Good day, and thank you for standing by. Welcome to the Columbia Care second quarter earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lee Ann Evans, Senior Vice President, Capital Markets. Please go ahead.
Thank you, operator. Good morning, and thank you for joining Columbia Care's second quarter 2022 earnings conference call. With me today are Nicholas Vita, our Chief Executive Officer, David Hart, our Chief Operating Officer, Derek Watson, our Chief Financial Officer, and Jesse Channon, our Chief Growth Officer. Earlier this morning, we issued a press release reporting our second quarter 2022 results, which we also filed with the 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 disclose in more detail in the Risk Factors section of our annual Form 10-K, dated March 31, 2022, as filed with applicable regulatory authorities in Canada and in subsequent securities filings. We remind you that any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update any such forward-looking statements in the future, we specifically disclaim any obligation to do so except as otherwise required by applicable law.
Also, please note that on today's call we will refer to certain non-GAAP financial measures such as adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. 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.
Thank you, Leigh. Good morning, everyone, and thank you for joining our call. This quarter was an unprecedented moment in the time for the markets and the company. We heard from our consumers that inflation is backbreaking, walls are empty, crime is up, qualified labor is scarce, and overall confidence and happiness is down. Our answer to these cyclical challenges has been to first look within our organization to find opportunities and make decisions that enhance our position and make us stronger when the environment normalizes. We are proud of the steps we continue to take to move the Columbia Care towards a better, more efficient baseline. These economic trends have only reaffirmed our decision to combine with Cresco.
Having observed firsthand how the integration planning is going, I feel better than ever that the scale and power of this combination will profoundly change the cannabis market and create the unquestionable leader in the industry. As momentum builds among our companies, so too has the excitement throughout our organizations, among our investors, and within the communities we serve. In that context, with the pending dispositions and regulatory approvals upon us, this will likely be the last quarterly earnings call where Columbia Care will report as the business and portfolio in the same way. Turning to our operations. In spite of the economic headwinds and challenges, which disproportionately impacted our mature markets, we saw surprising resilience across the country and in several cases, outstanding performance in our highest growth emerging markets.
Cannabis is countercyclical in many respects, but what makes the sector truly unique is that the industry players who have exposure to newly legalized markets such as New Jersey, Virginia, and West Virginia, have embedded organic growth that is extraordinary in today's environment. At The Cannabist Company, we've continued to make decisions to drive the organization forward, first by capitalizing upon growth from emerging markets as they transition to more favorable regulatory structures. Second, further leveraging our constantly expanding scale that we have invested in over the past several years. Third, implementing strategies in mature markets like Colorado to consolidate supply and distribution channels. It is important to note that this process will happen in every highly fragmented market as the sector evolves.
As market leaders, we prefer to participate in the acceleration of this process in spite of short-term dislocation to ultimately achieve a rational marketplace with long-term growth and stable margins. The market shift that has occurred in Colorado over the past two quarters is the most visible example of the invisible hand of supply demand dynamics, forcing a return to normalcy, a process that is required to ensure growth and profitability for the surviving operators in 2023. With this context, let's discuss this Cresco transaction. We've made significant progress towards closing the transaction since the March announcement. First, we cleared federal Hart-Scott-Rodino antitrust review, the only federal hurdle in the U.S. Second, we received overwhelming approval from our shareholders with over 98% of the votes cast in favor of the transaction.
Third, we received approval from the Supreme Court of British Columbia, the last judicial approval needed in Canada. Fourth, the asset divestiture process has been progressing as planned in terms of timeline and expectations for gross proceeds. Let me share some relevant details there to help you think through timing. In every market with planned divestitures, prospective bidders have completed initial due diligence. We have evaluated bidders, have signed LOIs in advance of executing definitive agreements for every asset being sold, awarded exclusivity to certain lead bidders, and are now moving through the final negotiations to sign definitive purchase and sale agreements, which we expect to announce in the next 30 to 45 days. The state regulatory approval process continues to move forward on a similar rapid path. We have already submitted license transfer applications for over half of the licenses that require approval.
Applications for the divestiture markets are being prepared, and we plan to submit them concurrently with the execution of definitive agreements for the asset sales to advance an expedited and successful review process. Lastly, in terms of the integration and pre-close work streams needed to plan for an efficient and effective combination, every targeted integration milestone is on track to accommodate the late 2022 close. From a cash flow and liquidity perspective, the upcoming asset sales will result in a substantial reduction in CapEx. This is expected to positively impact our free cash flow toward the end of 2022, as well as the free cash flow and net debt of the combined business. This is all very good news for shareholders, for our team, and for the industry.
In the context of cyclical macroeconomic headwinds, a new bipartisan federal landscape in the next 12 to 24 months, Columbia Care, as part of Cresco, will emerge as the most scaled, best capitalized company in the industry. There's never been a moment in the history of regulated cannabis when it has been so clear that scale is the most important determinant for long-term success. Before I turn the call over to Derek, I would like to make a few comments regarding the company's performance in Q2. Our performance this quarter was a tale of two cities. In spite of the difficult environment, we made decisions, some of which were quite difficult to effect positive outcomes at the corporate level, and in particular, in markets where structural change is required to stabilize the environment.
The company delivered solid organic top-line growth of 5% sequentially to reach $130 million of revenue for the quarter. That's up 18% year-over-year top line in an environment where the broader economy saw a second sequential quarterly decline. In 12 of our 17 U.S. markets, we achieved sequential growth in gross margin. In 10 markets, we saw sequential growth in EBITDA. 16 out of 17 markets were EBITDA positive this quarter. Unfortunately, a $6 million sequential decline in Colorado's EBITDA negatively impacted our consolidated adjusted EBITDA margin, which showed a decline to 9% for the quarter. Excluding Colorado and California, Columbia Care saw a 500 basis point improvement in adjusted EBITDA of over 14% in our other markets, 60% better than last quarter's consolidated results.
