Good morning, everyone. Welcome to TerrAscend's third quarter 2020 conference call for the three-month period ending September 30th, 2020.
Listeners are reminded that certain matters discussed in today's conference call, or answers that may be given to questions asked, could constitute forward-looking statements that are subject to risks and uncertainties relating to TerrAscend's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in TerrAscend's annual information form and other periodic filings and registration statements. These documents may be accessed via the SEDAR database.
I would like to remind everyone that this call is being recorded today, Thursday, November 19th, 2020. I would now like to introduce Mr. Jason Ackerman, Chief Executive Officer of TerrAscend. Please go ahead, Mr. Ackerman.
Hi. Good morning, everyone, and thanks for joining us on our call today. With us, as usual, we have our Chairman, Jason Wild, and Keith Stauffer, our Chief Financial Officer. We will take a few minutes this morning to review some of our progress and priorities on our recent success, and Keith will discuss our results, and afterwards we will take some questions.
We had another very productive quarter as we continue to demonstrate great progress on executing our goals. We've added depth and scale to our business and have continued to be responsible in managing our costs with great discipline. The positive results of this focus have really been seen in our reported EBITDA margins of 35% this quarter, which is up a full 10 points from last quarter.
This was driven by strong improvements in both our gross profit margin, as well as continuing to leverage our SG&A costs. I want to acknowledge that these results are really driven by our people, and I'm so impressed with what our team has been able to achieve, and I'm really loving the strong base of talent that we're building as a team. Taking a look at our current footprint, I'm also excited to have announced that we have entered the state of Maryland with an acquisition of HMS, which is a cultivator and processor of medical cannabis products.
We've entered the market with an attractive EBITDA multiple and plan to expand our depth and capacity in Merrill Lynch over time. This acquisition establishes another strong foundation for us in an East Coast state, which is contiguous.
It's really a great strategic fit as we'll be able to leverage both our existing talent, which oversees our neighboring operations in New Jersey and Pennsylvania, as well as our playbook of our strong portfolio of branded products. We'll now have three states with a common playbook. We also remain very committed in these high-growth limited licensed markets to continue to look at opportunities to go deep and build scale. Moving over to Pennsylvania, our best-in-class branded manufacturing business continues to perform very well. We've recently completed our cultivation expansion, which increased our capacity by another 25%. That expansion happened during the third quarter and has begun to hit the markets in early November, and we're very pleased to say that all of our new capacity is fully selling through.
In addition, the team is making great progress on improving new records on yields and grams per square foot, while costs continue to go down in that market inside our facility. We've continued to demonstrate our ability to ramp up and meet customer demand, and are extremely proud of the fact that all of our products are available in every dispensary in the state.
This widespread success is really a focus on the team, on great product quality and product innovation, and a strong focus on delivering great levels of customer service to our retail partners. Looking at our retail presence in Pennsylvania, all three of our dispensaries are performing well. The Plymouth location continues to break weekly and monthly records, even though it's been open for more than two years.
Our Lancaster store, which has opened for only six months, has quickly ramped up to the level of Plymouth, which is really fantastic. Our most recent store in Thorndale is also moving up quickly. We've seen some really strong continued demands at the retail level. Turning to New Jersey, we are extremely pleased that voters have approved the legalization of recreational marijuana in the state on election night. As we await the passage of the necessary legislation, we will continue to execute on our growth strategy here as we're very well-positioned to support the new market. We have already completed several harvests from our new 40,000 sq ft greenhouse, and our 80,000 sq ft indoor manufacturing facility will be completed at the end of this month and ready for planting. We anticipate sales in the market from these facilities to begin in the coming weeks.
I'm excited to announce the soft opening of our Phillipsburg location in New Jersey on November 23rd, with a full grand opening on November 30th. That will be our 9th Apothecarium location nationwide and our first one in New Jersey. We really look forward to bringing our full suite of branded products in the New Jersey marketplace. Additionally, we've signed leases for our 2nd and 3rd dispensary in New Jersey, and we're targeting opening these in the first half of next year. With our recent entry into Maryland and the footprints we've established in key states such as New Jersey and Pennsylvania, we think we're very uniquely positioned to capitalize on the anticipated growth trend of legalized recreational adult on the East Coast, and we're developing a very strong presence here, which we believe will be well-positioned for the future.
