TerrAscend Corp. (OTCQX:TRSSF) Q3 2022 Earnings Conference Call November 14, 2022 5:00 PM ET
Company Participants
Jason Wild – Executive Chairman
Ziad Ghanem – President and Chief Operating Officer
Keith Stauffer – Chief Financial Officer
Conference Call Participants
Andrew Bond – Jefferies
Kenric Tyghe – ATB Capital
Andrew Partheniou – Stifel GMP
Eric Des Lauriers – Craig-Hallum Capital
Noel Atkinson – Clarus Securities
Andrew Semple – Echelon Capital Markets
Victor Ma – Cowen Companies
Shaan Mir – Canaccord Genuity
Operator
Good afternoon. My name is David and I will be your conference operator today. At this time, I’d like to welcome everyone to TerrAscend’s Third Quarter 2022 Earnings Call. Joining us for today’s call is Jason Wild, Executive Chairman; Ziad Ghanem, President and Chief Operating Officer; and Keith Stauffer, Chief Financial Officer.
Today’s presentation includes forward-looking statements about the business outlook in the states in which the company operates. Each forward-looking statement discussed in today’s call is subject to risks and uncertainties that could cause that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading of Risk Factors in our annual report of Form 10-K for the fiscal year ended December 31, 2021 and subsequent filings that were or will be filed with the Securities and Exchange Commission and available at www.sec.gov and our website at www.terrascend.com. The forward-looking statements in this presentation speak only as of the original date of this presentation and we undertake no obligation to update or revise any of these statements.
I’d now like to introduce Mr. Jason Wild. Please go ahead, Mr. Wild.
Jason Wild
Thank you. Thank you very much, David. Good afternoon, everybody and thank you for joining us today. The third quarter represented a period of genuine progress and significant improvement for TerrAscend. In spite of a challenging macroeconomic environment, we delivered sequential top line revenue while significantly reducing operating expenses. These actions resulted in an almost doubling of adjusted EBITDA and adjusted EBITDA margin expansion of 800 basis points sequentially.
Positive cash flow from operations totaled $1.5 million in the quarter, a significant improvement versus negative cash flow from operations of $16 million in Q2. Excluding $9 million of taxes paid in Q2, we delivered a $7 million improvement quarter-over-quarter. While momentum appears to be building for federal regulatory reform, we remain focused on building a business that generates positive operating cash flow with or without the benefit of uplifting tax relief or a lower cost of capital.
Q3 was a solid step forward in executing against this strategy as we generated modest positive cash flow from operations. In New Jersey, we continue to perform well at both retail and wholesale. TerrAscend has quickly established as bulk as a top three player in what is one of the most attractive markets in the country. In Maryland, we operationalized our new cultivation and manufacturing facility in Hagerstown and are now in an enviable position for the start of adult-use, just as we were in the period leading up to adult-use in New Jersey. In Pennsylvania and Michigan, we made significant progress on reducing costs and streamlining operations amidst the very competitive environment. Subsequent to the third quarter, we closed a debt financing with Polaris at attractive terms, considering current market conditions, significantly strengthening our balance sheet and enabling us to continue to execute on our growth plans. We are also finalizing the refinancing of our loan facility in Michigan with more news to come on that shortly.
On the M&A front, TerrAscend is fortunate to have a wide open map. The pain in the industry and capital markets continue to experience has resulted in opportunity to acquire businesses at a fraction of previous multiples. We are focused on expanding our retail footprint in our existing markets like Maryland, Michigan and Pennsylvania through bolt-on acquisitions that are both OpEx efficient and accretive. In terms of new markets, we have a robust pipeline of single state and multi-state assets that are not available to others due to licensing caps.
In closing, I would like to pullback to a 40,000-foot view of the industry and outline the factors that I believe will drive TerrAscend’s continued leadership in this space. There are things that we can control and things that we cannot control. To execute against the things that we can control, our team is ultra-focused on building deep relationships with consumers by delivering high-quality, consistent products and best-in-class brands that our customers expect and deserve. Investors, shareholders and market conditions demand and require profitable bottom line results and the companies that cannot get there will not survive. On that front, we have made the operational decisions to ensure that TerrAscend continues to generate positive cash flow from operations.
Regarding the things that we cannot control, I am more positive than I have been at any point over the last few years, whether it’s safe banking, which many expect to pass in the current lame duck session of Congress, uplisting or even legislation that addresses the onerous 280E tax code, I would not be surprised if this legislation accelerates from both sides of the aisle following last month’s order by the President to fast track the review of the federal scheduling of cannabis and we are encouraged by the results of the mid-term elections that this initiative will remain on track.
We have started to see green shoots for the industry, including Canopy Growth recently announced plans to consolidate its U.S. investments, state level decoupling of 280E taxes in many markets, and the most recent adult-use ballot wins in Missouri and Maryland. All of this leads me to believe that the dam is finally about to break and I know that TerrAscend is ready to capitalize on the opportunity.
