Good afternoon. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to TerrAscend's Q3 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 actual results to differ materially from those projected in such statement.
Additional information regarding these factors appears under the heading 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.
Thank you. Thank you very much, David. Good afternoon, everybody, and thank you for joining us today. The Q3 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 uplisting tax relief or a lowered 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 continued to perform well at both retail and wholesale. TerrAscend has quickly established itself 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 a very competitive environment. Subsequent to the Q3, we closed a debt financing with Pelorus 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 the industry and capital markets continue to experience has resulted in opportunities 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 pull back 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've 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 midterm elections that this initiative will remain on track. We have started to see green shoots for the industry, including Canopy Growth's recently announced plan 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've always been inspired by this famous quote from John F. Kennedy. Quote, "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." Close quote. While TerrAscend has no plans to go to the moon 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?
Thank you, Jason, for laying out the macro overview and higher level aspects 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 six 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 roles 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 two 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 rate at $900 million, only six 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 brand and licensed brand, 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 1 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 Phillipsburg and the addition of Lodi early in the Q3. 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, products, and formats for wholesale distribution, leveraging the same strategy that has proven so successful in New Jersey. Finally, our vertical integration plan 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 helped by last week's election. When that time comes, we will be prepared to leverage our vertical scale, brands, and capabilities. At the retail level, we increased the vertical mix of our own Kind Tree and Gage brand 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 action to manage expenses and streamline operations, resulting in reduction in our cost per pound. 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 dispensaries, 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 extend 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 a 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?
Thanks, Ziad. Good afternoon, everyone. The results that I'll 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 Q3 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 margin 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 Q2 and 45.5% of revenue. Note that the $26.7 million in the Q3 included $3 million of one-time items, mainly related to severance and legal settlements. Excluding these one-time items, underlying OpEx in the Q3 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 a 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've outlined. For the Q4, 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 in 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 a $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 Pelorus, 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 Q2. Excluding $9 million of taxes paid in the Q2, we delivered a $7 million improvement in 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 project, 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're 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.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star key followed by the number one on your touch-tone phone. You'll hear a three-tone prompt acknowledging your request. Questions will be taken in the order they are received. Should you wish to withdraw your request, please press the star key followed by the number two. If you're using a speaker phone, please lift your handset before pressing any keys. One moment while we assemble the queue, and we'll take our first question from Andrew Bond with Jefferies. Your line is now open.
Evening, Andrew Bond on the line for Owen Bennett. Thanks for taking our questions. Maybe first on M&A. Your commentary around increasingly attractive M&A opportunities. You mentioned a couple of potential states and opportunities for acquisition, 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.
Sure. Thanks for the question, Andrew. Yes, I would say that we are equally weighting our desire to add more retail in Michigan, Pennsylvania and Maryland. We have multiple conversations going on in each of those three states, and we think that it's a strategic move in all three of those markets. As it relates to adding additional states or possibly other multi-state operators, we also have a pipeline of deals that we are looking at on that front as well. 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, 12-18 months.
Great. Thanks for that detail, Jason. Second from our side, on the target for each of your 3 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 3 stores are tracking towards that if any one of those 3 does stand out in particular? Maybe any incremental color on what needs to happen within your assumptions for those stores to reach that run rate. Thank you.
Yeah. Thanks, Andrew. Ziad here. We are very excited and still super bullish about New Jersey on 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 in, they're already around 90% of the way there. Lodi, since it's a grand opening, continues to ramp up nicely. When we look to all three stores, they are equally as important and we are excited about all three of them.
Great. Thanks, Ziad. I'll pass it on.
Thank you. Next, we'll go to Kenric Tyghe with ATB Capital. Your line is now open.
Thank you and good evening. Jason and Keith, encouraged to hear your commentary with respect to Michigan and the fact that you expect the EBITDA margin positive in the next couple of months versus quarters. Can you speak to the, as we think through 2023, you know, 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.
Yeah. Hi, Kenric. Keith. I can take that and Ziad can add into it. I'd say one of the Michigan is really one of the areas where we may have made the most progress and taken 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 right-sized and healthy and getting it on solid footing. That's why we don't wanna box ourselves in and say exactly, but we do feel confident enough to say in weeks but not months or quarters.
really we see ourselves getting to neutral to slightly positive in EBITDA in Michigan. Then as we look into next year, it's really now we're on this solid footing on this healthy foundation, and we've added some stores like Pinnacle. What gets us further kind of up that curve on the positive scale is really bolting on and further consolidating in that state as there's a lot of targets out there, and there's a lot of kind of fight for survival. We feel like now with the actions we've taken, we're poised to capitalize on that. Ziad, anything to add?
