TerrAscend Corp.

Good morning, everyone and thanks for joining us on the 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, we'll discuss our results and afterwards we will take some questions.

So 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 it's continued to be responsible 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 cost. And 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 account that we're building as a team. Taking a look at our current but 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 branded products. We will 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, 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 insider facility. We've continued to demonstrate our ability to ramp up and meet customer demand, we're extremely proud of the fact that all of our products are available in every dispensary in the state.

This wide 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 a 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 and our most recent store in Thorndale is also moving up quickly.

So we've seen some really, really strong continued demand 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 wait [ph] 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 markets. We have already completed several harvests from our new 40,000 square foot greenhouse and our 80,000 square foot indoor manufacturing facility will be completed at the end of this month and ready for planting.

So we anticipate sales in the market from these facilities to begin in the coming weeks and I'm excited to announce the soft opening of Phillipsburg location in New Jersey on November 23, with a full grand opening on November 30. That will be our ninth [indiscernible] location nationwide and our first one in New Jersey.

We really look forward to bring a full suite of branded products in New Jersey marketplace. And additionally, we've signed leases for our second and third 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 drugs 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 up license opportunities, and opening these 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 5000 feet to 20,000 feet, including some great progress and some amazingly hard work from our team. We've increased throughput by 500%.

And 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 apothecary store is 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. And 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 2000 products over the last two weeks in a row, which I can't tell you how great that feels, you know, see the team has some really wonderful wins.

As we driven this greater commercial focus, and have introduce a lot of new items in the market. We've also right size the operation to match more of the current market sizing.

And with this streamlined approach and target approach I'm probably, 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. And I'm really proud of the team and the dedication that they have put into this and 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 at Shutter.

Ed brings a wealth of experience and business acumen from this time spent in the US global pharmaceutical industries and will further strengthen our board as we accelerate our growth strategy. You know, despite the challenges of this environment in 2020, due to the pandemic, our team has been very successful and serving customers safely while maintaining a high level of satisfaction.

And I'm really, 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. And 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 provides 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 and MD&A and our all in Canadian dollars. I will 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 CAD51 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 streamline 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 tariffs and Canada operations, which achieved slightly above breakeven adjusted EBITDA for the first quarter in its history.

Q3 2020 SG&A was CAD13.7 million compared to CAD15.9 million for the previous quarter. This sequential reduction was primarily driven by onetime expenses in the previous quarter, related to professional and other fees.

Excluding onetime expenses we've maintained costs relatively flat, generating significant leverage overall. As a percentage of revenue SG&A continue to improve, reducing to 27% this quarter compared to 33% in Q2, due to our continued focus on controlling cost.

Looking at EBITDA, excluding a CAD22 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 CAD10 million in Q3 from CAD3.8 million in Q2. Our Q3 2020 adjusted EBITDA was CAD17.8 million, compared to minus CAD8.7 million last year, same quarter, and on a sequential basis increased by 56% from CAD11.4 million in the previous quarter.

We saw improvement in our adjusted EBITDA margin to 35% in Q3 from 24% in Q2 and 14% Q1. These improvements are clear indication that our focus on going deep and gaining scale, while controlling costs 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 CAD12.7 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 CAD22 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 earnout 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 CAD45 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 US dollars, 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 earnout payment for this acquisition of $155 million US dollars 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 US dollars.

We expect to continue to use funds generated from the operation to prepay up to an agreed upon total of CAD30 million. Consequently, and as per a recently signed agreement with the sellers, TerrAscend will have the option to defer up to an equal CAD30 million from March to June of 2021, with leaving TerrAscend with CAD95 million of remaining balance due in March of 2021.

It is important to note that most of this potentially deferred CAD30 million could be funded directly through free cash flow generation from the Ilera business during the three month period. With regards to the remaining CAD95 million balance, we believe that we will have a clear line of sight to multiple financing options for making this final payment.

