over to David to cover operational highlights. David?

David Hart

Thank you, Derek. I will now highlight important operational developments during the fourth quarter, particularly in our top markets. On a revenue basis, our top 5 markets alpha [ph] medically were California, Colorado, New Jersey, Ohio and Virginia. On an adjusted EBITDA basis, our top 5 markets were Massachusetts, New Jersey, Ohio, Pennsylvania and Virginia, with Massachusetts replacing Colorado since Q3. I want to highlight that New Jersey and Virginia both remained in the top 5 this quarter, further demonstrating the strength of our emerging markets. As Nick mentioned, in Q4, we leaned into cash preservation and inventory management which negatively impacted gross margin in the quarter. In cultivation, we remain focused on increasing quality and potency while lowering our production cost per pound.

During the quarter, we continued to optimize production planning, genetic selection, environmental controls and plant management across the portfolio. A number of our markets are seeing improved potency THC percentages through strict adherence to SOPs and have identified numerous high-potency strains of 26% THC or greater. We currently have over 68 high-potency strains in our library, with plans to increase our genetic diversity in the coming months.

On the manufacturing side, we are ramping the production of concentrates in the portfolio and launched Hedy Edibles in the beginning of Q4, followed by our cannabis tablets under Press 2.0. We continue to expand SKU and product offerings in each of our markets as we meet customer and patient trends.

Now to discuss a few markets in more detail. In California, we closed our downtown L.A. dispensary and cultivation site in January as part of our efforts to optimize our portfolio as pricing pressure has stabilized but nevertheless persists. In Colorado, we took down a significant amount of canopy and closed 1 store during the quarter. We saw a sequential decline in sales as compared to Q3 due to competitive pricing, lower average dispensary sales and decreased transactions. Colorado was a focus of restructuring efforts during the first quarter of 2023, where we've continued to drive efficiency and cut costs by beginning to wind down several cultivation sites. We've closed a total of 4 retail locations in the state, yet still remain a leading market position with 23 active dispensaries.

Turning to Massachusetts, where we saw a sequential improvement in gross margin as we continued to optimize automation and streamline processes throughout our manufacturing facility. We launched numerous SKUs in 2022, including Roll Your Own pre-roll kits, Triple 7 and Seed & Strain popcorn and Press 2.0. The market continues to see wholesale pricing pressure, mainly in the flower category.

In New Jersey, revenue was up 150% in the second half of 2022 due to ramping adult-use sales and strong wholesale opportunity. Our cannabis locations in Deptford and Vineland were some of our top retail locations in our portfolio in the second half of 2022. During the quarter, we introduced multiple SKUs, brands, product line extensions and flavors, including dablicators in Amber hash. We achieved automation for flower and pre-rolls at our second cultivation site in the state which helped streamline production to meet strong demand for the adult-use market.

In Ohio, we saw an increase in internal deliveries to our own stores which led to a significant expansion of shelf space, providing us a platform to reintroduce genetics and overall quality to the market with increasing competition. 50% garden canopy reduction late in the fourth quarter helped to mitigate an overabundance of finished products. We also introduced strain-specific CO2 carts and RSO dablicators under Seed & Strain brand during the quarter which provided more product diversity and allowed us to increase internal sales year-over-year. New operators are set to open throughout 2023 which we expect will lead to an increase in wholesale opportunities for production as well as an increase in competition for our retail portfolio. We remain optimistic that our introduction of high-quality products in the market will position us well as competition on the retail front intensifies.

Turning to Pennsylvania. Revenue was down sequentially due to lagging wholesale demand but we saw an increase in adjusted EBITDA margin as we skewed towards retail. One of the biggest changes to canopy capacity as part of our January restructuring initiative was the reduction of canopy in the 270,000 square foot facility in Saxton, Pennsylvania. We retain optionality to scale up when market conditions warrant.

Finally, turning to Virginia which continues to be a top market for Columbia Care. During the fourth quarter, we opened 2 new cannabis locations in Richmond and Williamsburg. Virginia expansion has continued in 2023. With 2 additional openings thus far, we have 8 retail locations open to date with 4 more in development. Revenue in Virginia has increased nearly 100% year-over-year. We are still seeing double-digit growth on a quarterly basis as the medical program continues to expand. In a state with more than 8.5 million people, there are currently just 55,000 patients registered in the state are about 0.6% of the population. We're seeing that number increase as the program has become 1 of the most accessible medical programs in the country. There's significant room to grow the patient population and we look forward to serving them as we add additional retail locations in the Commonwealth.