Yeah, I think you described it well, Keith. Kenric, 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 or actually improving on them. That has helped us get to our target. We continue to hold a premium price in Michigan. While we're seeing a lot of pressure on the pricing at retail, our blended average still continue to hold pretty strong. 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. OpEx, finally, we have made some tough decisions. The team, I couldn't be prouder of what they have accomplished. 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.
Great. Thanks so much for the color. 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 its early days, when fully ramped, how should we think about what sort of throughput that facility can support. When I say throughput, I mean, what kind of dollars and dollar growth can it support, and will you be well-positioned, or how well-positioned will you be for expected adult use be that late in, you know, early in 2024 or 2025? I'm curious if you think we'll see a start to adult use. Seems to be a pretty wide gap. Thanks.
Sure, Kenric. I'll take the first part of that, and yeah, Jason, you take the second part. We have a significant investment into Hagerstown. I think we've said before, $25 million, the project's completed. The facility is massive. The infrastructure's in place overall, and we've turned on the initial set of rooms that gives us double the capacity that we had at Frederick just in this first initial phase. To turn on additional sets of rooms, it's a fairly minimal outlay that that's gonna get us multiples of where we currently sit. We did it kind of thoughtfully that way just to make sure we have clear line of sight to the timing of adult use, which Jason, you can give some thoughts on.
That's how we thought through it, that's how we planned the project. From now until adult use, we feel like we have plenty of capacity to ramp up to 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?
Sure. I mean, I'll start this off with, to a certain extent, my guess is as good as yours, Kenric. What I would say is, you know, we obviously, there's obviously an overwhelming majority of the voters voted for legalization, so there's a clear mandate, but for the state to roll out the program, I would say sooner rather than later. You could have looked at, you know, we can look at it like, Maryland's gonna be like, New Jersey was or like Arizona was, a few years ago, where Arizona quickly kicked in very quickly and Jersey took you know well over a year.
We hear 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 staff the MMCC, and we just need to see the speed at which all of that rolls out. What I would say is that is exactly why we are phasing in our cultivation capacity there in the state. Like Keith mentioned, our starting capacity is gonna be double what we had in our Frederick facility, and much higher quality, because this facility is just, you know, state-of-the-art.
As we get more of a view on when we think that the program is going to kick in, then we'll start bringing on those other rooms as well.
Thanks, gentlemen. I'll take it back in queue.
Thank you. Next, we'll go to Andrew Partheniou with Stifel GMP. Your line is now open.
Thanks. Good evening and congrats on the good operational progress here. Maybe starting off with the Cookies exclusive partnership in Pennsylvania. Understanding now this is in multiple jurisdictions as you mentioned. You know, 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, you know, how wholesale is doing in other markets? Do you think that this could open up new opportunities when you introduce this in Pennsylvania? Could you just remind us again, maybe I missed it on timing, when this could come into play in Pennsylvania? Thanks.
Hi, Andrew. Ziad Ghanem here. Thank you. You know, it's we're in the early journey of launching Gage and Cookies in Pennsylvania. Time will tell, but early signs are convincing us that we're getting some exciting traction. You know, 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 a menu would look like, saving or improving margin and paying it on the revenue line or losing patients will end up reversing that trend. We do believe that both Cookies and Gage will give us new opportunity in Pennsylvania, and the early signs are showing this.
Thanks for that. Maybe switching gears, you know, you guys mentioned we're gonna see shortly, the outcomes of the refinancing on the Gage debt. Could you talk a little bit about, you know, what are you seeing out there? What should we kind of be expecting given that you just recently did a $45 million financing? You know, are you thinking about any other sources of growth capital? More specifically, could we see Canopy somehow getting involved in any way? Interestingly, you know, they announced that strategic restructuring, if you wanna call it, but they didn't do much with the TerrAscend asset that they have or investment. If you could talk to that'd be useful.
Sure.
Thanks.
Sure. Thanks, Andrew Partheniou. Well, I'll start. Let me first start on Michigan, and then I'll touch upon Canopy. Here's what I have to say 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 had been presented with to refinance the full $55 million. 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.
As it relates to Michigan, I would say bear with us for a few days, and we will have an update for you. 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 that I was thrilled when David Klein called me a day or so before they made the announcement. You know, just for about three or four 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.
Thanks for that. I'll get back in the queue.
Thanks, Patrick.
Okay. Okay, next we'll go to Eric Des Lauriers with Craig-Hallum Capital Group. Your line is now open.
All right. Thank you 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. You know, from some of your peers, we've heard a bit of an increase in the mix of value, but you know, you guys are obviously kind of doubling down on premium products. Just wondering, you know, especially with your Cookies partnership here, just any commentary on any of the trends you're seeing there between premium and value.