Lastly, 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 CAD192 million to updated guidance have at least CAD196 million of revenue and from previous guidance of CAD45 million to updated guidance of at least CAD54 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 square foot greenhouse and the 80,000 square foot 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 analyze the late Q3 2020 expansions of State Flower and continued 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 Maryland will begin contributing to our sales once we have -- 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 CAD360 million to CAD380 million, representing 85% to 95% growth versus 2020 and adjusted EBITDA to be in the range of CAD140 million to CAD160 million, representing 155% to 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 up for questions.

Thank you for taking my questions. On the 2020 guidance into the fourth quarter, you 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 a 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 but we should see it continuing to improve so that the guidance shows might be a little bit on the on the conservative side but we should really see the cultivation expansion from Pennsylvania kicking in and then mix improvements there.

So there's a little bit of drag from New Jersey and retail but overall, we should see positive momentum.

And then up into right into 2021, which is good. And then Keith, make sure I heard a comment you made on your prepared remarks.

I think you said the Ilera payment, the CAD30 million would be pushed from March, I think and so until June, you said that you'd be free cash flow positive in the first quarter, and you would be able to fund a CAD30 million delayed payments with free cash flow generation. Did I hear that correctly?

Am I correct in assuming that you'll generate at least CAD30 million in free cash flow in the second quarter?

Yes, that's correct. That's what that implies.

Okay, excellent. Thank you very much.

Thank you, and good morning. Jason, you've previously provided some really good color on just 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 you're reading [indiscernible] just so we can get a feel on those two markets and how your thinking has evolved?

Yes. So when New Jersey, it's definitely going to be a pressure catalyst.

We expect six or seven months from now New Jersey will have this rec up and running. And we'll be able to operate under the rec rules.

As, it's kind of the indication we've been given. And then as you can imagine, the chatter that we've heard in the other states in Pennsylvania, there's a lot of talk about, about rec, I can't speculate.

As you know, the legislative processes can be quite tricky. More politics then customer support.

But just like New Jersey, the population is very supportive of recreational. So we'll see, we'll see.

But as you know, with Pennsylvania growing as fast as it can now, well over 400,000 card holders, you know, we would characterize the rec, the record market in Pennsylvania is really already turning rec when you look at the population that's there. And we see that strength just continuing.

That's great. Jason, and 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 States?

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 a point that much to go around? That it's needed to handle their face not through 2021?

Yes, sure. Look the market is very robust.

And while there's some capacity continued 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 is immediately sold and absorbed into the marketplace.

And, from a competition perspective, I want to say I don't worry about it. But of course, we worry about every day satisfying customers, if we weren't six, 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 had great success with that.

And so we don't, you know, we've been competing in the state with all of the regular players. And so we have a very high degree of confidence that we will continue that level of success.

And remember, there's, still under 100 dispensaries that have a license to 280. So the market has a lot of room to grow.

So as others bring on capacity, we still see that being absorbed for quite some time. And again, it's and it's not even rec.

So we think this a real long runway here for us to compete successfully. That's great.

And then, just a quick final question from me. On the guide, as you know, the adjusted EBITDA margin of the 40% plus through 2021 on a 35% exit here, you certainly given some indication on the drivers, but could you provide some color on what could possibly go right or go wrong around that 40% margin, any sensitivity or insights you can around that case would be really useful?

Just understand how you, 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?

Yes, sure. So, first of all, our forecasting internally is very much a bottoms up built.

So 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. But 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 is a recall, we've put in place all of the SG&A outside of the stores to build New Jersey without any revenue. So, there's a very high level of confidence that as we wrap New Jersey without taking on too much more G&A, we'll see that leverage come through.

Thanks, Jason. Congrats.

I'll get back into queue.

Yes, hi, thanks for taking the questions. Great quarter.

So with Pennsylvania be in such a large part of the business now. I guess and you've done a multiple rounds of capacity expansion.

You know, that's going to be a key driver, obviously, for next year's growth. So can you just kind of go into how much more, you know how much harder you could push the assets now?

And how much room there is to increase production from these assets? And, do you have any further ability to expand that capacity in Pennsylvania?

Hey, Glenn. We do, there's some there are two core drivers for Pennsylvania, about 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.