In closing, I'm pleased with the progress that our team has made in all of 2022. We've carried our momentum into 2023 with 3 new store openings so far and are determined to ensure we are well positioned in growth markets with a strong retail footprint. And we will be ready to hit the ground running as adult use comes online in more states like Maryland in the future.

I will now turn the call back to Nick and we will take your questions. Nick?

Nicholas Vita

Thank you, David. We look forward to taking your questions. Operator, can you please open the line?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Aaron Grey with Alliance Global Partners.

Aaron Grey

So first question from me. Just wanted to dive a little bit into the margin during the quarter. Could you quantify maybe how much of a drag there were from some of the markets that you've exited some of the record cultivation like California, Colorado, Pennsylvania during the Q. And mostly just trying to better conceptualize how we think about margin improvement in the near term that you kind of spoke to and how much color we might expect as you kind of shift in and capitalize on some of those savings you mentioned?

Nicholas Vita

Why don't I start off with a very high-level sort of comment and then I'll turn it over to David and Derek to sort of fill in the gaps. Obviously, what we suggested is that the totality of the restructuring to date culminates in about $35 million in a reduction of overall OpEx. And so that ought to flow to the bottom line. Part of those changes in OpEx related to reduction in canopy and we still have the same footprint. We still want to preserve the, let's call it, the call optionality associated with the square footage. And we have some approaches that we're actually activating now to sort of reignite the need to sort of activate that canopy over the next 24 months. But there will be an absorption accounting issue that has to flow through from gross profit. So although you see sort of a significant improvement in SG&A as a percentage of revenue, you'll also see sort of an offset in the form of the absorption accounting that gets spread out through our gross margin.

Now we're focused on gross margin now that we're sort of wrapping up the SG&A piece of the restructuring puzzle. And so we feel confident that there's a very, very clear path to help us get there. The net outcome should be positive. But if you want to sort of -- let's say, if you want to isolate Missouri, like we were losing about $1 million a year in EBITDA in Missouri. And so that obviously reverses and it's also a source of liquidity for us which is 2 good things that are meaningful. If you think about Puerto Rico, Europe, some of the -- like everything that we closed was negative in terms of EBITDA contribution. So it was a very deliberate attempt to kind of cull the portfolio and reduce our exposure to anything that wasn't contributing at the level that we wanted it to contribute. So I don't know, Derek and David, if you have anything to add to that or if you could provide some additional sort of specifics to help Aaron?

Derek Watson

Yes. Thank you, Nick. Aaron. So as you've pointed out, there was certainly a significant impact on gross margin in Q4 as a result of the restructuring and as a result of the cultivation takedown. Our growth -- adjusted gross margin in Q3 at 42.8% going down to 37.4% in Q4 is a reflection of that. So that's about 5.5 percentage points. We don't treat the under absorption of cultivation sites as an adjusted EBITDA add back that just flows through cost of goods sold, as Nick said, it's part of absorption costing. So in the short term, I'd say that 5.5 percentage point swing is something that we'll be experiencing until, as Nick says, we bring that cultivation back online. And we're past this restructuring that we've initiated in Q4.

Aaron Grey

Okay. Great. And the second question for me, just want to speak a little bit on Virginia. I know it's a strong medical market for you guys right now but with adult use regs stalled, can you speak to how you now approach the market in terms of investments? You mentioned continued building out the full allotment of retail more so on the cultivation side. How you look to approach the market with more uncertainty in terms of when adult use might come in? And any insight you might have in terms of the prospects of adult use coming online for the regs as well?