In closing, I have always been inspired by this famous quote from John F. Kennedy. “We choose to go to the moon in this decade, not because it’s easy, but because it’s hard. That challenge is one that we are willing to accept, one we are unwilling to postpone and one which we intend to win.” While TerrAscend has no plans to go to the mood anytime soon that quote continues to motivate us. The challenge of operating in this industry is one that we are willing to accept, in fact, relish and it is one which we certainly intend to win.
With that, I will now turn the call over to Ziad to provide an update on our key markets. Ziad?
Ziad Ghanem
Thank you, Jason, for laying out the macro overview and higher level aspect of our business. Before going into more detail on our operations, I would like to introduce Karim Bouaziz, who recently joined us as President of our Northeast region. Karim brings nearly 6 years of cannabis industry experience, starting as Co-Founder and SVP of Operations and Retail with Vidacann. Prior to joining the cannabis industry, Karim held key finance and operational leadership role in both private and publicly traded companies across varying industries, including Newell Brands, United Technologies and the Walt Disney Company. We are excited that Karim has joined our team at TerrAscend. I had a chance to work with him earlier in my cannabis career and know firsthand that he brings a deep understanding of cannabis across the entire vertical chain, along with the right leadership skills. Karim has been with us for 2 months and we have already felt the impact.
Now, I would like to take us through more details on our operations state by state. New Jersey remains a key growth driver. According to data reported by BDSA, New Jersey sales are currently run-rating at $900 million, only 6 months into the adult-use program life. Within this market, where demand continues to outpace supply, we are strategically allocating our production between our retail and wholesale channels. New Jersey is also proving out our brand strategy as we leverage our own brands and licensed brands, which has resulted in the acquisition of new customers and high retention rates. As a result, we have quickly established ourselves as a top three operator in the state.
Our Kind Tree branded flower represents 3 of the top 10 selling SKUs in the state, with Frosted Melon Gelato holding the number one position. We also own more than 50% market share of the concentrate category, with 7 of the top selling SKUs. Our Gage brand is performing very well and continues to gain traction in the state. Our retail sales in the state showed strong growth quarter-over-quarter, driven by continued strong performance in Maplewood and Sellersburg and the addition of Lodi early in the third quarter.
In Maryland, we have completely exited our legacy facility in Frederick. We are now fully operational with cultivation and manufacturing at our new Hagerstown facility and we expect our first harvest in January. Given adult-use was approved by Maryland voters last week, we are preparing to go to market with a full suite of brands, product and format for wholesale distribution, leveraging the same strategy that has proven so successful in New Jersey.
Finally, our vertical integration plant in Maryland remains on track. We are actively evaluating M&A opportunities, targeting the four dispensary limit. Pennsylvania remains a key strategic focus area for TerrAscend. While the current medical program has matured, adult-use is on the horizon and was likely held by last week’s election. When that time comes, we will be prepared to leverage our vertical scale, brand and capabilities. At the retail level, we increased the vertical mix of our own Kind Tree and Gage brands in our stores and introduced the Cookies brand through recently announced expansion of our partnership. We now have a partnership with Cookies across Michigan, New Jersey and Pennsylvania.
The wholesale channel in Pennsylvania has become increasingly challenged by the recent trend of verticality, but we are encouraged by the early traction of our newly launched Cookies and Gage brands. We have also taken decisive actions to manage expenses and streamline operations, resulting in reduction in our cost per pound. And in recent months, we have seen an increasing number of opportunities to acquire additional retail licenses at a fraction of previous multiples.
In Michigan, we took steps to reduce our cost structure and improve profitability. We have reduced our workforce and scaled back organic store expansion plans. As a result and while much of our motivation in acquiring Gage was to extend the brand beyond state borders, we are on a path to becoming EBITDA and cash flow positive in Michigan within months, not quarters.
During the quarter, we closed on the acquisition of Pinnacle, which includes 6 dispensary licenses with 5 currently operational in the southern part of the state, near the borders of Ohio and Indiana. This acquisition increased our retail footprint in Michigan to 17 locations, with 19 expected by the end of the year as we open 2 new stores. The Pinnacle stores are performing well and have enabled us to add positive cash flow by adding only four-wall OpEx. This allows us to leverage our existing cost structure and state level operating team. We continue to build our branded wholesale business, which we expect will begin to contribute to the bottom line more meaningfully over time.
On the M&A front, Michigan remains a fragmented market. And this dynamic presents additional opportunities to gain further scale and expand operating leverage similar to our Pinnacle acquisition. We continue to evaluate multiple opportunities in this regard. In Canada and California, we have taken additional steps to optimize operations and reduce costs. In Canada, we significantly reduced costs, which we expect will result in a significant improvement in cash flow over the coming months. In California, we shut down our Valhalla production facility in the quarter, choosing instead to outsource our manufacturing due to favorable economics. This combined with the reduction in the workforce and other measures, which will lead to a positive EBITDA in California.