So we think that will continue to add and benefit to the end that's very much dropping down to the bottom line. And then 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. So 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, but then can you just let us know? Like, is that factored into the guidance for next year?

Or is rec upside at this point? Or how it's difficult to time it exactly?

So how you've played that into the guidance?

Yes, sure. Well, look this is regulation.

So we know this is speculation, but the indication we've been given is that the state has a goal of getting the commission up and running within 30 days of the ballot initiative and hopefully within six months, having the recs written to allow people to operate under that new bill. So we were hoping that June, July of next year, we'll be able to operate and at that point, we will already have our dispensary all three of our dispensaries hopefully open.

So that'll give us an advantage. So we have not budgeted rec at all in our numbers.

Our numbers under the medical market are what we forecasted in the budget today.

Great, that's helpful. And then lastly, 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 and so just kind of your outlook for next year on how you're thinking about California.

Yes, you know, California, it's we're very concentrated in the north. Our goal is to add.

Do some very tactical ads to our retail presence. To go deeper with on shelf, we've had some good success, the gummies are the number one selling or flowers now the number one selling.

So we've that will continue to help with our margin structure in California. But given the dynamics in that marketplace, you know, we continue to remain relatively cautious on our investments relative to the east coast.

So I'm very pleased with the progress that we've made. But, our investments in that area are more limited, they would be where we think the returns are higher in the East Coast.

All right, great. Thanks for the color and congrats again on the quarter.

Good morning, and thanks for taking my question. I guess first with respect to New Jersey.

Your Full Square [ph] 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 where their sights may be going up?

Yes. So as you know, that state is divided into three, North, Central and South.

So there is a limited number of competition. There is only 12 licenses in each region.

So there'll be 12 stores for the North, where we are and the North has the largest percentage of the population. So, yes, there will be competition, I think we're in great locations, we're on within a 30 minute drive of our locations, as well over two and a half million people from each one of our locations, which are more towards the New York City side.

So now we feel really good about the locations. And we haven't seen another dispensary in that area where we're opening.

Great, thanks on that. And maybe a more general question with respect to adding additional states in the east, our valuation expectations, climbing, or they're still reasonably priced assets to be had, I guess, given the green wave with the election results?

You know, that's a very situational thing. You know, Maryland was a divestiture from the merger, because of the two licenses.

So I do think that we have seen a quite a range in opportunities, but I think you'd expect us to maintain some pretty strong disciplines on, we're not just trying to get somewhere to be somewhere where we've got to make sure it makes a ton of financial sense. So we do see, opportunities out there for sure.

Understood on that. Thank you.

And just my final question around Pennsylvania, you've mentioned product mix, being one of the drivers behind gross margin improvement, I guess, can you elaborate a bit on that? Comment as to as to how sustainable that aspect is?

Well, most of the Pennsylvania margin is been actually fairly steady between flower manufacturers to its roughly 50-50 plus or minus, and apologize. What's the core driver of growth and margin in Pennsylvania, it's 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.

So those are the two largest contributors to the expansion of the margins.

Excellent, thanks for the color and congrats on the 2021 guidance.

Hello, everyone. Good morning and congrats on the quarter.

My first question here, you know, you're about to deliver the first of your production to the New Jersey market. I imagine 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're 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 dispensers that have opened up have seen great success, and very strong volume.

And so there's an absolute shortage in the marketplace. So we've been contacted by most all the usual suspects in the state.

And so once we see the performance of our first dispensary, we'll decide how much to push out into the wholesale market. But now I have absolutely no concerns about the ability to sell out our production, the demand is very strong.

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 build from Q3. And I guess one of the question marks and my thinking is whether the New Jersey, operations were fully stopped out in Q3, or whether there might be an additional SG&A investment needed in Q4 to get that fully up and running.

Keith, do you want to take that?

Yes, sure. So yes, there'll be some additional build out in SG&A and in New Jersey, and in other areas.

So we'll continue to see the dollars grow but definitely not at the same rate as our revenue is growing. So we continue to expect to see the rate come down gradually over time.