David Hart will discuss in more detail. We saw standout results in a number of markets, including New Jersey, which more than doubled revenue on a sequential basis, West Virginia, which more than tripled the revenue quarter over quarter, Virginia, which saw revenue increase more than 12% over Q1, and Florida, where we saw a 200 basis point sequential improvement in gross margin. Along those lines, we have achieved continued growth of our in-house brands, which now represent approximately half of our retail value. This supports a better customer experience, helps drive foot traffic, and protects margins. This is particularly important as the consumer is unquestionably under pressure, and we see a continued shift in preference to the value segment, reflected in pricing of the average basket size that has declined in most markets. Wholesale has also come under significant pressure.
This was particularly impactful in Colorado, where in spite of having a cost per gram of packaged trim flower of less than $1.35, most recently, pricing continued to fall below those levels, at times in concert with competitor closures, company closures, and the company inventory liquidation. This has led to disruption at all levels, with larger players exiting the market and smaller players folding throughout the supply chain. I believe it is in our best interest as the largest operator in Colorado to advance the normalization of the market. We are making decisions now with that mindset in order to benefit in the long term from our leadership position in the second-largest regulated cannabis market in the world. Sequential underperformance in Colorado and California had a disproportionate impact on our quarter results for the quarter.
As I mentioned before, excluding those two markets, our EBITDA margin would have been over 500 basis points higher for the quarter and 60 basis points better than last quarter. David Hart will discuss the proactive steps we took in 2Q to remediate the Colorado market and also to discuss what we are doing in those markets today to reverse the trajectory that we saw in Q2, and to bring those markets in line with what we are seeing elsewhere in the portfolio. We've made tactical investments in our infrastructure and cultivation operations that have significantly lowered production costs for both harvested flower and packaged products in these markets, and expect these changes to deliver improved results in 2H 2022, accelerating into 2023.
Across the board, we have implemented significant cost reduction programs and are judiciously managing capital spending with a focus on specific dispensary and production projects. Columbia Care remains well-positioned in some of the strongest growth markets in the industry, including New York, Virginia, West Virginia, and we are pleased to see cultivation yields and quality that continue to improve and lower our cost per gram. In addition, our internal brand portfolio serves as the customer's experience differentiator and continues to attract and retain customers in the segments being targeted. Although we are not counting on near-term improvements in Colorado and California for any financial planning purposes, we have seen some strength return to both markets in July and are comfortable that in the context of our cost-cutting activities and significant improvements in cultivation efficiency, we can deliver better products at lower cost with higher margin going forward.
Any snapback in either market would have a materially positive impact on our overall performance. In the meantime, we continue to execute against our strategic growth initiatives and remain excited about the combination with Cresco to create market-leading scale that will drive greater efficiencies and bring value to our customers and shareholders alike, especially at our high-growth, high-margin markets. Now, let me turn the call over to Derek to review the quarterly results and our outlook for the second half of the year in more detail.
Thank you, Nick, and good morning, everyone. I'll provide a brief summary of the key financial results for the second quarter, discuss our outlook for the rest of the year, and briefly address status of the transaction with Cresco. Revenue in the second quarter was $129.6 million, an increase of more than 5% sequentially, and 18% year-over-year when compared with our results from Q2 of 2021. The sequential increase was driven primarily by standout growth in several new markets, including New Jersey, Virginia, and West Virginia, as well as outperformance in Florida. Of note, this increase did not include any new retail locations opened in Q2. Retail revenue was up 4% quarter-over-quarter, despite lower average basket sizes and a higher proportion of consumers moving away from premium and into value categories.
Wholesale revenue growth increased 11% over Q1, despite a softening of the wholesale market industry-wide. As you've heard already, our quarter was impacted by results from the most mature markets of Colorado and California, without which our revenue growth would have been up almost 9%. Adjusted gross profit for the second quarter decreased sequentially to $55.1 million from $56.7 million in Q1, resulting in an adjusted gross margin of 42.5%, down 3.6 percentage points from Q1. The primary driver of this sequential decline in gross margin was Colorado, excluding which we would have produced a gross margin north of 45% for Q2.
The broader improvements in gross margin, which increased sequentially in 12 of our 17 markets, were driven by continued cultivation efficiencies and an increasing share of our higher margin in-house retail brands, both of which provide protection against further margin erosion in the current cost environment. Reported operating expenses were $73 million in the second quarter, up $2 million from the last quarter due to investments in our growth markets and increased royalty fees paid to third-party brands, and are net of an 8% decline in our corporate SG&A as a result of cost-cutting initiatives enacted in Q2. We anticipate continued reductions in corporate SG&A in the third and fourth quarters. Non-GAAP adjusted EBITDA for the quarter was $12 million or 9% of revenue, down from $16.9 million in Q1.
The sequential decline in adjusted EBITDA and associated margin is primarily driven by sequential declines in our Colorado, down over $6 million quarter over quarter, and California markets, without which our adjusted EBITDA would have been over 14%. Initiatives are already well underway in both markets to bring costs more in line with the local dynamics. As Nick mentioned, we saw encouraging results in the majority of our markets. 16 of 17 markets generated positive EBITDA in the quarter, a reflection of our longer-term margin improvements and continued benefits from prior investments. New Jersey and West Virginia demonstrated the biggest sequential increase in EBITDA contribution on a dollar basis, while California and Colorado saw the largest declines. Wholesale represented approximately 15% of revenue in Q2, still below expectations, but up from 14% in the first quarter and driven by sequential growth in Pennsylvania and West Virginia.
We ended the quarter with $81 million in cash following significant payments, including $35 million in taxes and an increase of approximately $14 million in working capital that includes new cultivation inventory in our emerging high-growth markets. We expect to begin monetizing this inventory in the second half of 2022, which will have a positive impact on our cash flow. Earlier this year, we shored up our capital structure with a private placement of $185 million in 9.5% senior notes prior to the market volatility and rising interest rate environment. We continue to focus on managing our liquidity position, attaining free cash flow, and the efficient deployment of capital through the balance of this year.