Turning to the West Coast, we announced last week that we have opened an additional dispensary located in Capitola, our first one outside of the urban bay area that was contiguous, further expanding our retail presence to five locations in Northern California. Our West Coast team has been highly successful identifying lease license opportunities and opening new dispensaries in some pretty strategic locations within the state. We've also recently commenced sale of our newly expanded State Flower cultivation facility in San Francisco. It was expanded from 5,000 ft - 20,000 ft, including some great progress and some amazingly hard work from our team. We've increased throughput by 500%. The product coming out of State Flower is incredibly high quality, premium market, which we're selling both through our own dispensaries, and through the wholesale market.
Our first launch of State Flower into our Apothecarium stores represented close to 45% of all flower sales, which really supports our goal of becoming more and more of our own products on our own shelves in California. Looking at Canada, we've made some great progress implementing our strategy here. I'm pleased to report that we begin to see some really great signs of success. We've fully revamped our product offering with significant improvements in our commercial focus. For example, in the province of Ontario, we had the number one selling item out of 2,000 products over the last two weeks in a row, which I can't tell you how great that feels, to see the team have some really wonderful wins.
As we've driven this greater commercial focus and have introduced a lot of new items in the market, we've also right sized the operation to match more of the current market sizing. With this streamlined approach and target approach of [portfolio], I'm proud to say that we have finally achieved, I'll call, slightly positive EBITDA in the quarter, Canada, which is a huge achievement. I'm really proud of the team and the dedication that they have put into this. I'm proud to say I'm very optimistic about the future in Canada. Throughout the year, we've also made several additions to ensure our team was well supported for growth. This has continued with the appointment of a new board member, Ed Schutter.
Ed brings a wealth of experience and business acumen from his time spent in the U.S. global pharmaceutical industries and will further strengthen our board as we accelerate our growth strategy. Despite the challenges of this environment in 2020 due to the pandemic, our team has been very successful in serving customers safely while maintaining a high level of satisfaction. I'm really proud of the frontline workers who have shown up every single day and have done an amazing job growing the business and serving customers. I'm really confident that we will continue to finish out the year on a very high note. I'd like to turn the call over now to Keith, who will discuss the financial highlights of the quarter, as well as provide some updates of our guidance for next year. Keith?
Thanks, Jason. Good morning, everyone. Just as a reminder, the results that I'll be going over this morning can be found in our financial statements in MD&A and are all in Canadian dollars. I'll first spend some time talking through our third quarter results, and then I'll outline our updated guidance for the current year and also talk through our first-time guidance for 2021. For the third quarter, net sales increased 90% to CAD 51 million compared to Q3 2019 and increased 8% sequentially. This sequential growth was largely driven by growth in our retail stores in Pennsylvania, which continue to ramp extremely well, along with stronger sales from our new and streamlined portfolio in Canada. Gross margin before gain on fair value of biological assets for Q3 2020 was 59%, compared to 18% a year ago, and 56% in the previous quarter.
Improvements in gross margin are a result of higher mix and lower cost from our increased cultivation yields per pound in Pennsylvania, as well as improvements within our TerrAscend Canada operations, which achieved slightly above break even adjusted EBITDA for the first quarter in its history. Q3 2020 SG&A was CAD 13.7 million, compared to CAD 15.9 million for the previous quarter. This sequential reduction was primarily driven by one-time expenses in the previous quarter related to professional and other fees. Excluding one-time expenses, we've maintained costs relatively flat, generating significant leverage overall. As a percentage of revenue, SG&A continued to improve, reducing to 27% this quarter compared to 33% in Q2 due to our continued focus on controlling costs.
Looking at EBITDA, excluding a CAD 22 million net increase in fair value of warrant and derivative liabilities related to our preferred share issuance in June, we continued to improve sequentially to CAD 10 million in Q3 from CAD 3.8 million in Q2. Our Q3 2020 adjusted EBITDA was CAD 17.8 million compared to CAD -8.7 million last year, same quarter, and on a sequential basis, increased by 56% from CAD 11.4 million in the previous quarter. We saw improvement in our adjusted EBITDA margin to 35% in Q3 from 24% in Q2 and 14% in Q1. These improvements are a clear indication that our focus on going deep and gaining scale while controlling cost is enabling us to deliver industry-leading profitability levels. We will continue this focus through our recent pending addition of Maryland and our imminently ramping business in New Jersey. Adjusted net income for the quarter was a positive CAD 12.7 million.
