TerrAscend Corp. (TRSSF) Q4 2022 Earnings Call Transcript

TerrAscend Corp. (OTCQX:TRSSF) Q4 2022 Earnings Conference Call March 16, 2023 5:00 PM ET

Company Participants

Jason Wild - Executive Chairman

Ziad Ghanem - President and COO

Keith Stauffer - CFO

Conference Call Participants

Kenric Tyghe - ATB Capital Markets

Andrew Partheniou - Stifel

Eric Des Lauriers - Craig-Hallum Capital

Glenn Matson - Ladenburg

Noel Atkinson - Clarus Securities

Andrew Semple - Echelon Capital Markets

Operator

Good afternoon. My name is JP, and I will be your conference operator today. At this time, I’d like to welcome everyone to TerrAscend’s Fourth Quarter and Full Year 2022 Earnings Call. Joining us today is Jason Wild, Executive Chairman; Ziad Ghanem, President and Chief Operating Officer; and Keith Stauffer, Chief Financial Officer.

Our remarks today include forward-looking statements including statements with respect to the Company's outlook, the Company's guidance for fiscal year 2023 and estimates and assumptions relating there too and the company's expectations regarding its market opportunities and other financial operational matters.

Each forward-looking statements discussed in today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication for future performance.

Additional information regarding these factors appears under the heading Risk Factors and Company’s Form 10-K filed earlier today with the Securities and Exchange Commission or the SEC, which filing is available @www.sec.gov and on our website@www.terrascend.com. The forward-looking statements in this call will speak only as of today's date, and we undertake no obligation to update or revise any of these statements.

Also during the call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our Investor Relations website or on the SEC website.

I would now like to introduce Mr. Jason Wild. Please go ahead, Mr. Wild.

Jason Wild

Good afternoon, everybody. Thank you for joining us. TerrAscend continues to hold a leadership position as a vertically integrated North American operator in the growing cannabis industry. Despite a challenging macro and cannabis industry environment in 2022, we delivered record revenue of $69 million for the fourth quarter an increase of 50% year-over-year and a 4.2% quarter-over-quarter growth rate. In terms of annual revenue, also a record, we reported $248 million in revenue for the full year, up 28% year-over-year.

Importantly, during 2022 revenue grew sequentially every quarter throughout the year, despite macro headwinds. In addition to our sales performance, we delivered our second successive quarter of positive cash flow from operations.

Last spring, we implemented measures to ensure that TerrAscend was positioned to be profitable without the benefit of regulatory or tax reform. Honestly, we thought the safe banking had a good chance of passage, but we made a conscious decision to hope for the best but plan for the worst. These actions to optimize our operations and reduce expenses, including interest expense, drove positive and improving cash flow from operations in the second half of the year.

Our efforts to improve our balance sheet culminated in the equitisation of $90 million of Canopy debt in December of last year. I'm particularly proud of this transaction as I believe it is an indicator of the strength of our relationship with Canopy.

Total outstanding debt declined by $80 million in the quarter, providing annualized interest relief of $10 million per year going forward. We believe that the strategic measures we took in 2022 have prepared us well for the current operating environment. With the progress we're making in Michigan, we expect to be EBITDA and cash flow positive from operations in each of our states in the first half of 2023. Ziad and Keith will provide more details on that progress.

Looking ahead, we expect New Jersey to continue to perform well. We're also excited about the prospect of Maryland turning adult-use this summer, and we're optimistic that Pennsylvania will follow soon thereafter. In both states, we are game ready as we were in New Jersey with the capacity, the right team, the retail footprint and brands to capitalize on the opportunity.

Turning to M&A, we continue to have a wide open map to explore opportunities. In 2022 we closed on the Pinnacle dispensaries in Michigan and in early '23 we closed on our first dispensary in Maryland. We have an increasing number of deals in our pipeline within our existing states, as well as in new markets that are very interesting to us, especially given the distressed environment.

This is clearly a buyers’ market, as many operators are facing an existential crisis. We have been speaking for about a year about how we're being patient and believe that we will be able to buy assets for pennies on the dollar. In fact, we are now reviewing opportunities to acquire assets, essentially for free, as long as we're willing to assume certain debt and lease obligations. And even that is up for negotiation.

I've been discussing with Ziad recently that the only thing better than a super low multiple deal is to get an asset for free. While originally said in jest, this has now become a reality. Not only are we looking at assets, which would assign zero value to the equity, but we actually believe we could get paid to acquire assets via debt and lease renegotiations combined with that zero equity value.

On the capital markets front, we are excited about the prospect of a New York -- New York’s, Toronto Stock Exchange listing. We recently filed our application and believe that post our reorganization, we will qualify for a listing on this exchange. Based on timelines presented by our legal advisors, we believe we could be in a position to list soon after our Annual Shareholders meeting in June.

With the listing on the TSX, we believe that TerrAscend stock will be afforded greater accessibility to a broader pool of institutional investors seeking opportunities in leading cannabis operators in some of the best markets in the world. We expect that a TSX uplifting could provide a significant advantage in M&A discussions. We believe that sellers will be more willing to accept TerrAscend stock as consideration and assign a greater value to our shares once listed on a major exchange.

Just to be clear, we don't look at the TSX listing as a magic bullet. The capital markets have clearly been unkind to the cannabis space in the past year. We do believe however, that a well-run cash flow positive company can unlock substantially more value and significantly lower its cost of capital if listed on a major exchange with more participants, higher standards and increased liquidity. This is in my view, not only a great opportunity for TerrAscend, but I believe that it is also a positive for the cannabis industry, as our uplifting could pave the way for others to list in the future.

In conclusion, I'm so proud of the actions and accomplishments we made in 2022. And I'm looking forward to seeing how 2023 unfolds. No doubt it's been a challenging period for the industry. But our team has met these challenges head on, demonstrating considerable resilience and the ability to execute effectively in a tough market.

Given our improved balance sheet, cash flow, and cost structure, we are on a strong footing today to both execute in current market business conditions and capitalize on the historic M&A opportunities that have become more plentiful recently.