Nicholas Vita

Well, let me -- first off, I'm going to turn it over to David in a moment. But Virginia is a very attractive market. For those of you who remember the way Massachusetts or Arizona evolved, I think there are some very sort of important similarities. In that, you have a far more limited sort of characters that are actually operating in that environment. You have a very large total addressable market and you kind of stated that's basically opened up the medical market as wide as it possibly can. So we built out our infrastructure and we continue to build out our infrastructure because there is substantial unmet demand throughout the state in all of our areas. The manufacturing and cultivation piece is something that was already scaled. So if we have to -- if the regulations sort of surface to transition to adult use, that's not something that's going to require us to -- it's not going to require a lot of time or money for us to convert our operations because we'll already be ready for that transition point.

But in the meantime, what we see is, frankly, even you can use Pennsylvania as an example, you see a very, very reasonable framework for the medical market that is growing at an enormously fast cliff. And we're basically poised to take advantage of that growth and it's been a very good market for us and it will continue to be a very good market for us. It's -- whether or not we have adult-use regs surface in the next, let's call it, 6 to 12 months, I don't know. But our model and our expectations are built on that because we always knew that there was a legislative change that was required to move that path forward. So think about if you had a state the size of Illinois but you have 4 operators for all intents and purposes, that's kind of the market opportunity set for us in the state of Virginia and we're very excited about that.

So I think heads we win, tails we win and that's 1 of those few moments in time when you can really say that with a great deal of confidence. I think that there is pressure to continue moving towards adult-use but at the same time, there's also pressure to continue expanding the medical program and making sure that access is there and unfettered access, more importantly, is available to anybody who needs to be a participant in the program. But, David, maybe you can add some color.

David Hart

Yes. The only thing I would add is we've continued to be focused on building out the retail footprint. We have been deliberate in attempting to find viable locations, not only for the medical program but that we think will be ideally positioned for an adult use framework as well. So that is why we still have several facilities in final stages of being identified and built out. So that will occur in 2023. And as Nick mentioned, on the manufacturing and cultivation side, we have 2 locations, both of which have been essentially fully built out and are operational. So the team on the ground on a day-to-day basis continues to see organic growth every time we open a new door from Richmond down to the southern border and out to the East Coast. And so we continue to benefit from the organic growth opportunities of just providing incremental doors for access for patients.

And the team is hyper focused on canopy, THC level increases and genetic diversity and concentrate brand launches commensurate with other states. So it's no change to the operational plan in Virginia over the last 18 months or so. Let's continue to execute until the adult-use framework comes our way which we'll be well positioned for.

Operator

Our next question comes from Scott Fortune with ROTH MKM.

Nicholas Vita

May be on mute. Operator, maybe we should come back to Scott and go to the next question.

Operator

Can you not hear him? I can hear him.

Nicholas Vita

We can't hear him.

Operator

Okay. One moment. Scott, your line is open.

Scott Fortune

Can you hear me now?

Nicholas Vita

We hear you great.

Scott Fortune

Sorry about that. I don't know what that happened there. But real quick, I just wanted to provide a little bit more update. Obviously, the wholesale side is weak versus the retail side. But kind of how do you see the mix going forward here with the verticality. Are you kind of fully stretched out now on your verticality for the states? Or do you still have some room to sell your own products in your own stores? And with that, how are you looking at kind of New Jersey? You mentioned before kind of more doors opening up in the first half of 2023 in the wholesale opportunity. Just kind of a better sense of wholesale opportunity and that mix going forward as you see that starting to improve?

Nicholas Vita

So let me turn that over to David. But before I do, I think that the -- in terms of the infrastructure, just the raw infrastructure to participate in the wholesale market and the retail market, we feel very good about the CapEx we've spent sort of over the past several years and we're well positioned to take advantage of that. Our -- obviously, with the merger on the horizon, right? It's changed -- it's forced us to see the world through a very different lens because we haven't had sort of -- the decisions we're making are decisions in collaboration with Cresco. But what I can tell you is that knowing that we don't have a defined time line based on the regulatory elements of the approval process, what I can tell you is the following: on a steady-state basis, for Columbia Care, as just a unique independent entity, the way we approached the restructuring, our own restructuring was to first get our SG&A in line with where we thought it should be which I think we're getting close to. Now that we've done that, we're going to -- we've also, at the same time, run a parallel path to improve our quality of manufacturing and cultivation and actually introducing products that give us the full suite of SKUs that we really need to be competitive in each market.