Capital expenditures in the second quarter were approximately $29.1 million, down from $29.5 million in the first quarter, and include one-time land purchases totaling $13 million in New Jersey and Delaware. We anticipate much lower CapEx, totaling less than $20 million for the remainder of this year, with spend limited to our planned store openings in Virginia and cultivation expansion projects on the East Coast. Building off Nick's overview of the status of the Cresco transaction, we've signed LOIs in advance of definitive agreements with potential buyers for assets in all the required markets and anticipate announcing the signing of definitive agreements in the coming weeks.
We're focused on the remaining stages of regulatory approval in each of our markets and also working with a third-party expert to independently determine if there are milestone obligations to gLeaf, given its potential impact on the exchange ratio. In summary, the process for closing the Cresco transaction is moving forward well, as anticipated on multiple fronts. Turning to our outlook for the balance of the year. Anticipating business and financial reporting impact from the asset divestitures required for the Cresco transaction, assuming limited improvement in Colorado or California, and reflecting the continuation of economic headwinds, we expect to see sequential top-line growth of mid-single digits in each of the next two quarters.
There will clearly be outliers on the upside, such as in New Jersey with our new cultivation capacity coming online, Virginia, where we'll have new dispensaries opening, and West Virginia that's benefiting from the rapid expansion of the wholesale market. From an EBITDA perspective, we expect to show growth in the second half of the year due to cost-saving measures, efficiency initiatives, and continued improvement in many of our high-growth markets, leading to sequential increases in EBITDA margin in the range of 150 to 250 basis points per quarter compared to our year-to-date results. If a more normalized supply-demand dynamic returns to Colorado before the end of the year, we could see potential upside to these EBITDA growth rates. As usual, this outlook does not include any further changes in the regulatory environment in any of our markets.
With that, let me turn the call over to David to cover our operational highlights. David?
Thank you, Derek. For the next several minutes, I will highlight several important operational developments that materialized during the second quarter, particularly in our top markets. On a revenue basis, our top five markets alphabetically were California, Colorado, Massachusetts, Pennsylvania, and Virginia. On an adjusted EBITDA basis, our top five markets were Maryland, Massachusetts, Ohio, Pennsylvania, and Virginia. Ohio replaced Colorado in Q2, highlighting the materiality of the changes happening in both markets. Driven by inflation impacting the consumer wallet, a shift among competitors to leverage their own retail networks for products from their own supply chain, and a decision by many operators to cut price in the wholesale and retail markets, in many cases by more than 50%, we have seen price compression in several markets. Colorado's performance had the largest impact on our results in Q2.
As the largest operator in the state, we are leveraging our scale throughout the supply chain to accelerate the journey to long-term stability, positioning Columbia Care and Cresco for greater success in 2H 2022, as well as 2023 and beyond. There were macroeconomic headwinds during the quarter that impacted all operators, including decreased consumer spending, lower retail traffic, and an oversupply of bulk inputs. As you would expect, we are taking material steps to address these issues and future-proof the company's operations. All price points, including wholesale, have shown some level of softness. This is particularly acute in more mature or maturing markets. Given our scale in Colorado, we view this as an opportunity, and we are taking actions to strengthen our position as a market leader in one of the world's largest cannabis markets.
This includes, among other things, rationalizing cultivation facilities, headcount optimization, market-leading bulk flower options in our retail businesses as well. As a result of these actions, we believe that we have gotten Colorado to where we want it to be from a cultivation and manufacturing standpoint. We saw record yields out of our Steele facility with respect to grams per sq ft and potency, resulting in a decrease in our cost of production, a testament to execution on the strategic investments we've made in that market. We are not finished in Colorado. Our strategy during the second quarter moving forward is to increase our market share and take advantage of our scale. We are implementing additional significant cost-saving measures in Colorado that will directly impact the bottom line.
We are taking steps to further reduce the cost structure, improve quality, create a better customer experience, and have already restructured market leadership. Moving to California. Oversupply remained a headwind during the quarter as the illicit market grew and outdoor and greenhouse material flooded the market at low prices. Despite this competitive environment, we remain focused on driving operational efficiencies and generated record wholesale volume in the month of July. On the cultivation front, we produced extremely high-quality product with exceptional yields and potency results. The average potency was over 30% THC, with some strains testing over 36% THC with a THC of 38%+. In Massachusetts and Pennsylvania, we introduced some of our popular brands like Tyson 2.0 and Classix during the quarter. Pennsylvania was a major contributor to the sequential increase in wholesale revenue because of innovations and launches such as these.
In Massachusetts, we introduced the Tyson 2.0 one gram vape and Mike Bites edibles. We expect these new product introductions to make positive contributions to our EBITDA margin in the state of Massachusetts. Turning to Virginia, we expanded our Portsmouth cultivation facility, adding additional rooms for vegetation, clones, and bloom, and increasing our overall canopy space. We continue to make strides in the automation of flower packaging, which will allow for up to a 30x packaging speed increase for flower packing. We also rebranded our Portsmouth location to Cannabist, making it the 31st cannabis retail location in the nation. We continue to pursue ongoing expansion efforts to find new dispensary locations in anticipation of adult use coming online in 2024 in the state. Now, to briefly touch on a few markets that were not in the top five by revenue and adjusted EBITDA for the quarter.
With the authorization of adult use in New Jersey, that state had standout results, with revenue more than doubling on a sequential basis. In addition, we operationalized our Vineland 2 facility, which adds 270,000 sq ft of cultivation and production capacity to our total footprint in the state. We expect our first harvest in Q3 of this year and look forward to serving the wholesale market as demand in the state continues to swell. West Virginia was also a standout in the quarter. Now with four dispensaries and one cultivation facility, revenue in the state more than tripled quarter-over-quarter. We've also achieved continued growth of our in-house brands, which now represent approximately half of our retail revenue.