With that, I'll now turn the call over to Ziad to provide an update on our key markets. Ziad?

Ziad Ghanem

Thank you, Jason. And Hello everyone. I will briefly walk everyone through a more detailed discussion of our operations state by state. But first, I'd like to talk about what I've been seeing firsthand across our organization. I have spent significant time in the field with people across all of our divisions. I could not be more impressed by the professionalism and quality at our retail and cultivation locations.

We cannot be successful without an elevated customer experience. Between spending time at our locations and spending time with our people, I am convinced that we have all the ingredients for success, the look and feel of our stores, the quality of our service, friendliness and efficiency are the reasons for the loyalty of our customers and patients.

New Jersey is a great example of this exceptional customer experience. Our three dispensaries are all performing well above the state average. And our brands continue to retain a top three market share position.

The same team that successfully transitioned New Jersey from medical to adult-use is now ready for the transition to adult-use in Maryland this summer, and also eventually in Pennsylvania.

I'm proud to say that we continue to add very talented professionals to our team. Jeroen De Beijer recently joined as our Chief People and Culture Officer. Jeroen, brings more than 20 years of experience in global human resources, and people management operations to TerrAscend. We are thrilled that he has joined our team and look forward to his contributions.

Now, I would like to take us through more details on our operation state by state. New Jersey remains a substantial growth driver for us as we continue to see strong sales and margin performance.

BDSA data confirms that we are capturing significant market share in New Jersey as a top three operator and several of our SKUs are among the top 10 in the state. This demonstrates the strength of our brands, not only within our own doors, but across all of the other adult-use dispensaries in the state.

We are over indexing in key product categories, including flower and vapes. And we continue to hold a commanding share of the concentrates segment. This leaves us with room for further growth opportunities in other form factors such as edibles and pre-rolls. We recently announced our partnership with yet another leading brand, Wana, part of the Canopy USA family, which we anticipate will help us drive further market share gains in edibles.

For Pre-Rolls, we recently installed more enhanced automation at our facility, thereby enabling us to increase our output and meet substantial demand for that segment. This has led to a 5% market share gain in the Pre-Roll category in the past eight-week period, according to BDSA.

Overall, pricing in the state has remained stable, and New Jersey sales are currently a run rating at a $1 billion. Recently, BDSA data indicates that total sales in the state continued to grow 19% in the latest eight-week period over the prior period, while our brands outpaced the market and grew 26%. As I mentioned earlier, our three stores in New Jersey and aggregate have continued to outperform the state average.

Looking ahead, we are on schedule and on budget for further cultivation expansion at our Boonton cultivation facility, which will enable us to expand our supply to this growing market.

Turning to Maryland, fourth quarter sales were stable on a sequential basis, while gross profit was still under absorbed due to startup expenses, as our Hagerstown facility had not yet begun to harvest, as previously discussed on last quarters call. Following the year end, we have had several harvests, which have yielded quality level equivalent to our cultivation facilities in other states.

In January, we closed on the acquisition of Allegany Medical dispensary, Phase 1 of our vertical integration efforts in Maryland. AMMD is a 10,000 square foot high performing medical dispensary, currently generating roughly $8 million in annualized sales, double the state average per dispensary. Located in Northwest Maryland, this store is literally walking distance from West Virginia, and within six miles of the Pennsylvania border, both currently medical only states.

The close border location of AMMD is very similar to our highest revenue producing dispensary nationwide in Phillipsburg, New Jersey with Eastern Pennsylvania a few 100 yards away. We have seen that locations like this have the potential to double or triple their sales in adult-use environment. So needless to say, we are very excited about our Maryland dispensary given the expected near term launch of adult-use. We are awaiting further guidance from the state after voters approved adult-use last year on November 8. But early indications based on the bill that was recently released and discussed, point to adult-use going live July 1.

As we prepare for adult-use in Maryland, we will increase output at our Hagerstown cultivation and manufacturing facility to meet the expected surge in demand. From a branding perspective, we will be ready for adult-use with our leading brands, including Kind Tree Engage, along with our partner brands.

Bottom line, with adult-use is implemented in Maryland, we are prepared to go to market with ample capacity, a full suite of brands, and a broad range of high quality product for retail and wholesale distribution, leveraging the same strategy that has proven successful in New Jersey.

Now on to Pennsylvania, which in my view, is a sleeping giant. We are fully built out at our large scale cultivation and manufacturing facility, with plans in place to break -- with plans in place to bring our currently unused capacity as needed in response to adult-use conversion. Until then, we will continue to minimize expenses and optimize efficiency.

During 2022, we turned off a number of flower rooms and reduced our labor force and other variables cost accordingly, thereby enhancing our gross margins, which rebounded in Q4 versus Q3.

In the fourth quarter, our PA retail business experienced modest sequential growth, which we are pleased with in this difficult same-store operating environment. At wholesale, we saw a rebound during the fourth quarter, although of small days, driven by the introduction of the cookies engaged product lineups into the state's wholesale market.

Looking ahead, Pennsylvania continues to be a key focus area for us. We see encouraging signs on the regulatory front, around adult-use budget and timing.

In Michigan, during 2022 we entered this market through the acquisition of Gage, which included two important components, a leading vertically integrated operation, and a highly desirable iconic orange brand, our products to launch into our other markets.

In 2023, we will continue to execute on our plan to be a market leader in the state. While the market continues to experience supply demand imbalances, leading to pricing compression, we have taken meaningful steps towards achieving this leadership goal, profitability -- profitably. Our Gage brand has remained incredibly resilient in this market, continuing to command a significant premium to the average price per pound in the state.

We have taken advantage of this consumer brand recognition by rolling Gage out in Pennsylvania, New Jersey, and most recently Maryland. Consumer and patient reaction in these markets has been very positive. Late last year, we took decisive action to optimize our operations, improve efficiencies, and reduce our cost structure.