Yeah, Eric, Ziad Ghanem here. We're measuring very carefully the loyalty of our patients and customers. In the last quarter, I discussed the three upper buckets that we measure the loyalty from our customers and patients that visit us more than five times 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 tending to a vaster and bigger segments of the customers. In Q4, we will be adding our Legend brand in New Jersey and in Pennsylvania.
The combination of a value brand and a premium brand, we believe firmly that will capture and allow us to acquire new customers and retain ours. Just to give you an example, in Michigan, I shared the premium price and how carefully we're watching not to lower that price or increase that revenue and then sacrifice it on the margin. In New Jersey, the newest data shows that three out of the top 10 SKUs in the state are our own premium brands. We own 50% of market share of the concentrate in New Jersey.
The brand strategy that we have, building up the equity of our brands, complementing it with licensed products and traffic drivers, and expanding it into a value brand like Legend will be the best combination that we will have.
I appreciate that color. Just on Michigan, you know, appreciate the commentary on expectations for positive cash flow in months, not quarters. It's certainly great to hear. Could you comment or just, you know, maybe talk a bit more about, you know, how much of those improvements you expect to see from, you know, simple additional retail scale versus, you know, some improvements to standard operating procedures, for example, here. Ultimately wondering, you know, how much of these cost savings you see as transferable to other states, and maybe just more broadly comment on, you know, some of the strategic lessons that you've learned, you know, entering a very price pressure state in Michigan. Thanks.
Yeah. Hi, Eric. Keith, I can start. I can add in. I think that a lot of the actions that we've taken that Ziad outlined in detail there around first of all in like the operating expenses, that carries through. We did a lot of work on and this is probably what translates to other states and has already translated to 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're going here. That's translated across states. The gross margin progression will continue.
The OpEx actions that we've taken will carry forward at the level they're at the lower level they're at. The gross margin expansion is still to come because we continue to cycle out of inventory that's been procured from third parties, and we're cycling in and through more of the products that we're producing out of our extraction lab. We'll continue to see margins ramp there. I think Ziad outlined a lot of the other cost per pound initiatives which 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?
Yeah. I think you covered it. Just to give an example around how we're measuring that cost per pound in the labor model, two of the biggest buckets that will contribute to what we're trying to accomplish, both on the EBITDA and the cash flow. You know the cost of production is measured by the yield and measured by the cost per pound, 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, 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 common goal, and I think this is one that we can scale across all states. Again, I wanna reemphasize our goal, and we see a clear line of sight to get each state on its own to be EBITDA positive and cash flow positive from operation. We are as confident as we have ever been, seeing what we're seeing on a weekly basis that we are very close.
That's great to hear. Appreciate the color. Thank you.
Thanks, Eric.
Okay. Next we'll go to Noel Atkinson with Clarus Securities. Your line is now open.
Hi, good evening, guys. Nice to see sequential improvement in Q3. Just regarding the cost savings you guys achieved in Q3. It seems like it was quite substantial, especially after the one-time items. Can you give us a sense of how much incremental in Q4 you will see versus what you were able to report in Q3 from those prior initiatives? Do you have any further new cost savings, either at the cultivation side or the OpEx side, that are set to launch in Q4?
Hi, Noel, it's Keith. Yes. There's still more to come to your point. A lot of the actions were taken within the quarter. I would say just to frame it up without giving an exact number because there's 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'll come through additionally in Q4. That just as kind of a low side, high side. There's 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. As we've been outlining a lot, there's a lot more to come on the cost of goods front, where we're super razor focused, and that's like the next chapter for us as we know there's more there to go after. We have a pipeline of projects and opportunities to continue to drive first to that 50% gross margin that we've outlined before and that we're showing progress towards on an underlying basis. We believe we can eventually possibly get beyond that with the pipeline of projects that we have.
Okay, great. Thanks. Just next, a couple of quick ones. The Pennsylvania facility. You know, what is your production capacity utilization right now versus what your total capacity would be? Thinking that, you know, adult use is coming down the pike in the next couple of years, probably.
Yeah. Noel, we looked at the demand. We look at the wholesale business and how it was impacted by the verticalization. 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 concentrate that has no expiration date. You know, Jason always said we refuse to get 20 cents on the dollar if we can get a dollar in the future. Knowing that Pennsylvania will turn recreational, we will know that we will use that inventory. 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. 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 an overall capacity of that facility, we are done with our CapEx investment, as you know. If we turn this Fulton into a 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 wanna 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.
Okay. Then one last quick one. The state level decoupling of 280E taxes. Jason, can you just talk a little bit or Keith, talk about like, you know, what you see as potential impact on that on your business if you don't see some positive movement at Capitol Hill or out of the Biden administration in the next little while?