While this industry remains in its early innings, it is a promising and exciting growth story, and we are building a company for the long-term, a company that we believe will be at the center of this growth. I believe in our strategy, our brands, our states and most importantly, our team. We have a clear line of sight and expect to have every state in our portfolio contributing with positive EBITDA and sustained positive cash flow from operations as a company.
With that, I would like to now turn the call over to Keith to provide a financial update. Keith?
Keith Stauffer
Thanks, Ziad. Good afternoon, everyone. The results that I will be going over today have already been filed on both SEDAR and EDGAR. I’d also like to remind everyone that effective with our previous 2021 10-K filing in March of 2022, we became a U.S. filer with the SEC and report our results in accordance with U.S. GAAP. All the results that I will reference today are stated in U.S. dollars.
Net sales for the third quarter totaled $67 million, an increase of 3.4% sequentially and 36% year-over-year. The sequential growth was driven by strong results in New Jersey and a partial quarter benefit from the Pinnacle acquisition, partially offset by a decline in wholesale in Pennsylvania and challenging retail trends in both Pennsylvania and Michigan. Year-over-year growth was driven by New Jersey and the acquisition of Gage in Michigan, offset by the aforementioned headwinds and a continued challenging operating environment in Canada.
Regarding sales by channel, retail sales grew 11% sequentially to $53.4 million, driven by New Jersey and the addition of the Pinnacle acquisition, partially offset by pressure in Pennsylvania and Michigan. Retail sales grew 114% year-over-year, driven by New Jersey and the acquisition of Gage in Michigan, partially offset by declines in Pennsylvania and California. Wholesale sales declined 19% sequentially and 44% year-over-year to $13.6 million in the quarter, driven by a decline in Pennsylvania due to increasing verticality in the state. The decline in wholesale sales in Pennsylvania was partially offset by growth in New Jersey.
Gross margin for the quarter was 36.3%, impacted by a $6 million write-off of inventory in Canada. Adjusted gross margin for the quarter, excluding the inventory write-off in Canada, was 46.1% compared to adjusted gross margin of 47.1% in the previous quarter, a decline of 100 basis points sequentially, driven mainly by temporary operational drags from Maryland and Canada. We are now fully out of our legacy facility in Maryland and we have significantly reduced costs in Canada such that neither of these areas are expected to be a material drag on March and beginning in 2023. Excluding Maryland and Canada in Q3, adjusted gross margin would have been 49.0%. This demonstrates the progress that we are making towards our stated goal of 50% gross margin in the coming months.
G&A for the quarter was reduced by $2.7 million or almost 10% to $26.7 million or 39.8% of revenue compared to $29.5 million in the second quarter and 45.5% of revenue. Note that the $26.7 million in the third quarter included $3 million of one-time items mainly related to severance and legal settlements. Excluding these one-time items, underlying OpEx in the third quarter was $23.7 million or 35% of revenue. A driving factor of these cost reductions was a 12% reduction in our workforce. These actions will generate further savings into Q4 as we realize the full quarter of the benefit and without the one-time costs.
Adjusted EBITDA for the quarter was $11.3 million versus $5.8 million in the previous quarter, representing an almost doubling of adjusted EBITDA sequentially. Adjusted EBITDA margin improved 800 basis points to 16.9% in Q3 from 8.9% in Q2, driven by the operating expense reduction actions that we have outlined.
For the fourth quarter, we expect modest sequential revenue and adjusted EBITDA growth. This modest revenue growth will mainly be driven by growth in New Jersey, early traction with the introduction of the Gage and Cookies brands and PA wholesale, a full quarter of the Pinnacle acquisition in Michigan and continued progress with branded wholesale sales in Michigan, offset by the same pressures we continue to experience with retail sales in both Pennsylvania and Michigan.
Net loss for the quarter was $311 million compared to net income of $14.2 million in the previous quarter. In the quarter, we booked $331 million non-cash impairment to goodwill and certain intangibles of our Michigan business. Operationally, we could not be more pleased with the actions we’ve taken to reduce the cost structure and enhance gross margin profile of our Michigan business. We are also pleased with the traction of the Gage brand recently launched in our other markets. We have a clearly defined path and expect to become EBITDA and cash flow positive in Michigan in the coming months, not quarters.
We also continue to focus on strengthening our balance sheet. Following the quarter end, we closed a $45.5 million debt financing with Polaris adding to our Q3 ending cash position of $34.3 million. This additional cash provides us with the flexibility to continue to execute on our growth plans. We are also finalizing the refinancing of our loan facility in Michigan with news to come on that shortly.