For perspective, in Q2 of 2022, our first full quarter after the closing of Gage, we were experiencing significant EBITDA losses in Michigan. Within a very challenging operating environment, we took aggressive action within these initial months, which resulted in a q4 EBITDA loss of less than $1 million. In Q1, we are making further progress and expect a roughly breakeven quarter from an EBITDA perspective.

Based upon additional initiatives that we have underway, we anticipate this trend to continue to improve in Q2 and throughout 2023. Contributing to this progress, our extraction lab became 100% operational in our current quarter, increasing our full vertical integration on non-flower products. Michigan is a $2 billion market, which remain highly fragmented with many operators, both small and large, struggling to survive.

As we continue to advance on our own path to profitability in the state, we will also take advantage of the distressed situation in this market and come out the other side substantially larger and more profitable as we scale further at retail through M&A. Our considerable existing 17 store retail footprint in Michigan could see significant expansion through low to no cost M&A.

The addition of the Pinnacle Dispensaries in the second half of 2022 indicates that our model of adding retail while leveraging existing state level overhead is an effective strategy. Lower acquisition multiples should only increase attractiveness of these deals.

In December, the City of Detroit approved our cookies location on Eight Mile for adult-use. That location has performed extremely well with daily won rates more than doubling in the early initial days of adult use, as compared to when it was medical only.

Branded wholesale continues to gradually ramp up quarter-over-quarter. Now that our lab is fully functional, we expect our expanded product offering to drive accelerated wholesale growth in the coming quarters.

While we remain focused on continued success at the premium end of the market, we do acknowledge that certain markets, such as Michigan are price sensitive states. Value priced cannabis is a large component of Michigan sales. Therefore, in the coming weeks, we'll be launching our value brand Legend, which has enjoyed success in the value segment of the Pennsylvania market.

Turning to Canada. In an effort to further drive overall EBITDA improvements on a consolidated Company basis, we commenced an optimization of our operations in Canada. This optimization resulted in us discontinuing our licensed producer part of the business in order to focus on our Cookies Canada retail business. We are proud to be the exclusive operator of cookies retail stores in Canada. And as reported in our financial statements, the licensed producer business is now listed as a discontinued operation from an accounting standpoint.

In December, we listed for sale our 67,000 square foot facility in Downtown Mississauga at CAD23.4 million. To-date, we have received multiple bids on the property. We are optimistic that we will complete a sale transaction on this facility by mid-year.

Going forward, we will continue to operate our Canadian retail business, which includes our cookie store in Toronto. So in summary, recognizing the challenging operating environment, we have taken firm steps to improve operating efficiencies, drive sequential growth across our operations and deliver a positive operating cash flow as a company.

With our projected breakeven during the current quarter in Michigan, we are also well on our way towards our promised goal of EBITDA profitability in each and every one of our state. With an amazing team that has a relentless focus on the customer, complemented by an improved balance sheet, an exciting lineup of states and best-in-class institutional sponsorship. I'm more confident today than ever, in our ability to profitably grow this company, both organically and through attractive acquisitions as we build long term value for our shareholders.

I would like now to turn the call over to Keith to provide a financial update.

Keith Stauffer

Thanks, Ziad. Good afternoon, everyone. The results that I'll be going over today have already been filed on both SEDAR and EDGAR, and all results that I will reference today are stated in U.S. dollars.

In today's filing, TerrAscend was required for the first time to certify our compliance with Sarbanes Oxley related to internal controls over financial reporting. I am happy to report that in our first year under this requirement, we have certified with no material weaknesses or significant deficiencies in this regard. This is a huge statement to all of the work put in by the TerrAscend team over the last two years in preparation for this great milestone.

Note that all results discussed today incorporate our Canadian licensed producer business as a discontinued operation, as Ziad just described. Historical periods have been restated accordingly in compliance with U.S. GAAP.

Now on to our financial results. Net sales for the full year totaled $247.8 million, compared to $194.2 million for 2021, an increase of 28%. This strong growth was mainly driven by the launch of adult-use sales in New Jersey, where we continue to hold a top three market share position, as well as contributions from our acquisitions of Gage and Pinnacle in Michigan, partially offset by a decline in Pennsylvania related to the challenging market environment in that state.

Net sales for the fourth quarter totaled $69 million, compared to $66.2 million for the third quarter of '22, an increase of 4.2% sequentially, and 50% year-over-year. This sequential growth was driven by the acquisition of Pinnacle in Michigan, a rebound in Pennsylvania wholesale and continued growth of adult-use in New Jersey. The strong year-over-year growth was driven by adult-use in New Jersey and the acquisitions of Gage and Pinnacle in Michigan, partly offset by declines in Pennsylvania.

Regarding net sales by channel, wholesale revenue for the year was $64 million versus $107 million in 2021, a decline of 40%, mainly driven by the challenging operating environment in Pennsylvania. Retail revenue for the year was $184 million, compared to $87 million in 2021, an increase of 111%. Driven by adult-use in New Jersey and the acquisitions of Gage and Pinnacle in Michigan, partially offset by same-store sales declines in Pennsylvania, and California.

For the fourth quarter, wholesale sales were roughly flat sequentially at approximately $12 million, driven by growth in Pennsylvania related to the introduction of cookies engage product lineups, and growth in Michigan as we continue to ramp up our branded wholesale business in that state. This growth was offset by a temporary decline in New Jersey related to the state mandated conversion at year end to the metric inventory tracking system. This conversion created a temporary backlog -- order backlog among most operators in the state. For TerrAscend this backlog has already shipped in early 2023.

Retail sales were $57 million in Q4 compared to $53 million in Q3. Driven by growth in New Jersey, the Pinnacle acquisition in Michigan, and modest growth in Pennsylvania.

Gross margin for the full year 2022 was 41% compared to 58% in '21. Adjusted gross margin a non-GAAP financial measure for the full year '22 was 46% compared to 60% in '21. This decline was driven by a reduction in gross margin in Pennsylvania related to the challenging operating environment, as well as the new state mix in our portfolio that now includes Michigan.