This is the first time in company history reporting positive adjusted net income. This is a non-IFRS measure and excludes two non-recurring and non-cash items. The first item I noted a minute ago relating to the CAD 22 million net increase in the fair value of warrant and derivative liability associated with the issuance of the preferred shares in June. Given the increase in our stock price during the quarter, IFRS requires a non-cash charge to the P&L based on a fair value assessment of the instrument. The second excluded item is the accretion or revaluation of the contingent consideration, mainly relating to the final earn-out payment to the sellers of [Ilera]. I want to again emphasize that these two items are both non-cash and non-recurring in nature. We therefore are very proud to report this positive adjusted net income for the quarter.
Turning to the balance sheet, we ended the quarter with CAD 45 million in cash and cash equivalents, including restricted cash, which will provide us with ample liquidity to fund existing operations through Q1 of next year, when we expect to turn free cash flow positive. CapEx spending during the quarter was approximately $13 million and was similar to Q2. This investment was focused on the completion of our build-out in New Jersey, which is now largely completed, with some final payments coming due during the fourth quarter. As a result of our extremely high-performing Ilera Pennsylvania business, we will have a final earn-out payment for this acquisition of $155 million coming due in Q1 2021.
Due to the extremely strong cash generation from this business, we already prepaid $15 million in the past few months towards this final earn-out payment, thereby reducing the final payment to $140 million. We expect to continue to use funds generated from the operation to prepay up to an agreed-upon total of $30 million. Consequently, as per a recently signed agreement with the sellers, TerrAscend will have the option to defer up to an equal CAD 30 million from March to June of 2021, leaving TerrAscend with CAD 95 million of remaining balance due in March of 2021. It is important to note that most of this potentially deferred CAD 30 million could be funded directly through free cash flow generation from the Ilera business during the three-month period.
With regards to the remaining CAD 95 million balance, we believe that we will have a clear line of sight to multiple financing options for making this final payment. Before turning the call over to questions, I want to take a few minutes to discuss our guidance. As a result of our strong performance in Q3, particularly on profitability, we are increasing our 2020 annual guidance from the previous guidance of CAD 192 million to updated guidance of at least CAD 196 million of revenue, and from previous guidance of CAD 45 million to updated guidance of at least CAD 54 million of adjusted EBITDA. Q4 growth will primarily be driven by the cultivation expansions in Pennsylvania and California, continued ramp-up at dispensaries in Pennsylvania and California, the opening of our first New Jersey dispensary in Phillipsburg, initial sales from our Boonton, New Jersey cultivation facility, and our gummies launch in Canada.
As we look to 2021, we anticipate an exciting year with continued rapid growth and expansion. We expect our Pennsylvania business will continue to grow in Q1 2021, being the full first quarter following the completion of our 25% cultivation expansion. New Jersey will be a leading growth driver for us as we realize the full capacity of both the 40,000 sq ft greenhouse and the 80,000 sq ft indoor space beginning in Q1 2021 and ramping throughout the remainder of the year. For retail, sales from our Phillipsburg, New Jersey, and the openings of our second and third dispensaries in New Jersey in the first half of 2021 will drive growth. In California, we will fully annualize the late Q3 2020 expansion of State Flower and continue ramping up our retail footprint with our fourth and fifth stores in Berkeley and Capitola.
In Canada, with our business right-sized and our commercial strategy clarified, we expect to see positive contributions to sales and profit growth in 2021. Lastly, our recent acquisition of HMS Health will begin contributing to our sales once we have the required regulatory approvals and the final closing of the transaction expected in early Q1 2021. With all of these growth drivers, we expect annual revenue for 2021 to be in the range of CAD 360 million-CAD 380 million, representing 85%-95% growth versus 2020, and adjusted EBITDA to be in the range of CAD 140 million-CAD 160 million, representing 155%-190% growth versus 2020. Adjusted EBITDA margin as a result is expected to surpass 40% in 2021. In closing, we're very pleased with the quarter, and we anticipate to be a strong finish to an amazing and transformational year for TerrAscend.
We're even more excited for what is yet to come in 2021. I'd now like to turn the call back over to the operator to open it for questions.