Cash flow from operations totaled a positive $1.5 million in the quarter, a significant improvement versus negative cash flow from operations of $16 million in the second quarter. Excluding $9 million of taxes paid in the second quarter, we delivered a $7 million improvement and cash flow from operations quarter-over-quarter. Capital expenditures were $3.6 million in the quarter, primarily relating to the recently completed expansion at our Hagerstown facility. Our CapEx spending plans for the rest of the year mainly relate to final payments for our completed Hagerstown projects as well as relatively minimal outlays to complete three store openings in Michigan.
Over the past few years, we have completed 90% of our CapEx plans on our current footprint with additional expansion for New Jersey, the only remaining major outlay. We also closed on the acquisition of Pinnacle during the quarter, which included a $10 million cash component. In summary, we are pleased with our progress in Q3 and look forward to updating on our continued progress on future calls.
This concludes our prepared remarks. I’d now like to turn it over to the operator for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And we will take our first question from Andrew Bond with Jefferies. Your line is now open.
Andrew Bond
Hey, evening. Andrew Bond on line for Owen Bennett. Thanks for taking our questions. Maybe first on M&A – maybe first, in your commentary around increasingly attractive M&A opportunities. mentioned a couple of potential states and opportunities for acquisitions, specifically Michigan, Pennsylvania and Maryland. Just wondering how you would prioritize these three states? And are you considering any opportunities that provide entry into additional states? Or would you prefer acquisitions that deepen the footprint in your existing footprint? Thank you.
Jason Wild
Sure. Sure. Thanks for the question, Andrew. Yes. We are – I would say that we are equally awaiting our desire to add more retail in Michigan, Pennsylvania and Maryland. We have multiple conversations going on in these three states. And we think that that it’s a strategic move in all three of those markets. As it relates to adding additional states or other possibly other multistate operators. We also have a pipeline of deals that we are looking at on that front as well. So we sort of – that’s exactly the way we split up our view on M&A. It’s – the first part is going deeper where we are. And the second part is adding at least another state or two over the next, say, 12 to 18 months.
Andrew Bond
Great. Thanks for that detail, Jason. Second, from our side, on the target for each of your three New Jersey stores to get to a $40 million annual run rate within the first 12 months of rec sales. Can you talk about how each of the three stores are tracking towards that, if anyone one of those three does stand out in particular? And maybe any incremental color on what needs to happen within your assumptions for those stores to reach that run rate? Thank you.
Ziad Ghanem
Yes. Thanks, Andrew. Ziad here. We are very excited and still super bullish about the New Jersey at all fronts, particularly in retail, both our Maplewood and Phillipsburg stores continue to perform extremely well. We are actually kind of surprised. We said they’ll get to $40 million just a few months and they are already around 90% of the way there. Lodi, since it’s a grand opening, continues to ramp up nicely. And when we look to all three stores, they are equally important, and we are excited about all three.
Andrew Bond
Great. Thanks, Ziad. I will pass it on.
Operator
Thank you. Next, we will go to Kenric Tyghe with ATB Capital. Your line is now open.
Kenric Tyghe
Thank you, and good evening. Jason and Keith, encouraged to hear your commentary with respect to Michigan and the fact that you expect EBITDA margin positive in the next couple of months versus quarters. Can you speak to the – as we think through 2023, what EBITDA margin positive looks like and what that looks like compared to your expectations at the time of the Gage acquisition? Just trying to handicap how we can expect the Michigan business to track through 2023 on the reset you’ve done in the state?
Keith Stauffer
Yes. Hi, Kenric, this is Keith, I can take that I can add into it. So I’d say one of the – Michigan is really one of the areas where we have made the most progress and taking the most action in Q3 and really have been looking forward to giving this update because a lot of the costs that we talked about coming out of the business really were concentrated in getting that business rightsized and healthy and getting it to on solid footing. So that’s why – we don’t want to box ourselves in and say exactly, but we do feel confident enough to say this week, but not month – sorry, months but not quarters, months but not quarters. And really, we see ourselves getting to neutral to slightly positive in EBITDA in Michigan. And then as we look into next year, it’s really – now we’re on the solid footing on this healthy foundation, and we’ve added to stores like Pinnacle and will get us further kind of up that curve on the positive scale is really bolting on and further consolidating in that state as there is a lot of really – there is a lot of targets out there, and there is a lot of kind of fight for survival. And we feel like now with the actions we’ve taken, we’re poised to capitalize on that. Do you add anything to add?
Ziad Ghanem
Yes. I think you described it well, Keith, if I go down each line of the P&L, starting with the cost of production, we are at an all-time lowest cost per pound from a production perspective at our cultivation facilities while maintaining our quality and yield are actually improving on them. So that has helped us get to our target. We continue to hold a premium price in Michigan one, we’re seeing a lot of pressure on the pricing at retail. Our blended average still continue to hold pretty strong. And we are carefully looking at our pricing strategy in order to maintain that balance of revenue and margin. Launching our branded product in wholesale adjusting the price strategy and the traction that we are starting to see, we’re pretty positive about this. And then OpEx, finally, we have made some tough decisions the team, I couldn’t be prouder of what they have accomplished. And we are in a situation where we really feel pretty efficient in adding any incremental revenue we can – it will be efficient revenue run by the team.