Gross margin for the fourth quarter of 2022 was 44.6% compared to 47% in the third quarter. Adjusted gross profit margin a non-GAAP financial measure was 45.4% for the fourth quarter compared to 47.9% in the third quarter. The sequential decline in adjusted gross profit margin was driven by startup expenses and under absorption at our new Hagerstown Maryland facility and pricing pressure in Michigan, partially offset by sequential improvement in Pennsylvania. Gross margin in New Jersey remained consistent and healthy versus previous quarters. It is also notable that excluding the Maryland startup expenses, gross margin in the quarter was 47%.

General and administrative expenses for the full year 2022, excluding stock based compensation were $103 million, or 41.7% of revenue, compared to $60 million or 31% of revenue in 2021. The increase in G&A year-over-year was driven primarily by the addition of Gage in Michigan, who's SG&A totaled $40 million for the year, as well as the conversion to adult-use in New Jersey.

G&A expenses for the fourth quarter of 2022, excluding stock based compensation were $33.6 million or 48.7% of revenue, compared to $24.0 million, or 36.3% of revenue in the third quarter. This sequential increase was driven by a $10 million reserve for bad debt related to a customer in Michigan, which was disclosed in past filings.

Excluding this non-recurring item, underlying G&A was slightly down sequentially, and 34% of revenue, demonstrating our continued strong emphasis on expense reduction and control. It is important to note that excluding this bad debt accounts, our year end accounts receivable are current and not concentrated materially with any single customer.

Stock based compensation expense for the quarter was $1.6 million compared to $2.7 million in the third quarter. Full year 2022 adjusted EBITDA, a non-GAAP measure was $38.8 million as compared to $69.6 million in 2021. The year-over-year decline was driven by increasingly competitive conditions and a flattening of the medical market in Pennsylvania, partially offset by an increase in New Jersey driven by conversion to adult-use.

Michigan was a negative impact of $5 million to adjusted EBITDA for the full year. But as Ziad discussed earlier, most of those losses were in the first two quarters after taking control of that business. With Q4 adjusted EBITDA the loss of below $1 million and with line of sight to breakeven, and then positive throughout the rest of 2023.

Fourth quarter 2022 adjusted EBITDA, a non-GAAP measure was $12.2 million, representing a 17.7% margin as compared to $13 million and a 19.6% margin in the third quarter of 2022. This sequential decline was driven by startup expenses at our Hagerstown facility and Maryland combined with pricing pressure in Michigan. Excluding Maryland startup expenses, adjusted EBITDA margin was 19.3% in Q4.

GAAP net loss for the full year 2022 was $325 million, compared to net income of $6 million in 2021. 2022 includes a $311 million non-cash impairment of goodwill and intangibles as previously disclosed in our Q3 results related to our Michigan reporting unit. Excluding the impairment charge GAAP net loss was $14 million in 2022.

GAAP net loss in the fourth quarter of 2022 was $10 million compared to a net loss of $311 million in the third quarter. Q3 was impacted by the non-cash impairment charge that I just mentioned.

Turning to the balance sheet, cash and cash equivalents were $26.2 million as of year-end, compared to $34.3 million. At the end of Q3. Q4 positive cash flow from operations grew significantly to $7.3 million for the quarter versus a positive $1.5 million in the previous quarter, demonstrating our strong focus on continuing to improve cash flow from operations.

It is important to note that, while we did not make a tax payment during the quarter, if we include current period accrued tax of $5.9 million, we still would have generated positive cash flow from operations in the quarter.

The $8 million decline in our cash balance during the quarter was driven primarily by CapEx spending of $14 million related to the final payments for our Hagerstown, Maryland, new cultivation and processing facility, which became operational in the third quarter, partially offset by the positive operating cash flow of $7.3 million in the quarter.

Total debt outstanding declined by $80 million, to a total of $205 million at December 31. During the quarter we completed a $45.5 million financing with Pelorus Equity Group and paid down $30 million of our $55 million term loan with Chicago Atlantic, while refinancing the remaining balance of $25 million. We also paid down $5 million towards our Pennsylvania term loan in the quarter.

In early December, we converted all $90 million of our outstanding debt with Canopy growth into equity at CAD5.10 Canadian price per share. Finally, we are differentiated in the industry by not having done any sale leasebacks on any of our main properties, other than a few retail locations that were inherited as part of the Gage acquisition.

Approximately $3 million of transaction fees were paid during the period for the Pelorus in Chicago Atlantic transactions, and approximately $6 million of cash was distributed in the period to our New Jersey minority partners related to accumulated cash flow in our New Jersey partnership business. So net cash flow from financing activities was slightly positive for the quarter.

Looking into Q1, we expect to deliver results in the quarter that are roughly in line to slightly favorable with the fourth quarter of 2022 across the P&L. Despite typically negative seasonal patterns in cannabis from Q4 to Q1. We also expect to continue to generate positive cash flow from operations. In Q2, we expect mid-single digit sequential revenue growth over Q1. This growth will be driven by favorable Q2 seasonality, along with additional growth from ramped up output at our Hagerstown Maryland facility. And the benefit from a full quarter of dispensary sales in Maryland.

New Jersey will continue to experience growth in that robust market. And we also expect growth in Michigan from two new store openings and continued progress with branded wholesale. Gross margins should remain stable to slightly expanding, and we will continue to manage operating expenses at a roughly flat level, leading to a decrease in OpEx as a percentage of revenue. Therefore, we expect adjusted EBITDA growth in Q2 will be largely driven by the growth in revenue combined with moderate expansion in gross margin and operating expense rate.

In conclusion, having completed my third year as CFO of TerrAscend, I'm extremely proud of what we have been able to accomplish as a team amidst to what has been a very challenging operating environment. We developed internal plans in early 2022 that we sequence in a very particular order to drive positive cash flow from operations and to strengthen our balance sheet, we executed those plans successfully.