Thank you. Ladies and gentlemen, we will now take questions from financial analysts. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. In consideration of other callers and time allotted, we do ask that you please limit yourself to three questions. You may certainly re-queue if you have additional questions. First question comes from Matt McGinley at Needham. Please go ahead.
Great. Thank you for taking my questions. On the 2020 guidance into the fourth quarter, the implied revenue growth shows that you have a nice sequential increase in revenue, but the EBITDA will grow slower, and I think that implies some degradation in the EBITDA rate into the fourth quarter. What would drive the decline in the fourth quarter? Is that startup costs, or is there something else going on within the business that would be a drag on margin rate?
I'll let Keith answer, but I don't believe our margins are dragging. I think it's the opposite. Keith, would you take that, please?
Sure. We still have a little bit of startup costs from New Jersey and also with some of the mix coming in from the retail stores. We should see it continuing to improve so that the guidance shows might be a little bit on the conservative side, but we should really see the cultivation expansion from Pennsylvania kicking in and the mix improvements there. There's a little bit of drag from New Jersey and retail, but overall, we should see positive momentum.
Yeah. Up into the right into 2021, which is good. Keith, I want to make sure I heard a comment you made in your prepared remarks. I think you said that the Ilera payment, the CAD 30 million would be pushed from March, I think, until June. You said that you would be free cash flow positive in the first quarter, and you would be able to fund the CAD 30 million delayed payment with free cash flow generation. Did I hear that correctly, or am I correct in assuming that you'll generate at least CAD 30 million in free cash flow in the second quarter?
Yes, that's correct. That's what that implies.
Okay. Excellent. Thank you very much.
Thanks, Matt.
Thank you. The next question comes from Kenric Tyghe at ATB Capital Markets. Please go ahead.
Thank you. Good morning. Jason, you've previously provided some really good color on just the evolution of Pennsylvania market, New Jersey rec. Some of your thoughts around timing and how we get from here to there, from medical to rec. Could you provide some sort of just high-level update, sort of post the election and your reading of the tea leaves, just so we can get a feel on those two markets and how your thinking has evolved?
Yeah. In New Jersey, it's definitely going to be a pressure catalyst. We expect six to seven months from now, New Jersey will have its recs up and running, and we'll be able to operate under the rec rules. It's kind of the indication we've been given. As you can imagine, the chatter that we've heard in the other states, in Pennsylvania, there's a lot of talk about rec. I can't speculate. As you know, the legislative processes can be quite tricky. More politics than customer support. Just like New Jersey, the population is very supportive of recreational. We'll see. As you know, with Pennsylvania growing as fast as it can now, well over 400,000 cardholders, we would characterize the market in Pennsylvania as really already turning rec when you look at the population that's there, and we see that strength just continuing.
That's great, Jason. Then just a follow-up on Pennsylvania. Can you speak to competitive dynamics, competitive intensity with the recent change in control of another fairly material wholesaler and retailer in the state? Do you look at this as being additive? Do you look at this as being a threat in terms of that change of control, or is there just, to your point, that much to go around that it's neither here nor there, at least not through 2021?
Yeah, sure. No, look, the market is very robust, and while there's some capacity continuing to come online, the 50% growth in patient growth is really absorbing everything that's in. As we said, we just added 25% capacity. That was immediately sold and absorbed into the marketplace. From a competition perspective, I want to say I don't worry about it, but of course, we worry about every day satisfying customers. The fact that we're in all dispensaries in the state does show that we have been very successful at working very hard to compete and have great success with that. We've been competing in the state with all of the regular players, we have a very high degree of confidence that we will continue that level of success. Remember, there's still under 100 dispensaries out of a licensed 180.
The market has a lot of room to grow. As others bring on capacity, we still see that being absorbed for quite some time. Again, and it's not even rec. We think there's some real long runway here for us to compete successfully.
That's great. Just a quick final question from me. On the guide, the adjusted EBITDA margin of the 40+% through 2021 on a 35% exit here. You've certainly given some indication on the drivers, could you provide some color on what could possibly go right or go wrong around that 40% margin? Any sensitivity or insight you can around that, Keith, would be really useful just to understand how you've, I guess, thought about it and determined that midpoint 40% type margin. I mean, clearly you have a range there for a reason, so any insight you can provide around that would be great.
Sure. Keith, would you take that?