A larger variety of retail brands available, including our award-winning Seed & Strain, which launched five new SKUs in the month, supports a better consumer experience, helps to drive traffic, and protect margins. Before we close, I'd like to make one comment on Europe. As we discussed in the past, we took an asset-light approach to our European operations as we assess the near and intermediate term total addressable market and changes in the regulatory environment. Current macro headwinds such as inflation are greater in Europe, has been exacerbated by a regional war, over-regulation, and severe logistical and supply side challenges, including unprecedented fuel, food, fertilizer, power, and water shortages.
In the context of both cyclical and structural challenges, we've decided to wind down our operations in Europe, as we believe the real opportunity to be years away and require significant capital investment that is better deployed in the U.S. In the U.S., we continue to expect that optimizing production planning, genetic selection, environmental controls, and plant management across the cultivation portfolio will have a dramatic and favorable impact on gross margin. Our national cultivation team has done a tremendous job of improving SOP adherence. We've seen improvements in high-potency production, and we're setting new records in a number of markets. Our geographic diversity and markets with scale allow us to recognize trends early and act on them.
We are taking definitive actions that we expect will increase our margins in the coming quarters, and perhaps more importantly, set us up with leading defensible positions in some of the largest cannabis markets in the world in the longer term. I will now turn the call back to Nick for closing remarks before we take your questions
. Thank you, David.
Before we open up for questions, I want to make it very clear, we are encouraged by the continued growth and improving margin trends that we're seeing in most of our markets, even in these extraordinary times. The markets where we saw challenges, namely Colorado and California, we are on our front foot addressing the issues proactively and setting up the future for success. Getting the two largest cannabis markets in the world back to baseline will open the door for material upside and differentiation relative to our competitors. We've already begun to take steps to reduce costs across the board and have begun delivering higher quality at lower cost finished goods.
As a consequence, we anticipate margin recovery in the second half of the year and are confident in the long-term opportunity that our diverse portfolio represents and are excited about what the future holds for the combined entity when the Cresco transaction closes. Thank you again for your support. Operator, please open up for Q&A.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. We ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question comes from Aaron Grey with Alliance Global Partners. Your line is now open.
Hi, good morning, and thank you for the question. Yeah. My one question, I'll ask a, you know, high level one in terms of, you know, the mix between wholesale and retail. You know, I heard in the prepared remarks how wholesale mix was, you know, below what you had expected. You know, though it did kind of grow a bit Q-over-Q. We've heard from a number of operators speaking to, you know, increasing vertical integration amid, you know, market pricing pressure, something you guys are experiencing as well. Want to get some further color in terms of how you're looking at, you know, the wholesale business, particularly as you're opening up, you know, more stores in certain states where you could, you know, increase vertical integration versus, you know, wholesale, where you're currently a leading wholesaler.
Would love to get some further color on that. Thank you.
Thank you, Aaron Grey. Let me give some very high-level thoughts from my perspective, and I'll turn it over to David Hart so he can also share his insights. You know, we find ourselves in a really interesting moment because we have significant retail expansion opportunities from an organic perspective in some of the best markets, right? Whether it's New Jersey or Virginia, I think that you're going to see us continue to capitalize on those opportunities. Obviously, once New York turns to adult use, you know, we'll see an expansion there. The sweet spot of Columbia Care has always been that closed loop, fully integrated setup where we leverage our retail first and then move into wholesale.
Now, what makes your question so interesting is that in the context of the Cresco combination, Cresco is the national leader in wholesale. And I think that, you know, the combined business will have the most expansive retail network, I guess, outside of Florida, from a retail perspective. So, you know, I think that they're two sides of the same coin, meaning, you know, when markets are tough, you're going to see players become less likely to move towards a sort of wholesale relationship with new incumbents who are also competitors.
What we bring to the table as a combined entity is the fact that we have significant retail distribution of our own in all the markets that matter in a way that can really hurt if people don't want to participate in a normalized wholesale relationship. You know, not only do we have sort of the carrot, which is we can push people's products the same way they can push ours, we also have the stick, which is if no one is interested in buying our products as a combined basis, it's going to be very difficult for them to sort of continue to grow their business in the same way.
Wholesale has always been a greater opportunity to leverage EBITDA because they're really, you know, there's no real SG&A associated with wholesale revenue. But I think having the balance between, you know, sort of the most significant retail network on a combined basis going forward and the most significant wholesale opportunity and the most significant wholesale operator in the industry, I think that really sort of gives us a competitive advantage on both sides. I don't know, David, do you have anything to add to that?
I would just add that we continue to see an increase in terms of percentage of shelf space of our own products across the markets, and that's been a continued effort and focus for both the operations and the finance team. You know, I would. The caveat to that is I think we all recognize that the retail operations basically across the supply chain, all of our facilities need to stand on their own, right? The retail facilities need to compete at the hyper-local market. We're constantly balancing increasing from a gross margin perspective, the opportunity of shelf space for our own internal brands, but also recognizing that retail in current day, current state, needs to be hyper-competitive.
In markets where there's a diversified portfolio approach, we do take that in a market like California or Colorado. We continue to see the percentage of our internal products on the shelf increase across a number of our markets, and we'll continue to do that.
Yeah. I mean, Aaron, I think David just touched on something that I would like to sort of highlight, which is the reason why a market like Colorado and California become so interested and interesting is because they're fragmented. Really fragmented with significant amount of distribution throughout the state. From a wholesale perspective, that's going to be the largest piece of the pie that we can capture to really not only increase profitability, but also drive revenue growth and market share. Having the sort of the background of sort of being part of the Cresco family, I think will really change the way we actually have approached that wholesale opportunity in those markets.
By the way, you know, that's coming on the heels of what I would consider to be an important rationalization point where you've seen the supply chains on both, in both markets go through a period of dislocation, which has been driven by not only oversupply, but a lack of disciplined operators that I think are finding it difficult to fund their own businesses now, which is why we've seen so much transition amongst smaller and larger players in those markets.