First, we were at the forefront in the industry by taking proactive measures in the spring of 2022 we reduce our operating costs in order to generate positive operating cash flow. Those were not easy decisions, we reduced our workforce by 12%, which we announced in Q3. We also exited non-core and cash consuming businesses and took actions with an eye towards positive EBITDA and cash flow in every state. Then, in the back half of 2022, we turned our focus to our balance sheet and reduce our debt by $80 million, leading to $10 million of interest expense savings annually.

This challenging environment has become an existential crisis for many industries. With strong momentum operationally, our vastly improved balance sheet and improved operating cash flow, we are well positioned to capitalize on the surprisingly large number of opportunities that are surfacing in our M&A pipeline. We have ample access to multiple sources of capital, which could contribute to further strengthening our balance sheet and lowering our cost of capital.

Possibly the most exciting development is our application to list on the TSX, which is completed should increase the liquidity of our stock, broaden the potential pool of investors and further aid us during M&A discussions. We look forward to providing additional updates on all fronts as the year progresses.

This concludes our prepared remarks. I'd now like to turn it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Kenric Tyghe from ATB Capital Markets. Your line is now open.

Kenric Tyghe

Thanks. And good evening. Jason intrigued by your commentary on the M&A landscape. Could you provide me insight just with respect to is this a combination of both public and private? So do you seeing the sort of dynamic you're calling up with almost being paid to take operations or people's hands? Or is it more private market centric? Just trying to understand the breakout there and the size the opportunity?

Jason Wild

Yes. Hi, Kenric. Yes, I would say it's across the whole spectrum. It's public companies and private companies and multi state operators, as well as single state operators.

Kenric Tyghe

Appreciate that. And then Keith, if I could just dive in here, just with respect to the Hagerstown ramp, could you give us some indication of where you are on that journey? And your sort of expected level of readiness for that July 1 start, which is certainly sooner than some might have expected?

Keith Stauffer

Yes, sure. So it has been, like we mentioned, it's been a drag upfront, which we knew and we planned for until we realized the first harvests, which we did early this year. So we're, we're up and running now. We're at capacity on the initial rooms that we turned on, and we're already sort of calculating, if you will, when we turn on the next set of rooms, we just want to make sure we don't get too far ahead of ourselves. And we have kind of perfect clarity that July 1 is, in fact, the date. And so we're just kind of trying to thread that needle and not get -- not go too soon, but also not be too late to capitalize on the tremendous opportunity that we think is unfolding for the back half of the year.

Kenric Tyghe

Appreciate. And then a quick final, and for me, just on New Jersey, you're calling out the way where you at brand wise, solid performance, good growth. How does that solid performance a good growth translates into your expectations on that market three or six months ago? Is this market behaving as expected? I mean, certainly sounds like you're doing well in the context of that market. But, where is the market versus where you expected it to be at this point?

Ziad Ghanem

Yes, Kenric, this is Ziad. Thank you. It’s performing well, in line with expectation, if I break it down line by line, from a revenue perspective, we still continue to have no accumulation on our flower. I shared a little bit in my prepared remarks on all the other categories. From a margin perspective, almost a year in, we're sitting at a margin that is equal or higher from same time last year. So pricing has done well, the COGS and the yield and the cultivation effort has done well.

Then from an OpEx perspective due to the revenue, our plan continues to be in line and has done well from an OpEx as a percentage of revenue. So really, across the board, the state has performed extremely well in line with our budget.

Kenric Tyghe

Thanks, guys, congrats. I'll get back in queue.

Operator

Your next question comes from the line of Andrew Partheniou from Stifel, your line is now open.

Andrew Partheniou

Hi, good evening. Thanks for taking my question. I wanted to just ask about the balance sheet. So you're asking $24 million for the Canadian property. You mentioned at the close this summer, the deal you signed a $25 million term sheet for mortgage in Pennsylvania. Can you talk about when that could close? And do you have any plans or any ideas of any other debt repayments, capital raising or any other efforts to work on your balance sheet?

Jason Wild

Yes, hey, Andrew. So yes, we noted the two big ones that you mentioned, the Canada building, like we said on the call there, we it's been pretty active, actually a lot of back and forth multiple bids. So we're optimistic about getting that one done. The PA mortgage, we're happy about what we found there, and we're pretty far along and diligence not completed yet, but it would be somewhere in April, I would say that based on how that's progressing.

And then we have other irons in the fire, if you will, in terms of exploring other opportunities if and when we need the capital. I think one thing we really want to emphasize here is we're not concerned about raising the capital. We're trying to raise the capital at the right way at the exact point in time when we need it. And maybe I'll give you an example, we could have done a sale leaseback on the PA property. We added term sheet for $50 million at a 15% cap rate. And we kept looking around and we signed this term sheet that we announced today that's for less capital, but more efficient raise of the capital at 9.25% fixed. And that's the kind of way we go about things.

And -- yes, hopefully that I think I covered all your questions there.

Keith Stauffer

Yes, this is Keith. Hi, Andrew, just one I want to confirm and I want to assure everyone, we promised that we have zero anxiety around raising any capital that we need for the business. Our only focus and our only worries is, how to sequence in the most efficient way to avoid any unnecessary or any high interest that we don't have to get. So we continue to be disciplined and we continue to seek with things in a very thoughtful manner in order to increase and improve our cash flow situation.

Andrew Partheniou

Thanks for the fulsome answer, and maybe following along with the M&A discussion, that's, of course, related to this last question as well. Could you talk about, what would be in an ideal world, how you would fund an acquisition? Obviously, you talked about using stock with a potential TSX listing?

You talked about maybe raising more capital if you need it, no problem there. But could you talk about like, what's the ideal capital structure or mix for more M&A? And as well, if you could give us an update on where are you seeing the most opportunities in new states? I know you mentioned Michigan is interesting, but in new states, what -- do you have any updates there?