Kenric Tyghe
Great. Thanks so much for the color. And if I could just quickly pivot to Maryland. Just in the context of the approval in the midterms, can you speak to with respect to Hagerstown, when fully ramped, understanding it’s early days. It went fully ramped, how we should think about what sort of throughput that facility can support and we eat throughput? I mean, what kind of dollars and dollar growth the support? And will you be well positioned or how well positioned will you be for expected adult use be that late in early in 2024 or 2025? Just curious to have your thoughts, Jason, on when you actually think we will see start to adult you seems to be a pretty wide gap? Thanks.
Keith Stauffer
Sure, Kenric. I’ll take the first part of that, and Jason, can take the second part. So we have a significant investment into Hagerstown. I think we’ve said before, $25 million of projects completed. The facility is massive. The infrastructure is in place overall, and we’ve turned on the initial set of rooms that gives us double the capacity that we had at Frederic just in the first initial phase. And to turn on additional sets of rooms, it’s a fairly minimal outlay that’s going to get us multiples of where we currently sit. And we did it kind of thoughtfully that way just to make sure we have clear line of sight to the timing of adults, which Jason can give some thoughts on. But that’s how we thought through it. That’s how we plan the project. And from now until adult use, we feel like we have plenty of capacity to ramp back up our wholesale business in Maryland and hopefully add on some stores as we go as well as we mentioned in our remarks. Jason?
Jason Wild
Sure. So I mean I’ll start this off to a certain extent. My guess is as good as yours Kenric. But what I would say is – yes, we obviously – there is obviously an overwhelming majority of the votes voted for legalization. So there is a clear mandate for the state to roll out the program, I would say, sooner rather than later. You could look – we can look at it like Maryland is going to be like New Jersey was or like Arizona was a few years ago where Arizona quick kick in very quickly and New Jersey took well over a year. We are – from our conversations with people in the know in the state, they feel like it’s more likely to be not quite like Arizona, but figure at least sometime within the second half, hopefully, of next year. We still need to see the regulations come out. The legislators need to as the MMC, and we just need to see the speed at which all of that rolls out. But what I would say is that is exactly why we are phasing in our cultivation capacity there in the states like Keith mentioned, where starting capacity is going to be double what we had in our Frederick facility and much higher quality because this facility is just state-of-the-art. And as we get more of a view on when we think that the program is going to kick in, the then we will start bringing on those other rooms as well.
Kenric Tyghe
Thanks very much. I will get back in queue.
Operator
Thank you. Next, we will go to Andrew Partheniou with Stifel GMP. Your line is now open.
Andrew Partheniou
Thanks. Good evening, and congrats on the good operational progress here. Maybe starting off with the Cookies an exclusive partnership in Pennsylvania. Understanding now this is in multiple jurisdictions, as you mentioned, trying to understand here how do you think this is going to affect your wholesale opportunities given you have access to the recognized brand? Could you talk about perhaps how wholesale is doing in other markets? Do you think that this could open up new opportunities when you introduced this in Pennsylvania? And could you just remind us again, maybe I missed it on timing when this could come into play in Pennsylvania? Thanks.
Ziad Ghanem
Hi, Andrew, Ziad here. Thank you. It’s – we are in the early journey of launching Gage and Cookies and Pennsylvania. Time will tell, but early signs are convincing us that we’re getting some exciting traction. A lot of retailers have decided to go more vertical in Pennsylvania. I still believe that at the end of the day, the patient is going to be the judge of what many would look like savings or improving margin and paying it on the revenue line or losing patients will end up reverting the trend. We do believe that both Cookies and Gage will give us new opportunity in Pennsylvania, and the early signs are showing this.
Andrew Partheniou
Thanks for that. And maybe switching gears, you guys mentioned we are going to see shortly the outcomes of the refinancing on the Gage debt, could you talk a little bit about – what are you seeing out there? How – what should we kind of be expecting given that you just recently did a $45 million financing. Are you thinking about any other sources of growth capital? And more specifically, could we see Canopy somehow getting involved in any way? Interestingly, they announced a strategic restructuring, if you want to call it, but they didn’t do much with the TerrAscend asset that they have or investment. If you could talk to that – that would be useful. Thanks.
Ziad Ghanem
Sure. Sure. Thanks, Andrew. Well, I’ll start on Michigan and then I’ll touch upon Canopy. Here’s what I said about Michigan. I have zero concerns about our refinancing of the Michigan debt that comes due at the end of this month. The easiest thing to do would have been to just accept one of the multiple term sheets that we have been presented with to refinance the full $55 million, but our view was that the rates were not low enough to justify locking the company in for multiple years when we don’t need all of that money, and we think we may be on the cusp of a materially lower cost of capital in the coming months. So as it relates to Michigan, I would say they are with us for a few days, and we will have an update for you. But just to reiterate, I have zero worries about the refinancing. We have made our decision, and we look forward to sharing the details in the coming days.