What that really does is it opens the door for a very successful sort of wholesale, let's call it reintroduction in 2023 and the second half of 2022. So wholesale is going to continue to be a very important market, particularly in the two largest cannabis markets in the world, which are very, very different than the other markets that you people typically think about, like Pennsylvania or Florida. Because Florida, obviously there is no wholesale.
Pennsylvania, you have wholesale, but you have most of the operators with, you know, that have optimized and maximized their own retail distribution footprint, and that's really what they're trying to leverage right now in a cost sort of, let's call it a cost-stressed environment or a wildly stressed environment where the consumer doesn't have the same type of disposable income that they did, you know, 12 months ago. I actually think that wholesale will continue to be an important driver of the business, and it, because of our exposure to California and because of our exposure to Colorado, will actually be a unique asset going forward.
Thank you. Our next question comes from the line of Vivien Azer with Cowen. Your line is now open.
Hi. Thank you. Good morning. I wanted to follow up on the commentary around California and Colorado. Obviously, important call-outs in the quarter given the challenges in place. I was hoping, Nick, in particular, given what you just offered in terms of a stabilization and recovery, but what is embedded in your plan in terms of broader market deflation in the back half of the year for Colorado and California? And just to follow up on that, you know, how good of a read is it possible to have? Just given that, you know, there's supply in the market that you can't see at all, but, you know, maybe with an unwind of legal operators, you might have a sense of how much excess supply might still be coming online. Thanks.
Vivien, it's a great question, and I would actually bifurcate those two states because they're very different. Colorado, there's very little in the way of illicit market activity. It's a regulated market issue, and it's a structural issue for the market that we've been wrestling with. I'm gonna turn it over to David to give you some very specific data points on why Colorado is different from a macro perspective. From our view, you know, from our vantage point, what we've done is we've basically reconstituted our entire supply chain over the past 12 months. We've talked about this in the past. That's given us a much more efficient cost, sort of costed, a much more efficiently costed, sort of final product, but it's also given us higher quality in terms of pack content.
The products that we're manufacturing are cheaper, and they're much better than what's available out there in the market right now. The fact is the price point when people are going through a liquidation phase is very difficult. You know, you've heard the only other MSO in the market really talk about effectively exiting that market. You know, there have been plenty of articles about smaller players that have been winding down their own operations. In many cases, they're actually fully integrated players. You're seeing supply come out of the market. It's not a perfect science to figure out how much supply has come out of the market already.
Anecdotally, we're hearing it from our team on the ground, and because we have the largest retail network, we've got a pretty good finger on the pulse of what's actually out there. This includes, you know, not just Los Sueños, this includes our own cultivation capacity and a lot of the sort of the mom and pops that have been going through this very painful rationalization. I would say that we have a higher level of confidence because we have a better sense for the marketplace because of how it's structured and how regulated it is. I'll turn it over to David, and then I'll sort of switch back to California. David, you want to just talk a little bit about Colorado?
Yes, sure. Hi, Vivien. This is David. Just quickly in Colorado, to Nick's point, the illicit market is not really a pressure point for Colorado like it is in California, which so I think it does split the two markets. If you look at the historical price volatility in the wholesale market in Colorado, it's probably the most significant volatility of any sort of mature, you know, large cannabis regulated market in the country. We've taken, to answer your question, a conservative view for the balance of the year with respect to pricing. You know, this has been at a bigger disproportionate impact on the wholesale opportunity in Colorado relative to the retail opportunity.
I think the top-line numbers have been well publicized from the state of Colorado, so people know where that market's trending year-over-year. I think the volatility and the snapback potential is real based on just the structural difference in Colorado, whether it's you know it's plant count, the ability to flex up or flex down. It's very easy to take plant count down. There is a process to take plant count back up over time. That structural differentiation, I think, makes Colorado somewhat unique versus some of the other you know West Coast mature markets. From a Colorado perspective, we have taken a very conservative approach to the balance of the year.
We've taken, I think we highlighted a number of proactive measures, both on the cost-cutting side in Colorado, but also just on our aggregate portfolio in terms of, you know, plant count on a go-forward basis for the balance of the year and looking at our 2023 harvest potential there. I think Colorado is different because of the structural, the regulatory framework in Colorado. In California, I think our exposure across the supply chain is disproportionately on the retail side in terms of how we can flex in California. What we're gonna continue to be thoughtful about our allocation of shelf spacing in California based on what we see in the wholesale market in terms of an opportunity from a price point perspective.
That market has, you know, shown some stability recently, but it is certainly softer versus where it was in November of 2021 and, you know, a year prior to that. From an outlook perspective, I would say similar to Colorado, we've taken a conservative view for the balance of the year. I'll hand it back to Nick, but also offer if Derek wants to make any commentary in terms of the outlook.
Go ahead, Derek.
Yeah. I just want to reiterate that to your question on whether we're able to predict the balance of the year. To David's point, it's a tough market, but..
We're expecting the demand supply dynamic, dynamics to come back into line. Without that having taken place, as you said, we're being conservative in our outlook for the rest of 2022.
The only thing I would add about Colorado versus California is that Colorado just has a disproportionate impact on us. Of the two, that's probably the one where, you know, if the 80/20 rule is being applied, we're gonna spend most of our time trying to fix Colorado because I think we can have a more proactive role in that process. I think that it's a more predictable environment. The Californian environment is really a by-product of sort of, you know, the how prolific the illicit market is and how successful they are at actually sort of, you know, sort of penetrating the regulated market. That's becoming more and more difficult, but I think it's also a less transparent market framework for us to try to sort of dig in.
What we've been doing is not only sort of remaining conservative from a forecasting perspective, but also we've been changing the way we, you know, the products we make, the products we sell, and that's created a bit of a competitive advantage for us. We can start to reintroduce our brands and our products into the wholesale market that are actually competitive.
