Q3 2020 Terrascend Corp Earnings Call
Good morning, everyone and welcome to tell a sense, that's quite a 2020 conference call for the three month period and during September Thirtyth 2021.
No I reminded that certain matters discussed in todays conference call or answers that maybe given to questions could constitute forward looking statements that are subject to risks and uncertainties relating to test and ski trip and actual arpus and the funding.
Actual results could differ materially from those anticipated and these forward looking statements and.
Factors that may affect results are detailed interest and annual information form and other periodic filings and registration statements. This.
These documents may be accessed via to feed our data.
I would like to remind everyone that this call is being recorded today Thursday November 19, 2020 I.
I would now like to introduce Mr., Jason I come and Chief Executive Officer of tariffs and please go ahead and struck them and.
Hi, good morning, everyone and thanks for joining us on our call today.
With us as usual, we have our chairman chase and wild and Keystone for our Chief Financial Officer.
We will take a few minutes. This morning to review some of our progress and priorities and everything success and Keith will discuss our results and afterwards, we will take some questions.
So we had another very productive quarter and as we continue to demonstrate great progress and executing our goals, we've added depth and scale to our business and its continued to be responsible and managing our costs with great discipline.
The positive results from this focus has really been seen and our reported EBITDA margin of 35% this quarter, which is up a full 10 points from last quarter. This.
This was driven by strong improvements in both our gross profit margin as well as continuing to leverage our S unit costs.
And I want to acknowledge that and you know 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 accounts that were.
We're building out the team.
Taking a look at our current strip and I'm also excited to have announced that we had entered the state and Maryland with an acquisition of H. and that's what you say cultivate or in processor of medical cannabis products. We've entered the market with attractive EBITDA multiple and plan to expand her depth and capacity and Merrill Lynch overtime. This acquisition so.
I wish it was another strong foundation for Us and East Coast State, which is contiguous and it's really a great strategic fit as we will be able to leverage both our existing tower, which oversees and neighboring operations and New Jersey, and Pennsylvania, as well as our playbook coach or strong portfolio of branded products and I have three states.
On the play book.
We also remain very committed and these high growth when the lights and markets to continue to look at opportunities to go deep and build scale [noise].
And moving over to Pennsylvania are definitely.
Best in class brand and manufacturing business continues to perform very very well.
We've recently completed our cultivation expansion, which increased our capacity.
And another 25% non expansion happen during the third quarter and has begun to hit the markets are in early November and were very pleased to stay and at all or part and you capacity is fully selling true.
Hi. In addition, the team is making great progress and improving new records on yields and grams per square foot well costs continue to go down and that market insider facility. We've continued to demonstrate our ability to ramp up and meet customer demand are extremely proud and the fact that all of our products are available and every dispensary and the state.
[laughter], it's wide sexist assets is really a focus on the team and 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 and Pennsylvania or all three of our dispensers are performing well and.
And this location continues to break weekly and monthly records, even though it's been open for more than two years, our Lancaster store, which is open and probably six months and has quickly ramped up and to the level of planned left which is really fantastic and our most recent store and burned Dallas also moving quickly. So we've seen some really really strong.
And she gets demands at the retail level.
Turning to New Jersey, we are extremely pleased that voters have approved the legalization of recreational marijuana and the state and election night.
As we wait the passage of the necessary legislation, we will continue to execute on our growth strategy. Here is we're very well positioned to support the new market.
We have already completed several harvest from running 40000 square foot greenhouse and our 80000 square foot indoor and manufacturing facility will be completed at the end of this month and ready for plants and 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 our phillipsburg location and.
New Jersey underground to 20, Threerd and with a full grand opening on November 30, and.
That will be our nights apothecary I'm location nationwide and our first one and new Jersey.
We really look forward to bring a full suite of branded products and New Jersey marketplace and Additionally, we signed leases for a second and third dispensary in New Jersey, and we're targeting opening ideas and the first half of next year.
[noise] with our recent entry into Maryland, and the Preprints, we've established and key states such as New Jersey, and Pennsylvania, We think we're very uniquely positioned to capitalize and anticipated growth trend of legalize recreational jump from 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 and additional dispensary located and Capitola. Our first one outside of the urban Bay area and that was contiguous further expanding our reach sales presence to five locations and northern California, Our West coast team, it's been highly successful identify and lease up my simple.
And she needs and opening do centuries, and some pretty strategic locations within the state.
We've also recently commenced sales upper newly expanded state flower cultivation facility in San Francisco. It was expanded from 5000 feet to 20000 feet, including some great progress and it's amazing the hard work from our team we've increased throughput by 500% and.