As it relates to Canopy and the news out of Canopy a few weeks ago, I would say, a, that I was thrilled when David Klein, called me a day or so before they made the announcement. And just – for about 3 or 4 days, I actually was even barely sleeping. I was so excited about it. We have an excellent relationship with Canopy. We’ve had a long relationship or at least in terms of this industry. We’ve had a pretty long relationship with Canopy and we are always looking at ways to work more closely together.
Andrew Partheniou
Thanks for that. I will get back into queue.
Ziad Ghanem
Thanks, Andrew.
Operator
Next, we will go to Eric Des Lauriers with Craig-Hallum Capital. Your line is now open.
Eric Des Lauriers
Hi, thanks for taking my questions. First, I was wondering if you could just comment on any trends that you’re seeing the mix of premium versus value sales – from some of your peers, we’ve heard a bit of an increase in the mix of value, but you guys are obviously kind of doubling down on premium products. And so just wondering, especially with your Cookies partnership here, just – any commentary on any of the trends you’re seeing there between premium and value?
Ziad Ghanem
Yes, Eric, Ziad, here. We’re measuring very carefully the loyalty of our patients and customers. And last quarter, I discussed the three upper buckets that we measure the loyalty from customers and patients that visit us more than 5x every 90 days. We continue to have a very solid 75% of our foot traffic sticking with us with our premium products. Having said that, we are aware and we acknowledge the pressure and the inflation on our customers and patients, and we are moving in the direction of attending to investor in bigger segments of the customers. In Q4, we will be adding our Legend brands in New Jersey and Pennsylvania. But the combination of the value brand and the premium brand, we believe certainly that we will capture and allow us to acquire new customers and retain ours. Just to give you an example, in new – in Michigan, I shared the premium price and how carefully we are wanting not to lower the price or increase the revenue and then sacrifice on the margin. In New Jersey, the newest data shows that 3 out of the top 10 SKUs in the states are our premium brands. We own 50% of market share of the concentrate in New Jersey. So, the brand strategy that we have, building up the equity of our brands, complementing it with the license products and traffic drivers and expanding it into a value brand like Legend will be the best combination that we will have.
Eric Des Lauriers
I appreciate that color. And then just on Michigan, I appreciate the commentary on expectations for positive cash flow in months, not quarters, it’s certainly great to hear. Could you comment or just maybe talk a bit more about how much of those improvements do you expect to see from simple additional retail scale versus some improvements to standard operating procedures, for example, here? Ultimately, wondering how much of these cost savings you see is transferable to other states? And maybe just more broadly comment on some of the strategic lessons that you have learned entering a very price pressure state in Michigan? Thanks.
Keith Stauffer
Yes. Hi Eric, Keith, I can start. I can add in. I think that a lot of the actions that we have taken that Ziad outlined in detail there around, first of all, like the operating expenses that carries through. We did a lot of work on – and this is probably what translates to other states we did and is already translated in other states. We did a lot of work on the four-wall labor model at retail and really went hard on that in Michigan to get us to this visibility of where we talked about where we are going here. And so that’s translated across states. And then the gross margin progression will continue. So, the OpEx actions that we have taken will carry forward at the level they are at, at the lower level they are at. The gross margin expansion is still to come because we continue to cycle out of – almost cycled out inventory that’s been procured from third-parties, and we are cycling in and through more of the products that we are producing out of our extraction labs. So, we will continue to see margins ramp there. And then I think we had outlined a lot of the other cost per pound initiatives, which were – have driven savings in Michigan and are already translating outside of Michigan across other states like we mentioned in Pennsylvania, in particular, but also in New Jersey. Ziad, anything?
Ziad Ghanem
Yes. I think you covered it. Just to give an example around how we are measuring that cost per pound in the labor model, two of the biggest buckets that will contribute to what we are trying to accomplish, both on the EBITDA and the cash flow. The cost of production is measured by the yield and measured by the cost of power, and that is something that we can take to all states. Starting in San Francisco, where it should be the highest cost of production we have proved that we can accomplish the goal and that gives us confidence. From a labor model perspective, we – across all our retail fleet, we are measuring that labor model into percentage of revenue and transaction per man. We have a pretty strict goal. Our retail leaders are working weekly towards that coming goal. And I think this is one that we can scale across all states. Again, I want to reemphasize our goal, and we see a clear line of sight to get each state on its own to the EBITDA positive and cash flow positive from operations. And we are as confident as we have ever been seeing what we are seeing on a weekly basis that we are very close.
Eric Des Lauriers
That’s great to hear. Appreciate the color. Thank you.
Ziad Ghanem
Thanks Eric.
Operator
Okay. Next we will go to Noel Atkinson with Clarus Securities. Your line is now open.