With that sort of combination and knowing that we're leaning into a number of markets where we do have leadership like New Jersey, like Virginia, it allows us to really horse trade more effectively and participate in the wholesale markets to a much larger degree. And so, historically, we've always under-indexed in the wholesale market. I think what you'll see is that we intend to move that indexing north. But because we have a retail orientation, you're always going to see us sort of expanding, not only into our new facilities but maintaining share. And obviously, we're seeing increased foot traffic coming through our dispensaries. And all of that helps us from a brand building and from a margin perspective. So it's -- I think a rising tide raises -- sort of rises -- lifts all ships. We're seeing that through the retail channel but that retail success, we believe, is going to also translate into wholesale success because of the steps we've taken on a parallel path over the past 12 months but, David, maybe you want to weigh in.

David Hart

Yes. I would just highlight, as I look at this year, the trends at the end of 2022 and heading into 2023, I'd highlight 7 states where there is wholesale opportunity for us that's organic in terms of growth prospects. Colorado is pricing dependent. We obviously took some restructuring initiatives in Colorado and are focused on putting own product on our shelves in 2023. Depending on the pricing environment, we always have the opportunity to actually lean into the wholesale market if it makes sense from a revenue and a margin perspective but the priority is with our 23 doors. If you look at Illinois, there's obviously new doors opening. We have made some changes to our wholesale go-to-market strategy, one of which has had probably the most pronounced impact which is not providing exclusivity for new products or new genetics in our own doors and allowing wholesale partners to participate in those exclusive drops and that has had a pronounced impact on our opportunity in our go-to-market strategy in Illinois.

In New Jersey, as Nick mentioned, there are a number of new doors opening. We've established relationships with over 70 new doors that are opening in New Jersey. And so we are in constant dialogue about the day opening and initial inventory asks. And so we're hyper focused on capturing that new incremental market share in New Jersey. In New York, we've launched a number of new products. We've seen an improvement in our flower quality out of Riverhead and Long Island which has resulted in incremental wholesale opportunities and we were the first to market with the 25 mg concentrate which has been well received in the wholesale market. Ohio, I think Nick also mentioned, we've got new doors opening. We've got increased THC profiles in genetics in Ohio which is having a favorable impact on our business right now.

And then lastly, West Virginia, new doors are opening and we are essentially the [indiscernible] in the wholesale market in West Virginia in 2022 and we will be in 2023. And one, we probably don't spend enough time on but we're clearly excited about is Maryland going adult-use probably in July. There's going to be an incremental opportunity. I think we're well positioned there from a flower and concentrate perspective. So, as Nick mentioned, it's been a relatively low percentage of our total business because of the expansive retail footprint that we've had historically. But we do see the opportunity to begin to lean into the wholesale market opportunities in a number of states where flower quality, THC profile, genetic expression and concentrate SKU makeup is impactful. And so I would argue we're starting at a low base. So we've got an opportunity to take market share particularly in markets where organic growth is there to take.

Scott Fortune

I appreciate that color. And just following up on the Maryland market. You mentioned, obviously, CapEx reduction primarily going to adding new stores in Virginia and such that you mentioned. But how are you looking at the Maryland market and the confidence that they'll start here in mid this year and the kind of opportunities in the Maryland market. Obviously, we've seen pricing come off there but are we seeing any stabilization on the pricing kind of the Maryland market going forward?

Nicholas Vita

So just a couple of very high-level thoughts. I mean, I think Maryland for us, we're looking at it both from a retail and a wholesale perspective because we still have that PG County dispensary that we'd like to develop, that we're pursuing the site for right now. And I think we're cautiously optimistic that the way the regs shake out will be a net positive for all operators. The fact is you're going to see a fairly substantial expansion of the Maryland opportunity. We've seen some price declines over the past, let's call it, several quarters in Maryland and that's made it somewhat challenging. But our infrastructure there is very well suited for a conversion point which is kind of where we are right now and we would expect that the participation in the wholesale market that we've seen historically is something that will certainly be facilitated by the transition to adult use. But David, why don't you add?