You know the product coming out of state flower is incredibly high quality premium market, which we're selling both turnarounds of centuries.
And to the wholesale market and our first launch of state flower into our apothecary stores represent close to 45% of all flower sales, which really supports our goal of becoming a more and more of our own products and are on shelves.
California.
Looking at Canada, we made some great progress implementing our strategy here and I'm pleased to report that we begin to see some really great science and success, we have fully revamped our product offering with significant improvements and our commercial focus.
For example, and the province and Ontario.
We had the number one selling item out of 2000 products over the last two weeks and route which I can't tell you how great that feels you not see the team have passed and really wonderful wins.
As we have driven this greater commercial focus and have introduced a lot of new items and the market. We also right sized the operations and that's more of the current market sizing and with this streamlined approach and and target a push or per probably I'm proud to say that we are finally.
Achieved I call slightly positive EBITDA in the quarter, and Canada, which is a huge achievement and I'm really proud and the team and the dedication that they have put and incidents and I'm proud to say I'm very optimistic about the future <unk> and Canada.
Throughout the year. We've also made several additions to ensure our team as well supported for growth.
This has continued with the appointments and the new board member and shutter and brings a wealth of experience and this is Jack and then from his time spent in the U.S. global pharmaceutical industries and will further strengthen our board as we accelerate our growth strategy.
[noise] you know despite the challenges of this environments and 2020 or did that and then make our team has and very successful and serving customers safely while maintaining a high level of satisfaction and I'm really really proud of that.
My workers, who have shown up every single day, and they've done an amazing job growing the business and certain customers.
And I'm really confident that we will continue to finish out the year and a very high net.
I'd like to turn the call over now to Keith who will discuss the financial highlights of the quarter and as well as provide updates of our guidance for next year.
Thanks, Jason and good morning, everyone. Just as a reminder, the results that I'll be going over this morning, and can be found and our financial statements and Mdna and our all in Canadian dollars.
Oh from 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 51 million compared to Q3, 2019 and increased 8% sequentially net.
And this sequential growth was largely driven by growth in our retail stores, and Pennsylvania, which continue to ramp extremely well along with stronger sales from work from our new and streamlined portfolio and Canada.
Gross margin before again and carrying value biological assets for Q3, 2020 was 59% compared to 18% a year ago, and 56% and the previous quarter.
Improvements in gross margin as a result of higher mix and lower costs from our increased cultivation yields per pound and Pennsylvania as well as improvements within our tariffs and Canada operations, which achieved slightly above breakeven adjusted EBITDA for the quarter for the first quarter and its history.
Q3, 2020, GE and day, SG, and I was 13.7 million compared to 15.9 million for the previous quarter.
The sequential reduction was primarily driven by one time expenses and 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 and they continue to improve reduced net 27% this quarter compared to 33% in Q2 due to our continued focus on controlling costs.
Looking at EBITDA, excluding a 22 million net increase and fair value of war and and derivative liabilities related to our preferred share issuance in June we continued to improve sequentially to 10 million and Q3 from 3.8 million in Q2.
Our Q3 2020, adjusted EBITDA was 17.8 million compared to minus 8.7 million last year same quarter and on a sequential basis increased by 56% from 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 costs is enabling us to deliver industry, leading profitability levels. We will continue this focus through our recent addition, pending addition to Maryland and are eminently ramping business in New Jersey.
Adjusted net income for the quarter was a positive 12.7 million.
This is the first time in company history reporting positive adjusted net income.
This is a non I as far us measure and excludes two non recurring and non cash items. The first item I noted a minute ago relating to the 22 million net increase and the fair value of warrant and derivative liability associated with the issuance of the preferred shares and you gave.
Given the increase and our stock price during the quarter I as far as it requires a non cash charge to the P. now based on a fair value assessment of the instrument.
The second excluding that item and this increase 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 Alere.
I want to again emphasize that these two and those non cash and non recurring in nature.
We therefore very proud to report this positive adjusted net income for the quarter.
Turning to the balance sheet, we ended the quarter with 45 million and 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 U.S. dollars and was similar to Q2 day.
This investment was focused on the completion of our build out and New Jersey, which is now largely completed with and final payments coming due during the fourth quarter.
As a result of our extremely high performing Alere and Pennsylvania business.
We will have a final earn out payment from this acquisition of 155 million U.S. dollars coming due in Q1 2021.
Due to the extremely strong cash generation from this business. We are already pre paid 15 million and the past few months towards this final earn out payment.
Thereby reducing the final payment to $140 million U.S. dollars.
We expect to continue to use funds generated from the operation to pre pay up to an agreed upon total of 30 million.