Yeah, sure. First of all, our forecasting internally is very much a bottoms-up build. We have pretty good line of sight and visibility. The one variable, of course, is we haven't sold our first product in New Jersey, so there are just a lot of variables around getting out of the gates. Of course, we're optimistic, as Jason describes, it's going to be a supermarket , but just getting out of the gates and ramping that is really the variable. You look at Pennsylvania and you look at New Jersey and the scale that's going to be as a percent of our total business, and you look at the margins that are generated there, and assuming demand outstrips supply, which we all continue to believe, pricing will hold. Our costs continue to go down, and that's kind of the formula.
The thing I would add, as you recall, we've put in place all of the SG&A outside of the stores to build New Jersey without any revenue. There's a very high level of confidence that as we ramp New Jersey without taking on much more G&A, we'll see that leverage come through.
Thanks, Jason, and congrats. I'll get back in the queue.
The next question comes from Glenn Mattson at Ladenburg Thalmann. Please go ahead.
Yeah. Hi, thanks for taking the questions. Great quarter. With Pennsylvania being such a large part of the business now, and you've done multiple rounds of capacity expansion, that's got to be a key driver, obviously, for next year's growth. Can you just go into how much harder you could push the assets now and how much room there is to increase production from these assets? Do you have any further ability to expand that capacity in Pennsylvania?
Yeah. Hey, Glenn. Sure. We do. There are two core drivers for Pennsylvania. Well, three core drivers. One is retail does continue to grow. It's just amazing how strong it is. Second is the yields in the facility. The team just continues to dial in, and the productivity levels per square foot have continued to rise. We think that that will continue to add and benefit too, and that's very much dropping down to the bottom line. From a space perspective, we do believe that we have additional square footage that we can build, and we do intend to increase the capacity. We do believe that even after this recent increase, that there is lots of runway for Pennsylvania to grow.
Great. Jason, I missed what you said about when you thought New Jersey would go to rec, so if you don't mind repeating that. Can you just let us know, is that factored into the guidance for next year, or is rec upside at this point? Just, it's difficult to time it exactly, so how you've played that into the guidance.
Yeah, sure. Well, as you look, this is regulation, this is speculation, but the indication we've been given is that the state has the goal of getting the commission up and running within 30 days of the ballot initiative, and hopefully within six months, having the regs written to allow people to operate under that new bill. We're hoping that June, July of next year, we'll be able to operate. At that point, we will already have our dispensaries, all three of our dispensaries, hopefully open. That'll give us an advantage. We have not budgeted rec at all in our numbers. Our numbers under the medical market are what we've forecasted in the budget today.
Great. That's helpful. Lastly, just the outlook for California. I imagine it continues to be a little bit depressed given there was the wildfires and then there was some shutdowns and things. Just your outlook for next year on how you're thinking about California.
Yeah. California, we're very concentrated up in the north. Our goal is to do some very tactful adds to our retail presence to go deeper with our on shelf. We've had some good success. The gummies are the number one selling. Our flower is now the number one selling in house. That will continue to help with our margin structure in California. Given the dynamics in that marketplace, we continue to remain relatively cautious on our investments relative to the East Coast. I'm very pleased with the progress that we've made. Our investments in that area are more limited than it would be where we think the returns are higher on the East Coast.
All right. Great. Thanks for the color, and congrats again on the quarter.
Thank you.
Your next question comes from Russell Stanley at Beacon Securities. Please go ahead.
Good morning. Thank you for taking my question. I guess first, with respect to New Jersey, your Phillipsburg location, I think, is poised to have pretty limited nearby competition. I'm just wondering, given New Jersey's population density with respect to your second and third locations, do you have a sense as to how much of a buffer you'll have from potential competition and where their sites may be going up?
Yeah. As you know, the state is divided into three, north, central, and south. There is a limited number of competition. There's 12 licenses in each region, so there'll be 12 stores for the north where we are. The north has the largest percentage of the population. Yes, there will be competition. I think we're in great locations. We're within a 30-minute drive of our locations, as well over 2.5 million people from each one of our locations, which are more towards the New York City side. No, we feel really, really good about the locations and we haven't seen another dispensary in that area where we're opening.
Great. Thanks on that. Maybe a more general question with respect to adding additional states in the East. Are valuation expectations climbing or are there still reasonably priced assets to be had, I guess, given the green wave with the election results?