David Hart

I would just say we're -- the assets we have there are purpose built for adult-use conversion. So we've got a very stable cultivation leadership team down there which is still being operated by the gLeaf team. But we've recently completed the build of a manufacturing facility which is essentially adjacent to our cultivation facility. So we've consolidated the back of house, if you will, into 1 region in Maryland and getting some incremental scale on the manufacturing side. So I think we're well positioned for adult use and as a company, we've been through a number of these transitions and conversions. So I think we're well prepared for it and looking forward to it.

Scott Fortune

I appreciate the detail. And congrats on extending the debt from there.

Operator

Our next question comes from Glenn Mattson with Ladenburg Thalmann.

Glenn Mattson

Just quick first on the model. Just I think Nick at one point talked about extending the debt maturity allows them -- allows you guys an opportunity to rebuild the cash position. So I guess you're implying inherently that you'll be free cash flow positive for the year. I'm just kind of curious if some of the components of that. Would you expect like working capital reduction would be as maybe on the inventory side in particular? And then just more specifically on what the CapEx expectations for this year?

Nicholas Vita

So let me turn that over to Derek. I think he's probably in the best position to answer that. Go ahead.

Derek Watson

So on the working capital side, with cultivation coming offline, we have the opportunity to reduce inventory with the overall industry not growing as much as we'd anticipate. So yes, there's an opportunity to reduce inventory and free up working capital from that perspective. The CapEx initiatives that we've talked about, I think, in the last 2 years, we've built strong and early. So the CapEx focus for 2023 will continue to be at a lower level, while still supporting some of the manufacturing process built out in our growth markets and obviously, the store openings that we've got anticipated on the East Coast. So that is the path to free cash flow positive for 2023. And as we've mentioned in Q4, we've already hit that operating cash flow positive position based on a number of initiatives that we've taken towards the end of the year.

Nicholas Vita

The only thing I would add is that in the first quarter, you would expect to see some cash-based charges because of the restructuring we went through. Those are obviously onetime in nature but that's just -- that would be the only kind of anomaly in the plan. I mean, I think when you look at the improvements, if you just run out gross margin to kind of where it is right now and you assume that we've we realized the benefits of SG&A that we're expecting, you would anticipate EBITDA is also a significant contributor to sort of that migration to free cash flow positive.

Glenn Mattson

Great. And I'm not sure if there's any color you can give us on the update on the divestiture process in relation to the merger? And then maybe just on the timing of how it would work out, say, if you talk about a potential 2Q close, although I don't know if you're -- if that's something we're still sticking by at this point. But if it is -- how long would it take for you to like announce it? And then for the review process to happen in order to meet that kind of a deadline?

Nicholas Vita

Look, I think as Charlie said on the call, the Cresco call, there's a path to closing the transaction. We've sort of jointly agreed to extend the outside date to the end of June. There is a significant interest in the assets that are up for sale right now. And we're sticking with the time lines that are in the public domain. But I think that the most important message that we can convey to the market is that, candidly, the way the stock has traded is a little bit shocking and it's to the downside. I don't think we're getting any credit for having a sort of a stronger business as we have. And I think that what I would like people to take away from this call is a very simple message which is, the business itself is very attractive. The business itself is doing everything that it should be doing and the team -- we've shown great continuity. And that ought to be a sort of a catalyst for looking at where we are from a stock perspective. But independent of that, we continue to move forward with the transaction as contemplated.

Operator

Our next question comes from Matt Bottomley with Canaccord Genuity.

Matt Bottomley

Just sticking on the transaction with Cresco, I'm just wondering, I know you can't get into any granular details on it but are you able to provide any color as to where private sector valuations are relative to maybe your expectations when this deal was announced? And just even the attractive nature of Florida and Ohio and some of these assets that are up for sale. What is the landscape looking like right now? Just with respect to the capitalization of a potential buyer, having the capital to potentially pull the trigger on it. It's something that as everyone kind of follows the public market equities and how much they've sort of been eroding as of late, getting a lot of inbounds and concerns as to how that's telegraphing to potential buyers for these assets?