Noel Atkinson
Hi. Good evening guys and nice to see sequential improvement in Q3. Just regarding the cost savings you guys achieved in Q3. So, it seems like it was quite substantial, especially after the one-times items. Can you give us a sense of then how much incremental in Q4 you will see versus what you were able to report in Q3 from those prior initiatives? And then do you have any further new cost savings, either at the cultivation side or the OpEx side that were set to launch in Q4?
Keith Stauffer
Hi Noel, it’s Keith. Yes, so there is still more to come to your point. So, a lot of the actions were taken within the quarter. I would say, just to frame it up without giving exact number because there is still a lot of moving parts. But we would expect another sizable portion to come, let’s say, somewhere from another quarter to a half of the savings that we realized in Q3 that will come through additionally in Q4, just as kind of the low side, high side. And there is a pipeline of additional activities, not so much on the OpEx side. We tried to sequence and do all that all at one-time to get it done and get it behind us and get everybody engaged across the company and the effort going forward. But as we have been outlining a lot, there is a lot more to come on the cost of goods front where we are super razor-focused and that’s like the next chapter for us as we know there is more there to go after. And so we have a pipeline of projects and opportunities to continue to drive first to that 50% gross margin that we have outlined before and that we are showing progress towards on an underlying basis. And then we believe we can eventually possibly get beyond that with the pipeline of projects that we have.
Noel Atkinson
Okay. Great. Thanks. And then just next, a couple of quick ones. The Pennsylvania facility, so what is your production capacity utilization right now versus what your total capacity would be thinking that adult use is coming down the pike in the next couple of years probably?
Ziad Ghanem
Yes. Noel, so we looked at the demand. We look at the wholesale business and how it was impacted by the verticalization. And we have shut down five of our flower rooms in order to avoid building any unhealthy inventory. During that transition, we have converted any inventory that was stuck in the pipeline to – we washed it and we turned it into a concentrate that has no expiration date. Jason always said, we refused to get $0.20 on the $1, if we can get $1 in the future. Knowing that Pennsylvania will turn recreational, we will now that we will use that inventory. So, we have reduced that production in Pennsylvania with the same ratio that our wholesale has gone down. At the same time, we have adjusted the labor on the cultivation side in order to not let the scale impact our cost per pound. So, we thoughtfully did the same reduction in labor, increased automation in order to keep the cost per pound as low as we would like it to be. From – and overall, capacity of that facility, we are done with our CapEx investment, as you know. And if we have done this fault into full capacity, we will be able to supply the state both wholesale and retail business with no further CapEx investment. The only one thing I want to add, even with the reduction in our production, we are still accomplishing what we described in Michigan as far as reducing the cultivation production cost per pound.
Noel Atkinson
Okay. And then one last quick one. So, the state level decoupling of 280E taxes. So Jason, can you just talk a little bit or Keith talk about like what you see as a potential impact on that on your business if you don’t see some positive movements at Capitol Hill or out of the Biden administration in the next little while?
Jason Wild
Yes. I think that the Pennsylvania, I don’t think that has passed quite yet the decoupling of 280E. I think it’s similar to New Jersey, where it seems like it’s working its way towards being approved. But we are – on both of those, we believe that starting January 1st of next year, New Jersey and Pennsylvania will be decoupled from 280E. And we are even hoping that there is an outside chance that New Jersey goes to retro to January 1st of this year.
Keith Stauffer
And then just to add to that, and then Maryland has already decoupled as of June 30th or July 1st of this year, and then Michigan and California are already decoupled. So, our entire state footprint will just be subject to 280E at the Federal level shortly.
Noel Atkinson
Okay. Thanks very much.
Operator
Okay. Next we will go to Andrew Semple with Echelon Capital Markets. Your line is open.
Andrew Semple
Thanks for taking my questions and good evening. First, I have just – just want to ask if there were any states or operational factors that may have held back the adjusted gross margin in the quarter. I would have presumed to have seen the gross margins a little bit higher sequentially with the revenue mix shifting more to high-margin states such as New Jersey, as well as with increasing verticality in Pennsylvania, for example. Can you maybe speak to the margin drivers for Q3?
Keith Stauffer
Sure, Andrew. Hi. So, it’s really – and that’s where we tried to give some color, and I will give more. So, it’s really the shutdown and transfer from Frederick to Hagerstown that was still quite a drag from a gross margin dollar standpoint, negative. And in fact, we will see some drag on the flip side as we start up that facility without a lot of output in Q4. So, that’s why when I mentioned in my prepared remarks, we see that kind of being behind us effective 2023. So, I didn’t say Q4. And Canada, also was still an operating drag in the quarter. And so we have taken some actions there as well. So, those two, once we kind of cycle out of that, that’s where we get to this 49%, 49.0%, excluding those two factors. And that’s kind of where we see ourselves headed from what we call an underlying standpoint. And then there is more work to go on all the things we are talking about with cost per pound and everything to get us over that 50% mark. Hopefully, that answers your question.