That's a very situational thing. Maryland was a divestiture from a merger, because of the two licenses. I do think that we have seen quite a range in opportunities. I think you expect us to maintain some pretty strong disciplines. We're not just trying to get somewhere to be somewhere. We've got to make sure it makes a ton of financial sense. We do see opportunities out there for sure. We're being cautious.
Understood on that. Thank you. Just my final question around Pennsylvania. You mentioned product mix being one of the drivers behind gross margin improvement. I guess, can you elaborate a bit on that and comment as to how sustainable that aspect is?
Yeah. Well, most of the Pennsylvania margin has been actually fairly steady between flower and manufactured goods, roughly 50/50, plus or minus. I apologize, the core driver of growth and margin in Pennsylvania has been a factor of adding capacity and leveraging the scale, and the continued great performance of the cultivation team increasing grams per square foot, which has a very strong bottom-line performance. Those are the two largest contributors to the expansion of the margins.
Got it. Excellent. Thank you for the color and congrats on the 2021 guidance.
Thank you.
The next question comes from Andrew Semple at Echelon Capital Markets. Please go ahead.
Hello, everyone. Good morning and congrats on the quarter.
Thank you.
My first question here. You're about to deliver the first of your production to the New Jersey market. I imagine ahead of that, you're reaching out and building your relationships with potential customers in that state. Do you have any comments on the initial indications of demand that you are seeing for your products in that state from third-party retailers?
Sure. I would say that the demand is robust. The market is very underserved in New Jersey. Most all of the dispensaries that have opened have seen great success and very strong volume. There's an absolute shortage in the marketplace. We've been contacted by most all of the usual suspects in the state. Once we see the performance of our first dispensary, we'll decide how much to push out into the wholesale market. No, I have absolutely no concerns about the ability to sell out our production. The demand is very strong and it's fairly underserved at the moment.
Appreciate those comments, sounds excellent. I'm also just trying to get a sense of how SG&A may build from Q3. I guess one of the question marks in my thinking is whether the New Jersey operations were fully staffed out in Q3, or whether there might be an additional SG&A investment needed in Q4 to get that fully up and running.
Keith, you want to take that?
Sure. Yeah, there'll be some additional build-out in SG&A in New Jersey, and in other areas. We'll continue to see the dollars grow, but definitely not at the same rate as our revenue is growing. We continue to expect to see the rate come down gradually over time.
Okay, thank you for that. Just a final question, if I may. I noted earlier, Jason, your comments on your increased production capacity in Pennsylvania. It sounds like that is selling out. I am just wondering if you would look to further expand your Pennsylvania facility, given what appears to be robust demand for your products.
Yeah, we do believe there is both an opportunity to expand, and the demand is there. It would be our intention. We're not announcing any specific plans or exactly when we're going to do that. Given the strong cash flows and a very good return on investment, I would expect that we would do it. In addition, we feel very confident from what we're seeing that the market can continue to absorb it. There's still going to be a doubling of the dispensary base in the state, and still operating under a medical market. We feel very good about that. We're in all dispensaries in the state today, but there's a lot. People are still asking for more product.
Thanks for taking my questions.
The next question comes from Eric Des Lauriers at Craig-Hallum Capital Group. Please go ahead.
All right, great. Thanks for taking my questions, guys. Just a quick clarification. You mentioned that you've only budgeted for New Jersey medical, so am I reading that correctly that there's no New Jersey adult use sales in your 2021 guide?
That is correct. Putting in perspective, I think about this in two ways. We do believe that whether it's rec or med, our capacity and production will be fully absorbed in the market under either condition. I think where you might see a stronger upside that's not is at a retail level, we assume more of a medical market in our forecasts. If it goes rec, I think that's where we'd see a much stronger upside, which would mean that we would be pushing more product through our own channels and getting a higher price than we would be through the wholesale channel. That's how I might see how it might affect our numbers from what we budgeted.
Okay, great. That's helpful. Then, just switching gears to Ilera in Pennsylvania. I know Ilera was already a very well-run organization when you acquired it. Now we're seeing further increased yields. Jason, I know you're always focused on continual improvement. Can you talk to some of the things that the team has learned, and really how you've been able to increase those yields, where you see room for further cost management or yield improvement, maybe automation, or I don't know. Then, I guess, finally, just whether those are directly translatable to New Jersey and now Maryland.