Thank you. Our next question comes from the line of Kenric Tyghe with ATB Capital Markets. Your line is open.
Thank you and good morning. Nick, I wonder if you could speak to the performance of your operations in New Jersey in the quarter, specifically also providing any color on retail versus wholesale in the quarter. Perhaps more importantly, as you look to the second half with Vineland coming on, how you expect that, you know, retail versus wholesale performance to sort of track as we look to exit the year. Thank you.
Sure. Kenric, what I'll give you a very high level overview and then turn it over to David and Derek to comment. We only have two dispensaries open in New Jersey at this point. The third one is basically going through the planning and construction process. Those dispensaries from an adult use perspective only began full operational hours for adult use in June. We haven't had a full quarter of our exposure and our throughput in our own dispensaries to date. Yet we've seen significant growth across the board from a retail perspective. As you can imagine, the vast majority of the sort of long-term opportunity is really on the wholesale side.
You know, even after we have a third dispensary opened up, and we've seen significant, you know, demand for our products in the wholesale market, which has been great. The new facility we've produced is not only more efficient, you know, from a cost perspective, but it's also gonna now allow us to produce better products, differentiated products, and higher THC products. All of that I think will be, you know, sort of reflected in the demand profile you see for our wholesale relationships. That's, so it's a great market. It continues to show growth. It's, you know, still supply constrained because we're in the first inning of the conversion to adult use.
I think that if you look at sort of the products that we're actually to show growth, you know, it's still supply constrained because we're in the first inning of the conversion to adult use. I think that if you look at sort of the products that we're actually manufacturing and how the products are testing, you know, we feel very confident that we're gonna continue to see movement into and penetration into the wholesale market. We have built very good relationships with all the operators in the state. Let me turn it over to David for a moment. David, you can just weigh in, and Derek, you can weigh in as well.
We're very excited about New Jersey. We took a conservative approach on day one conversion to adult use. We wanted to be a good partner with the regulator in terms of maintaining that medical program. I think we took a very disciplined approach to that. As Nick mentioned, we've brought our second cultivation manufacturing facility online most recently. It was a rather large CapEx project for us, and it did add a ton of automation post-harvest, which would allow us to lean into the wholesale market. We had a great launch in our retail stores. We've continued to see solid improvements in terms of the allocation requests on the wholesale basis. To Nick's point, that's the long-term opportunity, knowing that we're, you know, we have three dispensaries allotted to us for the go forward foreseeable future.
It is really a wholesale business, and one of the reasons we're excited about the transaction with Cresco is obviously their expertise in the wholesale market. Continue to be focused on delivering high-quality options into the wholesale market, get our brands on shelves, and, you know, just maintaining a strong brand recognition trajectory in the state of New Jersey, both obviously with our locations and retail. But I would say arguably more importantly on the wholesale side and being good partners to the rest of the operators. Derek, I'll hand it over to you.
Yeah. Thank you, Dave.
I think just picking up on a comment we made on last quarter's call, to the whole point of the wholesale market in New Jersey, just before adult use came online, we'd mentioned that operators were retrenching in the wholesale market really to secure their own product through their existing supply chain. That has loosened up now in the second quarter. When we talk about New Jersey growing, doubling quarter-over-quarter in Q2, that is not only the strength of retail market, but the wholesale market opening up and becoming more normal. As David said, as we go into Q3 with the additional harvest capacity online, we're expecting increased growth in that wholesale market in another sequential quarter.
Thank you. Our next question comes from the line of Matt Bottomley with Canaccord Genuity. Your line is now open.
Yeah, good morning, everyone. Thanks for taking the questions. Just wondering if we can get a little more granularity on the remaining fiscal 2022 outlook. You know, sort of the implied reductions from the previous outlook on your new growth assumptions and margin expansion going forward, and just how it relates to how much of that is just solely the Colorado, California element, and how much of it might be sort of other pricing headwinds that we've heard from other MSOs as well, and some of the wholesale channels in other Northeastern markets.
Well, I mean, I think it's hard to really compare our results and our prior guidance to the rest of the year because Columbia Care won't exist, right? Columbia Care is gonna be part of Cresco, and we're gonna be selling assets and announcing those sales in short order. It's gonna be very hard for us to sort of leave guidance as it is, knowing that, you know, seven of our markets are gonna be experiencing divestitures. I think that is the single most important factor that we need to convey to the Street, which is I don't think it's appropriate to look at Columbia Care as a standalone entity going forward because of the process we're going through.
I think it's very hard to sort of parse out which assets will be announced for sale when, which assets will have which financial impact, because, you know, the M&A process, you know, although we have very sort of a very clear view of what's going on, there are always timing elements to it and requirements for disclosure. The number one thing that I would take away from the way we've tried to couch our guidance is that the business continues to grow in each market. We continue to see EBITDA margins improve in each market, but each market may not be in our financials going forward, the way we report. I think that it's just a hard question for us to answer because, yes, there are macroeconomic headwinds.
If you exclude Colorado and California, we had sequential growth, top line growth of 9%. We saw an expansion of gross and EBITDA margin across the board. You know, we had two markets that were exceptionally difficult that we have a plan to address, but they happen to be the number one and number two largest markets in the world. The way I think that we've tried to provide guidance is Columbia Care is, you know, the shareholders have spoken, regulators have spoken. It is going to be part of Cresco, and it's gonna be part of Cresco whether people believe it or not. That must affect the way we convey our future outlook.
Frankly, in this context, yes, there are some macroeconomic headwinds, but the outlook that you're talking about is really we're trying to think about it on a market-by-market business basis. If you strip out Colorado and California, I mean, I think that's easy to figure out where we are, right? We have north of 14% EBITDA margin in that part of the portfolio. If you look at Colorado and California specifically, what we expect to see is margin improvement through the rest of the year, and we expect to see some top line growth because of the stabilization. You know, what that actually looks like on a combined basis is very difficult to tell because of the noise you're gonna be seeing due to the transaction.