Yeah. Yeah. I think that the Pennsylvania, I don't think that that's passed quite yet, the decoupling of 280E in PA. 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 first of next year, New Jersey and Pennsylvania will be decoupled from 280E. We're even hoping that there's an outside chance that New Jersey goes retro to January first of this year.
Maryland's already decoupled as of June thirtieth or July first of this year, and then Michigan and California are already decoupled. Our entire state footprint will just be subject to 280E at the federal level shortly.
Okay. Thanks very much.
Okay. Next we'll go to Andrew Semple with Echelon Capital Markets. Your line's open.
Thanks for taking my questions and, good evening.
Good evening.
First off, 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?
Sure, Andrew. Hi. It's really that's where we tried to give some color. I'll give more. It's really the shutdown and transfer from Frederick to Hagerstown that was still quite a drag from a gross margin dollar standpoint, negative. In fact, we'll see some drag on the flip side as we start up that facility without a lot of output in Q4. 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. Canada also was still an operating drag in the quarter. We've taken some actions there as well.
Those two, once we kind of cycle out of that's where we get to this 49%, 49.0%, excluding those two factors. That's kind of where we see ourselves headed from what we call an underlying standpoint. There's more work to go on all the things we're talking about with cost per pound and everything to get us over that 50% mark. Hopefully that answers your question.
Yeah. 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've made in Pennsylvania and ongoing growth in New Jersey? And will we see any contribution from Maryland in Q4, or is that early 2023?
Okay. I'll start with that and Ziad can fill in. I'll say with Pennsylvania, we are cautiously optimistic. We've learned and taken our lumps in Pennsylvania. With the Cookies and Gage brands, we're seeing some positive traction there. We've been carrying Cookies for a month or so, maybe a little bit more in our retail. 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've all gone vertical, they still wanna carry Cookies. We have a selling program there in Pennsylvania. Again, we all know kinda what's happened to the wholesale market in Pennsylvania. That's why we'll say we're cautiously optimistic there. On New Jersey, New Jersey is going fantastic.
We have capacity. We've been selling to all the adult use dispensaries in the state, I believe, every single one of them, almost on a weekly basis. We've just been strategically allocating and balancing and making sure we don't sell out too much into one channel or another in New Jersey. 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'll be some sales coming from the processing lab is up and running, so there'll be some sales coming from manufactured products, but don't count on that being too material in Q4. We're really just ramping that up to sell a full portfolio of products beginning with flower beginning in Q1.
Yeah, thanks, Keith. Only thing I wanna add is, you know, we can't control the external environment. We can't guess what's coming, but what we can control and what we're focused on is our brand, is the quality and the launch of new product to extend our offering. That's the only thing I'll add, Keith.
Great. Thank you both. I'll get back into queue. Thank you.
Thank you.
Okay, next we'll go to Vivien Azer with Cowen and Company. Your line is now open.
Hi. Good evening. This is Victor Ma on for Vivien Azer, and thank you for taking the question. Just one from 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.
Hi, Victor. Keith. The gross margin in wholesale is gonna be lower than retail, but we're really trying to balance things out there as we get that program up and running and make sure that we have the 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. But directionally speaking, the margin in wholesale will be a bit lower than retail. Not notably, certainly nowhere near where the bulk wholesale margins were in the past, in the 10%-15% range. But we should be.
I mean, it's more like the ±30% range versus retail, which we believe can be higher into the 40%-50% range.
Great. Thank you. Put the caller back into the queue.
Okay. Next we'll go to Matt Bottomley with Canaccord Genuity. Your line's open.
Hey, 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. Maybe if you could, you know, help quantify that in any way, what percentage of revenues is that accounting for from the stores? Any sort of demand or signals or statistics you could provide on maybe the basket sizes or increase in traffic would be appreciated. Thanks.
Yes, thank you. You know, Cookies has been an excellent adjacent brand. It's every time we launch a corner, we've seen a solid contribution. In 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, vape flavors for Cookies and more products to come. But we haven't seen any surprises or anything that we haven't seen in Michigan.
I think 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 5 times every 90 days. We are measuring the basket size, obviously continues to be strong. The 3 stores have not seen a major dip in basket size, but the team is starting to measure the value of the lifetime value of the customers and the value of the customer per year, and we're very encouraged to see that continues to perform very strongly, almost 2 quarters in. We'll continue to see how Cookies will perform as we add more SKUs here in Q4.
Thank you. That's it for me.
Thank you.
This concludes today's question and answer session. I'll turn the call back over to Jason Wild for any additional or closing remarks.
Thank you all for joining us today. We look forward to speaking with you next quarter.
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation. You may now disconnect.