Keith Stauffer

So I can take the first part of that and Ziad you can take the second so. So yes, I mean idea. So we, through all of our conversations, we're always constantly exploring the mix of the consideration. And it's become much more favorable the past number of months in terms of less cash, sellers, willing to accept notes, longer term notes, lower interest rate notes, earnouts, all stock deals, of course, if it's accretive from a multiple arbitrage perspective, and so we, I mean, we constantly look at all that, we're in cash preservation mode. So cash is really very valuable to us. And we take that into consideration, and any the deals we're looking at, to try to just optimize that formula.

Ziad, do you want to go to the other part on the terms of the states?

Ziad Ghanem

Oh, yes, sure. In terms of the states that we're interested in, I would say, similar to what we've said, in the past, like, Michigan, East and then and then up and down the East Coast, those are sort of the main areas where we're looking at some assets. And back to just add a little bit to what Keith said about sort of deal components and consideration, I would say that the majority of the deals that we've been looking at much more recently, which entails some of these distressed assets, there's really no conversation about cash. It is, there's actually, it's more of a conversation about whether the equity is going to have any value at all, like I mentioned in the, in the script.

And then also, it's a conversation with the lenders and the landlords, to see how much they're willing to kick in to, essentially to make this thing work. So those are some of the bigger type deals that we're looking at.

Andrew Partheniou

Thanks for that. I'll get back in the queue.

Jason Wild

Thanks, Andrew.

Operator

Your next question comes from the line of Eric Des Lauriers from Craig-Hallum Capital Group, your line is now open.

Eric Des Lauriers

Great, thank you for taking my questions. I was hoping that you could perhaps quantify some of the efficiency gains you guys have made in Michigan, and then just kind of talk to us, how sort of efficient do you see that Michigan operation versus some of your other states like obviously, Michigan has much lower average selling price, but I'm just wondering if you can help us kind of understand the overall efficiency or you know, cost gains that you guys have made in Michigan?

And then you know how much you kind of see that as being transferable to other states. Whether essentially whether you still have room to kind of keep squeezing out efficiency in some of these other states beyond Michigan. Thanks.

Ziad Ghanem

Yes, thanks, this is Ziad. So we shared last time, we thought that Michigan is important to us, because we want to make Michigan successful on its own. And in order to be a successful cannabis company, our long term, you have to win in Michigan. So in Michigan, we started with our efficiency on the cultivation in the cultivation area, and really, by addressing three areas, yield/costs, variety of strains, and quality. And we have traveled a long distance and we're seeing the direct benefit, that allowed us in Q4 to be less than a million negative on EBITDA, and seeing what we see in Q1 being where we would like to be in Michigan.

From a gross margin perspective, I'm sorry to say that that part took us the longest, for multiple reasons, the internal reason is our production facility took us longer than what we expected. Now it's fully operational, that will allow us to go much deeper vertically on our Gage and Cookies product, we will get back up to where we are, for example, in New Jersey, and that will come back. And that will allow us to make up for a lot of the pressure and margin, with the pricing in Michigan being what it is today, the room that we have on the production and on the verticality, it gives me confidence that our margin has hit the rock bottom, and we'll be climbing from there. So that's on the margin side.

The earliest lever we pulled was on the OpEx and that's really by making the tough decision and looking at every penny and ask whether it's a must have or nice to have. And OpEx in Michigan fits in line with the company. So that is what will get us to a breakeven in and positive EBITDA in Michigan in 2023. The next stage in 2023, is to expand the model that we've done with Pinnacle. And to bring in retail stores five 10 at a time, with a good price on the acquisition was somewhere around 7% to 10% OpEx was just the retail OpEx the for wall bags, the labor model OpEx, and overhead support will still be the same that is in Michigan making us even further efficient. So that is on Michigan.

We're not looking at New Jersey and other state and saying, hey, things are great, and margins are great. We've taken all the learnings that we've seen in Michigan, and we've seen in California, and we are proactively addressing each one of them in the most successful state, including New Jersey, we're looking at a margin today that is higher in New Jersey, compared to where it started. And we will continue to squeeze every efficiency out of each line.

Eric Des Lauriers

I appreciate that car is very helpful. And then just last one for me here. I'm not sure if I missed this in the prepared remarks perhaps. But could you talk about your CapEx outlook for this year? If you're able to quantify it, that'd be great. But just you know, overall, kind of help us understand, you know, which projects you are working on from a CapEx perspective. And it seems like M&A is potentially more of a focus than CapEx, which just kind of help us understand how you're looking at that this year. Thanks.

Jason Wild

Yes, hi, Eric. Really one key CapEx project. And that's New Jersey expansion on our existing site. And that's really the one single and we have we have a little bit here at the beginning of this year, on the two Michigan store openings, which isn't super material. But those are really the two amounts. The New Jersey project we're scoping at call it ballpark $10 million. And we would be looking to specifically finance that project through different avenues equipment, lease financing and project based financing. So we looked for that to be kind of a net neutral or self-funded project. And that’s essentially our entire footprint, otherwise it's fully built out.

Eric Des Lauriers

That's very helpful. Thank you.

Operator

Your next question comes from the line of Glenn Matson from Ladenburg, your line is now open.

Glenn Matson

Yes, hi, just one for me. I'm curious, can you do you have a good sense of what the schedule for rollout for kind of like new stores in New Jersey is like on the social equity side? It seems like there's a lot of people who are laying the groundwork to begin to open new stores. And just as you think about the year as it progresses, what kind of scope you see there and what it means for your existing stores versus wholesale, that kind of thing? Thanks.

Ziad Ghanem

Yes, thanks, Glenn. This is Ziad. New Jersey, I think I'll divided into three phases. The first phase is what we've seen so far, and focusing on the verticality optimizing in launching and innovating your product lines. And really, from a cost perspective, we're still seeing as a farce, a total of 32 operating dispensaries, 21 of them are adult-use, the 11 niche are still continuing to be medical.

The second phase, they are more approvals that are coming online, and that are given, we will continue to build relationships with those small operators, and recruit them and build relationships with them to be on their shelf, and to offer the same products that we offer across all dispensaries except two in the stage today in order to build that brand, equity and loyalty.