I hope that's helpful. Derek, I don't know if you have anything to add to that.
Yes. No, I agree. Just picking up just briefly on the asset and sales. Once we have purchase agreements in place, those assets will be treated as assets held for sale. As Nick mentioned in his comments, they'll be reported in a different way going forward, and we anticipate that being in Q3. Just unpacking as you're asking about the balance of the year. Yeah, the Colorado, California markets, we're being conservative in how we think they are going to reset for the balance of the year. We still have high growth markets that we're experiencing benefits from in Q2 and expect to continue benefits in the balance of the year. They are still growing, and they are less dislocated markets than those other two.
Thank you. Our next question comes from the line of Scott Fortune with Roth Capital Partners. Your line is now open.
Hey, good morning. This is Nick on for Scott. Just looking for some color on Virginia. The state removed the medical registration card process recently. Just what have you seen in terms of pricing, patient growth, and overall demand in the state? If you can just provide the expected timing of those additional 8 locations set to come online here, that'd be helpful. Thank you.
David, you wanna take that?
Sure. So, in terms of new patient growth, we did see an uptick with the relaxation of patient registration requirements. That certainly had a, you know, the state had a pretty large pipeline, if you will, of patients waiting for the registration. We have seen a nice healthy uptick in terms of patient counts in the state, which is terrific. You know, pricing has been relatively stable. I think we have seen specific SKUs on the flower side move down a little bit, but I think that's not terribly surprising, at least it wasn't for us. I think we continue to look at the Virginia market from our perspective as a growth market, both in terms of retail and wholesale.
With respect to the new store, the remaining stores to be opened, I think we said on a previous call. I would just reiterate, we did not get regulatory clarification in terms of what the adult use regs will look like in terms of setback requirements and zoning, permitting, et cetera. We've taken a very conservative approach to try to make sure we're well-positioned with those stores when adult use does come. It's, I would argue, taken longer than we'd initially anticipated to find those sort of de-risk locations. They're all now underway and in development. I think the outlook we've given is that we expect the majority of those to be opened by the end of the year or shortly thereafter.
You know, we're doing everything we can to move through the zoning and the permitting process. We've now gotten pretty good at getting construction timelines dialed in. I think the supply chain has actually improved itself a bit. From our vantage point, I don't think much has changed from what we talked about before other than you know, two of them are probably gonna open in the near term, which is exciting. This is a market where every door that gets opened expands the market because of the lack of stores across the state right now. We're doing everything we can to open those doors, continue to see a really robust wholesale market for our brands as well. Continue to be excited about Virginia.
Yeah, I mean, the only thing I would add to that is, you know, the second quarter we had no new dispensary openings. You know, we are expecting, you know, dispensary openings in third quarter, dispensary openings in fourth quarter, in our most attractive markets, right? In Virginia, which we've seen significant improvements in sort of what's called patient enrollment, we're seeing continued improvements in activity and sort of moving towards adult use. All the thematic trends in Virginia continue to be very positive. I think what will be a nice addition to the overall portfolio and to the Virginia business is the fact that, not only will we be opening up our door, or new doors from a retail perspective, but others will as well.
We have the most robust supply chain. You know, I think it's reasonable to expect that the wholesale market will grow in concert with the retail opportunity.
Thank you. Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. Your line is now open.
Hi, this is Matthew Baker on for Pablo. Thank you for taking our questions. For our first one, just wanted to know if the Green Leaf milestone payment has been triggered, and if so, when and what were the amounts? Thank you.
The Green Leaf milestone payment is still going through the review process with an independent third party. We don't really have much else to offer. The only impact it would have is reflected in the exchange ratio adjustment. Let me turn it over to Derek to give a little bit more color.
Yeah. No, that's exactly right. The first milestone period goes through the end of the second quarter, end of June. As we've mentioned in the pre-prepared comments, we're working with an independent party to confirm what obligation there would be associated with that. We'll obviously update you once that process is complete.
Thank you. Our next question comes from the line of Andrew Semple with Echelon Partners. Your line is now open.
Hi there. Good morning. First question, just wanted to ask on the CapEx guidance, I guess, you gave for the second half of this year. It sounds like that's slowing down considerably. Is there any markets in particular where you've maybe stepped back your investment plans or, you know, maybe you could just highlight, has there been any scaling down of investment activities that are anticipated for the second half?
I'll give a very high-level overview, then I'll turn it over to Derek and then David. The CapEx plan for CapEx as Columbia Care was always to see a decrease in the ramp on the second half of the year because of the investment we've made. We're focusing solely on completing the projects that we had planned for 2022, which are the dispensaries in places like Virginia, for the most part. It's again going back to sort of a point I made a little while ago. We are going to be announcing divestitures related to the Cresco transaction, and so that changes a lot of the way we think about our own business and the way we've sort of planned things going forward.
It doesn't mean that we're not operating as an independent entity, but we are mindful of the fact that we want to deploy capital and preserve capital and sort of deploy resources in a way that positions the combined business for long-term success while at the same time maintaining continuity of operations and performance in the assets that will ultimately be sold. You know, it's a very difficult question to answer only because you know we have a lot more, I think, variables to take into consideration than others because of the Cresco transaction and because things are moving so quickly.
You know, Derek, I don't know if you have anything to add to that, but you know, you can imagine that you know, if there was an asset that Columbia Care had that Cresco had that's duplicative, it doesn't make a lot of financial sense for Columbia Care to really weigh in and make significant investments in those properties when they will not be part of the portfolio going forward. Doesn't mean that that's compromised or underinvested in. It just means that there might be a shift in prioritization for new capital expenditure products or projects.
I think it's just, you know, you have to think about it from the standpoint of what does Columbia Care look like as part of Cresco, as much as it's a question of, well, what's Columbia Care gonna do for the rest of the year? Because the two are absolutely linked.