Thanks for pointing that out and giving me a good chance to give a big shout-out to Andy and Greg. Greg, who runs Ilera, and Andy, who's our head cultivator. They're killing it. I think if you look at the culture that we've built, which is just never resting. The sites continue to be pushed, and one of the great things that we're able to do is we have several facilities, is really trying to bring who's doing the best in those different areas, which creates some great motivation to chase each other in a very fun way. The team just doesn't stop. They're doing a great job. They're really hitting numbers. Every month I'm seeing better and better yields. They're just dialing it in.
Don't forget, we've only been operating in the marketplace for three years, and you continuously learn a lot about the genetics and about other aspects for the growing. Yes, we've got a lot of runway to continue to improve. Absolutely, in New Jersey, our first crops were actually better than expected. We're very pleased and yeah, we fully expect to bring that shared experience to Pennsylvania. We've got a great growing team also. Ricky, who's running that out in New Jersey. I feel pretty good that we'll make continued progress. The team really works well together.
All right, that's great to hear. Last one from me, also great to hear about the prepayments and deferrals on the Ilera earn-out, not to mention that CAD 30 million in free cash flow potential. Can you just help us understand how you guys are thinking about debt versus equity? I guess, both with the earn-out specifically and then just a bit more generally speaking going forward.
Yeah, sure. Keith, would you take that?
Yeah, sure. I think we have, as I mentioned, CAD 95 million we believe is what we have. Suffice to say, we believe we're under-levered. If you look at our balance sheet, it's pretty clean. The only debt on the balance sheet is the Canopy loan, which is tied to synthetic convert warrants. We're very clean and under-levered and very confident that we can raise the capital to make that final payment and any other needs for future expansion.
The next question comes from Andrew Partheniou at Stifel GMP. Please go ahead.
Thanks for taking my questions. Congrats on the great quarter, guys. As well, the initiation on 2021 guidance. Maybe just a little bit of a housekeeping item. Can you talk a little bit about the tax implications that may have occurred in Q3? We've heard from a lot of operators that some tax was deferred from Q2. Obviously, that comes into play when talking about measuring your operational cash flow in the quarter or free cash flow going forward.
Sure. Good morning, Andrew. Yeah, that's true. You can group us into that dynamic. We didn't have any taxes that were paid in Q2. We had around CAD 9 million that we paid for 2019 and for estimated payments in Q1 that we made in Q3. That affected, obviously, our cash flow from operations in Q3. Yeah.
Okay. Maybe switching gears on New Jersey and how production will ramp up there. Can you talk a little bit about what we should expect in terms of the pace of that ramp-up? Could it be over a course of several quarters, or could it be similar to Pennsylvania, where the majority was in the first two quarters? A little bit of cadence color would be helpful.
Sure. We have kind of 3 phases for the growth. We have our first 40,000, which was cultivation only. That is flower producing, and that's about half of our flower production. That's available. Our second phase of the 80,000 sq ft is being completed at the end of this month. That's also where our manufacturing and indoor grow is. As we see that our opportunity is more for introducing half of our flower sales into the first quarter. The ramp-up of our second batch of flower and our manufactured goods would really kind of come towards the end of the first quarter. You would expect that we'd be more ramped up fully in the second quarter with our full suite of products as we're entering, and that's the ramp.
Retail, we have one store opening up, which will be fully up and running at the end of this month. That'll be full first quarter for one, and then store two and three, we're really giving guidance in the first half. It'll be up, but you'd expect one to be closer to the end of the first quarter and the other one closer to the end of the second quarter. I think you'll see a ramp over the three quarters as we kind of get fully up and running.
Thank you. That's very helpful. Maybe just following on the debt-to-equity comments. Your stock has done extremely well over the past six months, going up by 300%. In the M&A environment, there's a lot more expansion that you could do probably in the state that you're in or neighboring states. How do you see using that as leverage so that partners can participate on the upside with you? Could you talk a little bit about sentiment in the market for that as well?
I'm sorry, my phone came out. Keith, could you take that, because I actually missed.
Sure. There are multiple levers, as we mentioned in the prepared remarks. I mentioned, we believe we're under-leveraged, so that's one. I just want to kind of also put it out there that we have a number of warrants that are out there that could bring in a few hundred million CAD. That's a big number. Yes, we have the equity lever that's out there that we would continue to evaluate and measure up against our needs. Multiple options, and we're always exploring all the opportunities. To the final part of your question, just from continuous discussions that we have with the capital markets, we're just getting a lot of receptivity and interest that's building. That's positive, both on the debt side and the equity side. We're just very happy with all the options that we have.