And, the third phase, I think, where we start growing at a faster rate, and this is where we hope, and we plan to have our expansion on the cultivation by the end of this year completed, is on the same campus where we sit today. So plants will move to the new building and the capacity will be increased.

On the social equity part, we are building relationships with potential applicants and current players. It seems that the bill has slowed down a little bit it is in a discussion, but we continue to be close to it. And we continue to be extremely interested in partnering with small business owners and to communities to help grow market share and to help serve the communities that they and we live in.

Glenn Matson

So just to be clear, the small operators on the retail side, do you expect them to be open at some point this year, roughly what timeframe I know it's probably scattered with so many different little operators or whatever? But is that something that's going to be happening over the course of this year? And imagine it has an impact on the retail business until the wholesale kicks in? Or is there any better given taking -- give us some sense of the timing of how it might impact you positively or adversely?

Ziad Ghanem

Sure, we believe the schedule is not clear how often they come online. There are licenses that are one, but the capital market is not allowing for speed to go online. There are licenses that are still sitting idle and it's hard to tell when they come online. I do believe that throughout the year we will see more retail store coming in -- stores coming in. New Jersey still have the least count of store per capita. The market is still growing at a 17% trade the last eight-weeks pre price compared to the previous eight weeks. As long as that growth is in line with the dispensary growth over the retail doors, Glenn, I expect our gross to stay in line.

So between our retail stores and the wholesale business, our budget is to have no accumulation and no buildup of any inventory in New Jersey and we will continue to sell everything we produce. It's still a demand market.

Glenn Matson

Okay, great. Thanks for the color, Ziad.

Operator

Your next question comes from the line of Noel Atkinson from Clarus Securities, your line is now open.

Noel Atkinson

Hi, good evening, folks, and thanks for taking our questions and well done in Q4. Just a few quick ones for me. What exactly you have to do in order to complete a sufficient reorganization to list on the TSX?

Jason Wild

Thanks. So I thought nobody was going to ask about the TSX. It was like, we've already like five questions in or something like that. We can't say much about the reorg until we put out our proxy, which will be next month. But what we can tell you is that it will be similar to other companies that have talked about a pathway forward with the TSX, i.e., Canopy growth figure, it should be something similar to the concepts of their structuring or the structuring that they're going to put into place.

Noel Atkinson

Okay. Secondly, you mentioned some backlog that built up in New Jersey in Q4 that shipped in Q1, can you give us some sort of size of that that managed to ship in Q1?

Keith Stauffer

Yes, hi, Noel. It's a little bit north of a million dollars.

Noel Atkinson

Okay. And then, Jason, just something quick here. So, what are you seeing across the industry here to promote or pursue regulatory change sort of posts, the failures in late 2022? What do you think the industry should be doing to kind of promote itself to achieve some regulatory change here?

Jason Wild

I think that, I think I hear that safe is still has some momentum. I believe that everybody who hears that just, things that it's sort of the boy, that cried wolf at this point. So it's more of a we'll wait and see.

To be honest, in my view, like faith isn't even enough at this point, the industry is in a much, much tougher shape than it was a year and change ago, the first time that faith failed. I believe that there should be other sort of efforts made towards achieving our goals. And one of them honestly, I think, is taking things the judicial route, as opposed to through the legislative branch.

We believe that that the way that cannabis companies, legal state level cannabis operators will be being treated currently is unconstitutional. And I think that's another route that you're going to see some players take in the in the coming months, or that I would hope to see happen.

Noel Atkinson

Okay, great. Thanks a lot.

Operator

[Operator Instructions] Your next question is from Andrew Semple from Echelon Capital Markets.

Andrew Semple

Good evening, and congrats on the Q4 results. First question here, and apologies if I missed it. Could you quantify the magnitude of the margin headwind from the initial underutilization of the Hagerstown facility during Q4? Just trying to gauge what amount of low hanging fruits for margin expansion there is ahead as that facility ramps towards full capacity?

Keith Stauffer

Yes, hi, Andrew Keith. I mentioned in my prepared remarks and that if we factor out those startup expenses, our margin in the quarter was 47%. So like 250 basis points of impact or so. And that's just to sort of get it neutral. And then we feel like there's headway because as that facility ramps, and we get to positive, then that will contribute further.

So we do -- so we're kind of signaling that we're not giving a timeframe around it. But if that's the case in Q4, and if you peel that out, and we're 47 we feel pretty good with all the initiatives we have underway, that we can get into the high 40s, if not 50, over time with everything Ziad talked about Michigan in particular, there's a lot of room for improvement there. So yes, that's additional color around the margin.

Jason Wild

That's not singling that's laying it out.

Andrew Semple

That's helpful. Appreciate that. Just want to turn the attention to Michigan. If we begin to see some players dropping out of the market, maybe at a quicker pace in 2023. Do you think that begins to underpin pricing? And I'd be curious to hear your thoughts on whether cultivators or retailers in that state are bearing the brunt of the challenges?

Ziad Ghanem

Yes, thanks, Andrew. I think there are two things that are happening in Michigan that are impacting pricing, and I'll share some numbers The first one is the distress. And whether it's announced receivership or almost an announced receivership, you have companies that are willing and are taken $0. 20 $0.30 on the dollar to elongate or to extend their runway.

The same thing that's happening in Michigan. And this last month, we -- the CRA has registered the highest number of offenders from a practice perspective is a crackdown and an audit on any practice that is not 100% above the table and legal and legitimate. As a result of those, that capacity being impacted, the regulator's cracking down on the practice, we have seen over the last few weeks, three or four weeks, the price and the leader of distillate go up from $1,200 to north of $3,000. And the price per pound off-prem went up from $15 to $45. So to me, all the signs of the bottom being hit and Michigan's obvious we're seeing it internally, the market has seen it.

I still believe there's a period where there are the few last breaths that is taken by some players will impact the price a little bit. But overall, I feel it has plateau to the bottom. And it's seeing some recovery. Time will tell I don't want to be over optimistic. But the fact that we still have in Michigan is our brand continue to hold around 80% premium to the average pound price at retail.