Yeah. Just picking up on that, we've said before that our CapEx investments would be made heavily and early in anticipation of market growth. That's what you have seen in the last few quarters. As we said before, there was always gonna be an anticipation of lower sequential CapEx, which we've seen in Q2. It looks like a marginal decline, but we've got $13 million of land purchases in there in Delaware and New Jersey. If you're excluding those, there's already a big step down in that CapEx as we've made those investments we needed to. As we said, there's a little less than $20 million that we're anticipating for the balance of the year.
Where that is being invested is to improve the cultivation sites on the East Coast, as anticipated as they grow larger and we continue to take cost out with some automation and other process improvements, as well as the new dispensaries that we're opening that we just talked about primarily in Virginia.
Thank you. Our last question comes from Matt McGinley with Needham & Company. Your line is now open.
Great. Thank you. In Colorado, if that $6 million in sequential EBITDA decline is primarily driven by price decline and prices remain at or below your current levels, is there $6 million in SG&A or gross margin recovery on a quarterly basis to recover the profit dollars you lost there? I understand Nick's comments on not being a standalone company, but is this now a business where you're likely to run it more of like a low, low double-digit EBITDA margin rate, or is there still enough significant upside in those markets in the East where you could get consolidated EBITDA margin back to the, you know, 20%+ range you had previously? Are we just kind of now at a lower level given what's happening in these West Coast markets?
I'll take a crack at that, and then I'll turn it over to David and Derek. From an EBITDA perspective, I think there are several things happening in Colorado. There is ample opportunity for us to reduce and rationalize facilities and reduce costs to sort of improve the overall margin profile. That's what's called the SG&A line. But more importantly, the COGS piece of it is something that we've also made considerable adjustments to through the investment in manufacturing and cultivation. The productivity and the quality of the products, therefore the price points of the products, are coming to the market at a different sort of benchmark than they had previously.
From the standpoint of sort of our cost per gram and then, again, what's called the wholesale pricing and the pricing across the board, you know, sort of conundrum that you face when you see wholesale liquidation of inventory hit the market, you know, we view that as not a permanent state of existence. It's a transitory moment that you know that will last until some of the smaller players are flushed out and they've basically sort of eliminated their oversupply of flower. You know, it's an expiring commodity, right? It doesn't stay fresh forever.
Not only are we seeing kind of resumption of normal. We believe that we're starting to see the semblance of a normalized wholesale market beginning to come back, both from a pricing and a volume perspective. You know, obviously with the introduction of new products and the introduction of better products, we're seeing some of that carry through to the retail channel as well. You know, because it's difficult to predict how long and how much inventory people have built up, but we're seeing that shakeout take place. We're taking a conservative view.
Our view is that based on the changes we've made, if nothing improves from a pricing or from a demand perspective, which we don't think will be the case, and from a supply perspective, which we don't think is the case, based on the changes we can make to our own operations, we think we can, you know, continue to drive margin back up into gross margin and EBITDA margin back up over the next couple of quarters. Hopefully that answers the question. In terms of the direction of the overall EBITDA margin and the capability or the potential to hit those, you know, we continue to make changes with our corporate overhead structure.
We continue to make improvements in our cost of goods sold across the country, and we've seen significant improvements in efficiency and quality of flower that's coming out, coming online. Hopefully, you know, you've heard some of that commentary in today's discussion. All of those will have an impact on margin improvements. If we look at the rest of the portfolio, excluding Colorado and California, we have similar, you know, for the quarter was about 14.3%.
If we're telling you that we're seeing, we expect to see margin improvements, EBITDA margin improvements, in the rest of the portfolio in each market between 150 and 250 basis points a quarter, I think we start to approximate the types of guidance and the types of expectations that we would expect to see, which, you know, ultimately result in about roughly 20% plus EBITDA margin. I think the other piece of the puzzle that I would just highlight is, you know, the markets themselves are, when they're unburdened with the Columbia Care overhead structure, which is considerable because we've built the business to be a standalone entity to handle growth and to handle continued expansion into new markets.
Well, a lot of that goes away under the Cresco structures, right? That all of a sudden offers a great deal of scale and opportunity for the combined company to begin to really shine through with the market level EBITDA margin profile, which, you know, again, in 14 to 17 markets is quite attractive. In the last two or 15 of 17 markets is quite attractive. In the last two markets, you know, there are challenges, but they're not insurmountable, and we're going through the process of fixing them now. When you add that into a much more efficient and scalable corporate overhead structure, I think, you know, you get, you have the potential to get well north of 20% from an EBITDA margin perspective.
Let me turn it over to David and to Derek to see if you guys have anything to add.
Yeah. The only thing I would add is the current macro environment and even at the majority of the state level supports the reason for the transaction. I think getting to scale from a G&A perspective is something that this deal is going to achieve. I would just piggyback off of what Nick had mentioned. In terms of Colorado, I do think there are plenty of levers for us that we've started to pull and continue to pull on a go-forward basis to make it as efficient as possible in terms of a standalone operation in that state. Still a big market, right? Even with the year-over-year aggregate decline in that Colorado market, it's still a $1.6 billion to $1.7 billion market that's still highly fragmented.
There's opportunities to grow the business organically by taking market share. Still, I think, over time, given the supply and demand volatility that's historically been in that market, there are positive momentum and positive tailwinds behind us on a go-forward basis as we position for growth in that market through cost structure realignment, and, you know, frankly, facility realignment based on today's current sales trajectory. I think on a go-forward basis, there's still a huge opportunity for us to continue to be the leader in that state, but also to have a business that delivers on our expectations ultimately in terms of gross margin and EBITDA margin.
Thank you. This concludes the question and answer session. I would now like to turn the call back over to Nicholas Vita for closing remarks.
Well, thank you, everybody. I'm sure we'll be speaking with most of you throughout the day. If you have any questions, please let us know. As always, we greatly appreciate your time and continued support, and we look forward to the next several quarters and the integration with Cresco. Talk to you soon.
This concludes today's conference call. Thank you for participating. You may now disconnect.