Just on the M&A front, have you felt sentiment increasing towards accepting equity as a form of consideration? How have you felt the sentiment in terms of deal activity as well? Any color around that?
I guess what I'd say is that, yes, everything truly is situational, depending upon the situation of the different groups. I would say that there absolutely are cash-driven transactions, and there absolutely are people who are interested in the equity and rolling their position. I do believe that it is very fair to say that stock is definitely a currency that we could take advantage of regarding transactions, for sure.
Thanks for taking my questions. Congrats again.
Thank you.
Thanks, Andrew.
Thank you. The next question comes from Noel Atkinson at Clarus Securities. Please go ahead.
Hi. Good morning, guys. Well done in Q3, and thanks for taking our questions this morning. For the New Jersey production facility, based on sort of the first 40 and the next 80 that's coming online here, so you've got 120,000 sq ft. Can you talk at all about the production or revenue capacity in that amount of space versus what you have in Pennsylvania right now?
Sure. Hey, Noel. Yeah. There's two ways to think of it. One is our capacity out of New Jersey is probably around 75%-80% of what Pennsylvania is. We also have prices that are probably 20+% higher in New Jersey than they are in Pennsylvania. We also, as you know, have three retail licenses similar to Pennsylvania. Despite how strong the Pennsylvania stores are, we have expectations that New Jersey will be even stronger given that it's relatively under-stored compared to Pennsylvania. Players are seeing much stronger. I think between the three stores, we expect much stronger retail demands. With the prices, we'll be not as much, but under. Don't forget, we have an additional 100,000 sq ft footprint hat could take us up to north of 200,000 sq ft in New Jersey, which would make it larger than the Pennsylvania footprint.
Okay, great. Secondly, to that end, that's a great segue. What are you looking for for 2021 CapEx right now?
Keith?
We're not giving specifics on that, but I think we've conveyed the projects that we're looking into that we haven't made final decisions on yet. We would look to potentially further expand in Pennsylvania, if we see that unfolding, and then New Jersey that Jason just mentioned. We have Maryland that we're looking at. There are several new projects that could generate significant amounts of revenue and profit that they would come online at beyond 2021. Yeah. We're not going to provide specific amounts on the CapEx at this point.
Okay.
What I would add, though, is that the forecast for next year, the vast majority of the CapEx that supported that internal growth is already largely been spent with some amount into the first quarter with the stores and finishing up our facility. The CapEx that we would be adding would be additive growth to the business that we would see in the back to the following year after that. This year, most of that money is spent for 2021 results.
Well, that's great. Okay, perfect. Lastly, can you talk a little bit about how Maryland fits into your plan? It's a pretty big market, right? You got over 100,000 registered patients, I think CAD 600 million sort of run rate market size. Are you focusing on wholesaling there, or is there potential to add dispensaries there as well?
Yeah. We purchased a cultivation and processing license. The facility is within an hour shot of our Pennsylvania facility. I'm a huge believer in foot-on-the-ground ey\esight management. Our ability to get the Pennsylvania team working on this cultivation facility and integrating with the team is very high and strong, and that's a big advantage and one of the reasons why we look to do it. We plan on bringing the entire brand suites there. We don't have, at the moment, any dispensary licenses, but we are allowed under law to have up to four dispensaries in the state. We would expect very similar playbook to Pennsylvania and New Jersey, where we're more dominant on the brand and manufacturing side.
We do desire to have a retail presence, one, because we think it could be a decent return, and two, is it keeps our pulse on the local customer, and as a brand and manufacturer, you really want to be touching customers as well on the front line. That's our intention.
Okay, great. Thanks for taking our questions.
Thank you. There are no further questions. I will now turn the call back over to Jason Ackerman for closing remarks.
Great. All right. Thank you everyone, and the analysts for all the support and the questions. This will conclude it. Again, I have to, again, give a big shout-out to everyone on the TerrAscend team. You guys are fantastic. You guys are killing it, and I really appreciate all the hard work from everyone on the team up and down. Thanks, and we look forward to speaking again. Bye-bye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.