Nicholas Vita

So I mean, I think the way I was -- let me break that into a couple of different components. The -- there is no shortage of capital out there for the sector. I think there's a shortage of willingness to deploy that capital, right? I mean a lot of the assets that we're selling right now have some pretty significant regulatory sort of pathways that need to be understood in order to move forward. And that requires a lot of due diligence. I mean New York, Ohio, both of those markets could be dramatically different in 12, 24 months, just as examples. So we haven't seen a shortage of interest in getting into the sector. And frankly, I've been surprised at the upside as the number of parties that are not familiar with cannabis that have expressed interest in these assets because of the quality of them. But the time lines make it very difficult because you have several layers of things that have to go right at exactly the same time. And I think that's 1 of the things that has created -- it's created an element of unpredictability in the asset sales that is just something that's hard to deny.

The valuations, I mean, clearly, there's a connection between valuations in the public markets and the valuations in the private sector. I think though that a lot of the euphoria -- first of all, a lot of the public sector investors that were in the sector that has cycled out may have been looking for a catalyst that didn't materialize. So for example, safe passing. And I think that was a real concern for people and I think a lot of our competitors had done a lot to sort of build an expectation that, that was a possibility. When that has materialized, right, that was a disappointment. And so you saw people flow out, wondering when the next catalyst is going to come. But I think that the sort of the people that we're seeing now are much more fundamentally oriented and they're not making their investments based on the catalysts. They're making investment based on status quo.

And when you look at our business, just as a microcosm for the rest of the sector, right, the amount of SG&A we've taken out of the organization, gives us a very clear path on margin improvement -- EBITDA margin improvement, right? If we can even execute on half of the opportunities we see on the gross margin side, that flows through basically using the inverse multiple or the inverse margin as it flows through to EBITDA, right? That creates significant scale. So even with all the hiccups that come with cannabis, right, there are businesses out there like ours that have very attractive stories. And so I think that what we need to do as an industry and frankly, we need to work with voices like yours is to remind people that the fundamentals and the actual business outlook for the sector is very attractive. That hasn't changed, right? And I think that was -- that's one of the things that sort of contributed to all of the, let's call it, the noise that you're hearing in cannabis and the noise you felt through the capital markets.

But does that mean that we're going to hit our sort of expected target for valuations of the assets being sold? Time will tell. It's impossible for me to answer that question until we actually have the signed definitive agreements. But I'm encouraged by the fact that we have sort of agreements being negotiated. We have LOIs that are signed. We have parties that are very credible that are going through the process and very excited about the opportunities that an acquisition like that could mean to them.

Matt Bottomley

Got it. Appreciate that. And then just 1 more for me. Just on New Jersey. I'm wondering, is there any dynamics that you can share with respect to future CapEx that's needed in that market, call it, in this year and maybe early 2024 in order to facilitate the growth profile that we've been seeing in that market? Or just to kind of jockey up positioning with where you guys are in branded sales? Or is it just more of a function of overall timing and ramp as opposed to needing to invest capital in that state?

Nicholas Vita

So let me start off and then I'll turn it over to Derek and to David. To maintain the ramp of growth that we see today and we've seen up until this point, we have the infrastructure that we need. We have significant -- we've made significant CapEx on the cultivation and manufacturing side. There may be a few smaller things that we want to add here and there to sort of refine the portfolio and roll out additional concentrate lines or things in that kind of -- in that sphere. But I think the biggest CapEx sort of piece would be completing that third dispensary and actually competing on a sort of apples-to-apples basis with others that have 3 dispensaries open, that would be very, very meaningful to us. But that's all upside. And so do we have the money for that? Yes, we do. Do we have 2 sites in mind that we're looking at right now that are very serious? Yes. As 1 of them -- have we begun sort of picks and shovels and throwing hammers around 1 of them? Yes, we certainly have.

And so we're -- we have, I think, the ability to accelerate that growth rate in New Jersey. But I don't think there's anything fundamentally necessary for us to compete in the wholesale or in the retail setting that is sort of missing from the puzzle at this point. But David and Derek, may be you guys can lay it out.

David Hart

The only thing I would add is the significant CapEx investment required in New Jersey has been made by us. And so the incremental cultivation capacity is there for us. It's simply turning on lights and putting plans under them when we think the market opportunity presents itself. So we continue to aggressively commercialize ourselves in the state of New Jersey, primarily in the wholesale front. We have great organic growth at the dispensary level with the 2 that we have. But clearly, the wholesale opportunity is large for us on a relative basis to the retail side. So continue to lean into it and we have the capacity and we can lean into it when it's appropriate. We've purpose-built those assets in New Jersey for a large adult-use program.