Complemented with our value brand legend, we will have the biggest coverage we can in Michigan. And that strategy, that sequencing and that effort is what has allowed us to go from the significant EBITDA loss to be less than a million in Q4, but then also to look at Q1 being where we are and being happy with the results.

Andrew Semple

Great. That's very encouraging to hear. I’ll get back into queue.

Operator

Your next question comes from the line of Matt Bottomley from Canaccord Genuity. Your line is now open.

Unidentified Analyst

Hi, there. This is actually [indiscernible] on for Matt Bottomley. Good afternoon. So just wanted to touch upon the wholesale market dynamics in Michigan and Pennsylvania. I know you guys saw a rebound in wholesale prices in Pennsylvania this quarter. But I guess, going forward, how do you plan to continue this strong piping dynamic momentum seen in this market? And if I could just pivot to Michigan really quickly as the second part of my question, knowing all of the initiatives that you guys have in mind to implement here to increase sales for the wholesale market, I guess, how are you guys thinking about the timeline as to when you expect this market to show a rebound in wholesale prices? Thank you.

Ziad Ghanem

This is Ziad. I’d be happy to answer. So just want to make sure I got all the questions. So your question around wholesale in Michigan and Pennsylvania. That's the first part. And the second part, the timing around…

Unidentified Analyst

The timing around when you I guess expect Michigan to kind of show a rebound in prices as well?

Ziad Ghanem

So I'll start with the Michigan rebound in pricing. I think as I told Andrew in the previous question, we're seeing it. We're seeing it in some form factors. I talked about the trends I've talked about distillate, going up from 1200 to 3000 to 3200. So that's happening as we speak in Michigan. We think it will continue driven by the capacity driven by the distressed players and cultivators. And driven by the regulator's, that’s Michigan.

As far as wholesale in both state Michigan and Pennsylvania. In Michigan our ramp up in wholesale took longer than what we would have hoped and wanted and like. And that was driven by our ability to go as fast as we wanted on the vertical production. And that is due by our production facility being delayed. It's currently online and we have a clear line inside for the end of the quarter in Q2 to improve our verticality by almost twofold in Michigan. That will help not only in the margin in our stores, but it also will help by offering a vaster a bigger product portfolio to our wholesalers.

Michigan, wholesale is divided into two segments, the value brand and the premium brand. We will be offering both options to the price sensitive value segment and also to the premium brand. We have seen that improve already from Q3 to Q4 and we expect 2023 trend to continue on that wholesale side.

Pennsylvania. Quite honestly, what's happening is in Pennsylvania on the wholesale perspective, we are seeing a shelf space trade, i.e. similar brands and similar segments are exchanging shelf and amongst different competitors who are vertical. So you look at inbound and outbound wholesale. And those numbers are very similar. So there is a strategy that is working in Michigan. From a different perspective it's working from a margin protection, it's working from a verticality perspective. And it's working from a brand equity and brand promotion perspective.

I don't expect Pennsylvania's wholesale to rebound to where it used to be. But it will continue to increase like a bit slightly between Q3 to Q4. And we're seeing the same trend into Q1?

I'm not sure. Did I miss any part? Or is there any part I need to follow up on?

Unidentified Analyst

No, that was good. Thank you so much.

Ziad Ghanem

You're very welcome.

Operator

Your next question comes from the line of Steve Koch [ph] from Coyote Capital, your line is now open.

Unidentified Analyst

Thanks for taking the call guys. Two questions. One, would you be able to update us on the status of the lawsuit with Scotts Miracle Gro against JW and TerrAscend?

And the second on the TSX listing? Is there anything on that reward checklist that is unattainable or you think is going to be difficult to achieve to get the listing? Thank you.

Keith Stauffer

Yes, I'll try to answer on the TerrAscend, on TerrAscend behalf on the first part. There's not much to say from TerrAscend perspective, here's what I can say, our records, our board meeting minutes, and our practice and business conduct is second to none. I've spent 20 years in Fortune 17 companies and output, the integrity and the ethic of this group against anyone in the world. And I say this with a lot of humility.

There's nothing else to add, we really did not -- we did not have to make any argument because of what I described. And that's why we were in the best situation throughout the conversation. That's on behalf of TerrAscend.

Ziad Ghanem

Yes, in terms of me, I can’t -- as part of the agreement, I can't disclose the consideration that they paid me to settle the lawsuits that they filed against me. But I can only share that I'm very happy with the outcome.

Keith Stauffer

And then on the second part on the TSX part. There's nothing that we don't feel like we have in our hand in terms of the steps we need to execute on our end, which includes the reorg that we couldn't go into that will be in the proxy that comes out in April, which is more like mid-April by the way to just kind of tell you how close that is. And then of course, there's a shareholder vote that needs to occur that's outside of our control. And there's the TSX final approval that is up to them. But based on everything that we understand, we qualify we have the assets that we need and in Canada, and we're focused on that business and we look forward to.

Jason Wild

Yes, if I can add, our external council that was experienced and this still thing that we the expected time of uplisting end of June, beginning of July.

Keith Stauffer

Yes, sorry. What other thing than I would I that based upon this might be obvious, but based upon the fact that TerrAscend was originally a Canadian domiciled company, as opposed to all the other practically all the other players in the U.S. This reorg is not is the least complicated for us, probably versus practically everybody else. We've already had these structures in place to make sure that we segregated money in Canada and the US. So this is not it's not a major chore for us to restructure to be compliant with what the TSX is looking for.

Unidentified Analyst

Perfect, guys. Thank you.

Jason Wild

Thank you. Any other calls in the queue? And that's it.

Operator

There are no further questions at this time. Please continue.

Jason Wild

Well, thank you all for attended a call this quarter. We hope you are happy with the progress that we've made over the last two quarters. I know that we are, but we also know that we have a lot of work ahead of us, and we're going to get back to work. Thank you so much.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.