Okay, thank you for that. And just a final question, if I may.

I noted earlier, Jason, your comments on increased production capacity in Pennsylvania, you know, it sounds like that that is selling out. Just wondering if you would look to further expand your Pennsylvania facility, given what appears to be robust demand for your products.

Yes, we do believe there is both an opportunity to expand and the demand is there. So, it would be our intention, we're not announcing any specific plans or exactly when we're going to do that.

But given the strong cash flows, and a very good return on investment, I would expect that we would do it. And in addition, we feel very confident from what we're saying that the market could continue to absorb it, and then there's still going to be a doubling of the dispensary base in the state and still operating under medical market.

So we feel very good about that. And, we're in all dispensaries in the state today, but there's a lot of people are still asking for more product.

Thanks for taking my questions.

Alright, great. Thanks for taking my questions, guys.

So just a quick clarification. So you mentioned that you've only budgeted for New Jersey medical.

So am I reading that correctly, that there is no New Jersey adult used sales in your 2021 guide?

That is correct. But 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 products through our own channels and getting the higher price than we would be to the wholesale channel. So that's how I might see if you know, how it might affect our numbers from what we budgeted.

Okay, great. That's helpful.

And then switching gears to Ilera in Pennsylvania. So I know Ilera was already a very well-run organization when you acquired it.

But 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? Were you see room for further cost management or yield improvement?

Maybe automation or I don't know. But, and then I guess, finally, just whether those are directly translatable to New Jersey and now Maryland?

Yes, thanks for pointing that out. And give 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. Yes, they're killing it.

And I think if you look at the culture that we've built, which is just never resting. The site's continued 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 this different areas, which creates some great motivation to chase each other in a very fun way.

So the team just doesn't stop. They're doing a great job.

They're really hitting numbers, you know, every month, I'm seeing better and better yield. So they're just dialed in.

And if you didn't, don't forget, we've only been operating in the marketplace for three years. And, you learn, continuously learn a lot about the genetics and but other aspects for the growing.

So yes, we've got a lot of runway to continue to improve. And absolutely in New Jersey, you know, our first crops were actually better than expected.

So we're very pleased. And yes, 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.

So I feel pretty good that will make continued progress. And the team really works well together.

No, that's great to hear. And then last one for me, also great to hear about the prepayments and deferrals on the Ilera earn out not to mention that a CAD30 million in free cash flow potential.

Can you just help us understand how you guys are thinking about debt versus equity? I guess, you know, both with the earn outs pacifically and then just a bit more, generally speaking, going forward?

Yes, sure. Keith, would you take that?

Yes, sure. So I think so we have the, as I mentioned, that CAD95 million we believe is what we have.

And 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. So, 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.

Thanks for taking my questions and congrats on the great quarter guys. And as well, the initiation on 2021 guidance.

Maybe just a little bit of a housekeeping item. Did you have any?

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.

And 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. Yes, that's true.

And you can group us into that dynamic. So we didn't have any taxes that were paid in Q2, we had around CAD9 million that we paid for 2019.

And for estimated payments in Q1 that we made in Q3. So that affected obviously, our cash flow from operations in Q3.

Okay. And maybe switching gears on New Jersey, and how production will ramp up there.

I mean, can you talk a little bit about what we should expect in terms of, you know, 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. So we have kind of three phases for the growth, we have a first 40,000, which was cultivation only.

So, that's about half of our flower production. So that's available, our second phase of the 80,000 square feet is being completed at the end of this month.

So that's also where our manufacturing and indoor grow is. So, as we see that our opportunity is more for introducing half of our flower sales into the first quarter, and then the ramp up of our second batch of flower, and our manufactured goods would really kind of come toward the end of the first quarter.

So 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 and then retail, we have one store opening up, which will be fully up and running at the end of this month.

So that'll be full first quarter for one, and then store two and three, were really given guidance in the first half, it'll be up but you'd expect one to be closer to the ends of the first quarter and the other one closer to the end of the second quarter. So 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. And maybe just following on, on the debt to equity comments.

You know, your stock has done extremely well over the past six months going up by 300%. You know, in the M&A environment.