Derek Watson

Yes, I agree. Because it is 1 of those great examples where we invested early and heavily and particularly with the acquisition of the second cultivation site, we've got excess space at that second cultivation site ready for further expansion if needed. And as Nick said, it's the additional dispensary that will be the key part of any spending in 2023.

Operator

Our next question comes from Matt McGinley with Needham.

Matt McGinley

I have a few questions around the $35 million in annual savings. I think you noted that you don't expect to see the financials -- or that to show up in the financials until the end of the second quarter. So is the full year cost savings more like $17 million for the full year? How much of the savings do you expect to see in COGS versus SG&A? And with what you noted on the overhead absorption, I assume that a portion of that $35 million in savings is just related to having less labor in a mothballed production facility. But if you have this new offsetting absorption of fixed costs immediately that goes through COGS, is that $35 million run rate actually a $35 million run rate because you have this offset?

Derek Watson

Yes. So let me unpack a few pieces of that and I appreciate the question. So the $35 million is a net annualized savings. And yes, it was initiated in Q4. So some of those savings based on canopy reductions and exit of the California DTLA site, for example, are a full year impact for 2023. There are additional canopy reductions that took place over time. So there's not a full year impact but all of the -- all the restructuring has been initiated and, at this point, has now been executed on. So we've got the full benefit of that starting in Q1 and for the balance of the year. In terms of the overhead reduction, yes, the SG&A reduction was 25% of our corporate overhead -- corporate head count, I should say. That was also initiated in late 2022, early 2023. And those individuals have left the company. So we've also got the benefit of most of the year impact on those savings. So you'll start seeing that benefit in Q1 as well.

Matt McGinley

And what was the rough split between COGS and G&A in terms of the savings?

Derek Watson

So it's -- I'm not sure we've done that split but we can -- we can come back to you if we need to on that.

Nicholas Vita

But I think that the point you made about it being net savings, meaning that we factor that into our analysis to come up with this $35 million number. And the vast majority of it is headcount reductions through SG&A and basically the elimination of facilities or assets or operations that were losing money. So I think, Matt, if I'm not mistaken, the question you're asking is, is it really a $35 million or is it substantially less because of the offset? I think what you're hearing us, say, is that it's a $35 million number. We thought through that piece. It's still a moving target but it's more than just -- it's heavily weighted towards SG&A and it's heavily weighted towards the removal and closure of nonperforming assets. Is that a fair way to characterize?

Matt McGinley

That's clear and that's helpful. And then my last question would be, when we get your full cash flow statement when you file the 10-K, what would be the big drivers of that improvement in working capital? Was that mostly deferred taxes? Or did you make progress in reducing inventory which would likely be a little bit more sticky and say a lot more about your ability to generate cash from working capital in '23?

Derek Watson

Yes. So Q4, as you're pointing out, we had $5.2 million of operating positive cash flow in Q4. There's some of the working capital benefit that we already saw as a result of some of the restructuring initiatives. And we announced in mid-January but that was announcing at the end of the restructuring program. So there are some inventory benefits that we'll see in working capital benefits that will impact Q4. But it is an ongoing focus on liquidity and cash management that, again, we started in early 2022 given this was the third round of restructuring. So we're getting the benefit of multiple initiatives that are taking hold.

Nicholas Vita

Vis-à-vis, our deferred tax kind of changed.

Derek Watson

We are current on taxes, there's no deferral of taxes that you're going to see as a result of net working capital. It's operationally focused.

Operator

There are no further questions. I'd like to turn the call back over to Nicholas Vita for closing remarks.

Nicholas Vita

Great. Well, thank you, everybody, for your time. I'm sure we'll be speaking with many of you throughout the day. If anyone has any follow-up questions, please let us know. We want to make ourselves available and we love to sort of reengage with you and tell you a little bit about all the great things that are happening at Columbia Care. Thank you.

Operator

This concludes the program. You may now disconnect. Everyone, have a great day.

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Columbia Care Inc. (CCHWF) Q4 2022 Earnings Call Transcript