Andrew Semple
Yes. That’s very helpful. Thank you, Keith. My follow-up would be on the wholesale side of the business. Are you expecting any pickup into Q4 with kind of the earlier investments you have made in Pennsylvania and ongoing growth in New Jersey? And will we see any contribution from Maryland in Q4? Is that early 2023?
Keith Stauffer
Okay. I will start with that and Ziad can fill in. So, we are, I will say, with Pennsylvania, cautiously optimistic. We have learned and taken our lumps in Pennsylvania. But with the Cookies and Gage brands, we are seeing some positive traction there. We have been carrying Cookies for a month or so, maybe a little bit more in our retail. And then we just recently released on the menu in our wholesale. And our teams have really been getting calls from all the major players in Pennsylvania, even though they have all gone vertical, they still want to carry Cookies. And so we have a selling program there in Pennsylvania. And again, we all know kind of what’s happened to the wholesale market in Pennsylvania. So, that’s why we will say we are cautiously optimistic there. On New Jersey, New Jersey is going fantastic. We have capacity. We have been selling to all the adult-use dispensaries in the state, I believe or every single one of them almost on a weekly basis. And so we have just been strategically allocating and balancing and making sure we don’t sell out too much into one channel or another in New Jersey. And then in Maryland, I think was the last part of your question, first harvest is in January. So, we don’t expect much out of that facility in Q4. There will be some sales coming from that the processing lab is up and running. So, there will be some sales coming from manufactured products, but don’t count on that being too material in Q4. We are really just ramping that up to sell pool portfolio products beginning – with flower beginning in Q1.
Ziad Ghanem
Yes. Thanks Keith. The only thing I want to add is we can’t control the external environment. We can guess what’s coming, but what we can control and what we are focused on is our brand is the quality and the launch of new products to extend our off risk, just the one thing I will add.
Andrew Semple
Great. Thank you both. I will get back in queue. Thank you.
Ziad Ghanem
Thank you.
Operator
Okay. Next we will go to Vivien Azer with Cowen Companies. Your line is now open.
Victor Ma
Hi. Good evening. This is Victor Ma on for Vivien Azer and thank you for taking the question. So, just one for me. I just wanted to double back to Michigan specifically the branded wholesale business. Can you offer any commentary on how your expectations for gross margins for this business? And how maybe these expectations have changed since last quarter? Thanks.
Keith Stauffer
Hi Victor, Keith. Yes. So the gross margin in wholesale is going to be lower than retail, but we are really trying to balance things out there as we get that program up and running and make sure that we have pricing set appropriately between the channels, between retail and wholesale. And the strategy of premium with the Cookies and the Gage brands in both channels. So – but directionally speaking, the branded wholesale will be a bit lower than retail, not notably and certainly nowhere near where the bulk wholesale margins were in the past in the 10% or 15% range. But we should be – I mean it’s more like the plus or minus 30% range versus retail, which we believe can be higher in the 40% to 50% range.
Victor Ma
Great. Thank you for the color. I will jump back in the queue.
Operator
Okay. And next we will go to Shaan Mir with Canaccord Genuity. Your line is open.
Shaan Mir
Thank you for taking my questions. Just one for me here. On the New Jersey business, I just wanted to gauge the productivity of that Cookies Corner in New Jersey. So, maybe if you could help quantify that in any way, what percentage of revenues is that accounting for from the stores? Any sort of demand there is signals or statistics you could provide on maybe the basket sizes or increase in traffic would be appreciated. Thanks.
Ziad Ghanem
Yes. Thank you. Cookies has been an excellent adjacent brand. Every time we launch a corner, we have seen a solid contribution. And New Jersey before I talk about brand-by-brand, we see a solid market share of around 20% for us, 20% in flower, we have 50% in concentrate. Cookies is performing very similar to how it did in Michigan. We still have – it’s too early to tell the contribution as we – in Q4, we are launching 10 different flavors, based flavors for our Cookies and more products to come. But we haven’t seen any surprises or anything that we haven’t seen in Michigan. And both brands Gage and Cookies are holding a premium pricing in New Jersey, and they are resulting in what I described earlier as far as stickiness. And the percentage of customers that we are seeing more than 5x every 90 days. We are measuring the basket size, obviously, continues to be strong. The three stores have not seen a major dip in basket size. But the team is starting to measure the value of the – the life time value of the customers and the value of the customer per year. And we are very encouraged to see that continues to perform very strongly, almost two quarters in. But we will continue to see how Cookies will perform as we add more here in Q4.
Shaan Mir
Thank you. That’s it for me.
Ziad Ghanem
Thank you.
Operator
This concludes today’s question-and-answer session. I will turn the call back over to Jason Wild for any additional or closing remarks.
Jason Wild
Thank you all for joining us today. We look forward to speaking with you next quarter.
Operator
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation. You may now disconnect.
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