You know, there's a lot more expansion that you could do probably in the states that you're in or neighboring states. You know, how do you see using that as leverage so that partners can participate on the upside with you.

You know, could you talk a little bit about sentiment in the market for that as well.

Sorry, my phone came out. Keith, would you take that because I actually missed the question?

Yes, sure. So, I mean, there are multiple levers, as we mentioned in the prepared remarks.

So I mentioned, we believe we're underleveraged. So that's, that's one.

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 Canadians. That's a big number.

And, and then yes, we have the equity lever that's out there that we would continue to evaluate and measure up against our needs. So multiple options, and we're always exploring all the opportunities and get 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 it's building.

So that's positive both on the debt side and the equity side. So we're just very happy with all the options that we have.

And just on the on the M&A front Have you have you felt sentiment increasing towards, accepting equity as a as a form of consideration? You know, how have you felt the sentiment in terms of deal activity as well as any color on that?

Yes, I guess what I'd say is that, yes. You know, everything truly is situational, depending upon the situation of the different groups.

But I would say that there absolutely are cash driven transactions, and there absolutely are people who are interested in the equity and bowling their position. So I do believe that that it is very fair to say that that, you know, stock is definitely a currency that we could take advantage of regarding transactions for sure.

Thanks for taking my questions. Congrats, again.

Good morning, guys. Well done in Q3 and thanks for taking your questions this morning.

For the New Jersey cup [ph] production facility, based on sort of the first 40 and the next 80, that's coming online here. So you got 120,000 square feet.

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. Yes, so there's two ways there.

One is our capacity out of New Jersey is probably around 75% to 80%, of what Pennsylvania is. But we also have prices that are probably 20 plus percent higher in New Jersey than there are in Pennsylvania.

And we also, as you know, have similar, you know, three retail licenses similar to Pennsylvania. And despite how strong the Pennsylvania stores are we have expectations that New Jersey will be even stronger given that it's relatively under-store compared to Pennsylvania.

So, big players are seeing much stronger. So I think between the three stores, we expect much stronger retail demands.

And with the prices we'll be not as much but under and don't forget, we have an additional 100,000 square foot footprint that could take us up to north of 200,000 in New Jersey, which would make it larger than the Pennsylvania footprint.

Okay, great. And then secondly, so to that end, that's a great segue.

So what are you looking 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.

So we've been booked to potentially further expand in Pennsylvania if we see that unfolding, and then New Jersey that Jason just mentioned. And we have Maryland that we're looking at to there are several new projects that could generate significant amounts of revenue and profit.

That's not that they would come online at beyond 2021. So, but we're not going to provide specific amounts on the CapEx at this point.

Okay. But what I would add, though is that the forecast for next year, the vast majority of the CapEx that's supported that internal growth is already largely been spent with someone out into the first quarter with this stores and finishing up our facility.

So the CapEx that we would be adding would be additive gross to the business that we would see in the back to the following year after that. So this year, most of that money is spent for 2021 results.

That's great. Okay, perfect.

And then lastly, just can you talk a little bit about how Maryland fits into your plan. So it's a pretty big market, right, you got over 100,000 registered patients, I think 600 million sort of run rate market size.

Are you focusing on wholesaling there? Or is there a potential add dispensary's there as well?

Yes, so we've purchased a cultivation and processing license. The facility is within an hour shot of our Pennsylvania facility.

I'm a huge believer in put on the ground eyesight management. So 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 in one of the reasons why we look to do it. And we plan on bringing the entire brands of sweets 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. So we would expect very similar playbook to Pennsylvania, New Jersey where we're more dominant on the brand and manufacturing side.

But we do desire to have a retail presence. One because we think it could be a decent return and two, because it keeps our pulse on the local customer as the brand new manufacturer who really want to be touching customers as well on the front line.

So that's our intention.

Okay, great. Thanks for taking our questions.

All right. Thank you, everyone, and Damas [ph] for all the support and the questions.

This all concluded and 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.

So, thanks and we look forward to speaking again. Bye.