Consequently, and as per a recently signed agreement with the sellers Terrace and will have the option to defer up to an equal 30 million from March to do and up 2021.
Even tariffs and with 95 million.
The remaining balance and due in March of 2021.
It is important to note that most of this potentially deferred and 30 million and could be funded directly through feel free cash flow generation from the alaris business during the three month period.
With regards to the remaining 95 million balance we believe that we will have a clear line of sight to multiple financing options for making that 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 192 million you updated guidance of at least 196 million net revenue.
And from previous guidance of 45 million.
The updated guidance of at least 54 million of adjusted EBITDA.
Q4 growth will primarily be driven by the cultivation expansions and Pennsylvania and California.
Okay and need ramp up at dispensary in Pennsylvania, and California, the opening of our first and being Jersey Dispensary and Philippsburg initial sales from our boot and New Jersey cultivation facility.
And our gummies launch in Canada.
As we look to 2021 day, we anticipate and exciting year with continued rapid growth and expansion.
We expect our Pennsylvania business will continue to grow and 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 and both the 40000 square foot greenhouse and the 80000 square foot indoor space, beginning in Q1, 2021 and ramping throughout the remainder of the year.
For retail sales from our Phillips from New Jersey, and the opening of our second and third dispensers, and New Jersey and the <unk> in the first half of 2021 will drive growth.
In California, we will fully annualize the late Q3, 2020 expansion upstate flour and continue ramping up our retail footprint with our fourth and fifth stores and Berkeley and capital.
And candidly, though with our business right sized and our commercial strategy clarified we expect to see positive contributions to sales and profit growth and 2021.
Lastly, our recent acquisition of Hs and HMS, Maryland will begin contributing to our sales once we have <unk> 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 360 to 380 million, representing 85% to 95% growth versus 2020, and adjusted EBITDA to be in the range of 140 to 160 million representing 150.
5% to 190% growth versus 2020.
Adjusted EBITDA margin as a result is expected to surpass 40 per se and 2021.
In closing, we're very pleased with the quarter and we anticipate to be is a strong finish to an amazing and transformational year for tariffs that.
We're even more excited for what is yet to come and 2021.
I'd now like to turn the call back over to the operator to open up for questions.
Thank you.
Ladies and gentlemen, and we will now take questions from financial analysts should you have a question. Please press the star followed by the one day on your Touchtone phone you will hear my free Tom from Technology and you Reclassed.
If you are using a speaker phone cease lift the handset before pressing any cash.
And consideration of other callers and time a lot. It would you ask that you. Please limit yourself to three questions and you may certainly we queue. If you have additional questions.
Next question comes from not make and Lee at Needham. Please go ahead.
Great. Thank you for taking my questions and.
On the 2020 guidance.
Into the into the fourth quarter implied revenue growth shows that you have a nice sequential increase in revenue, but the EBITDA will grow slower and I think that implies and degradation and the EBITDA range into the fourth quarter, what would drive the decline in the fourth quarter is that is that startup costs or is there something else going on within the business that would 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.
Oh sure. So simple, we still have a little bit of startup costs from New Jersey, and also with with some of the mix coming in from the retail stores, but.
We should we should see as a continued and due to improved so that the guidance shows might be you know a little bit on the and the conservative side, but we should really see the the they call todays and expansion from Pennsylvania, kicking in and and the mix improvements there. So there's a little bit of drag from new Jersey and retail but overall.
We should see positive momentum.
Yeah, and and then up and the right up into the right and into 2021, which is good and if you don't have to make sure I heard a comment you made on a penny.
And your prepared remarks, and he said that the free the alere payment the $30 million, we push from March I think and so until June and you said that you would be free cash flow positive in the first quarter and you would be able to fund that $30 million delayed payment.
With a net.
And your free cash flow generation did I hear that correctly and <unk> am I, correct, and assuming that you'll you'll generate at least $30 million and free cash flow in the second quarter.
Oh, 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 H.B. capital markets. Please go ahead.
Thank you and good morning.
Jason you previously provided some really good color on and just the evolution of Pennsylvania markets, New Jersey rack or some of your thoughts around timing and how we get from here to there from a medical to two Rick could you provide some sort of just high level last day sort of post the election, and and you'll reading of the tea leaves just sort of get a feel and.
Two markets and how youre thinking at the mall.
[noise], Yeah, so and new Jersey, it's definitely going to be a pressure catalyst and we expect six or seven months from now and New Jersey will have its regs up and running and we'll be able to operate on a direct rules as a you know it's kind of the indication and we've been given and then as you can imagine a the chatter that we've heard and and the other states and pencil.
They oh, there's a lot and talk about about rack I can't speculate as you know the legislative process is going to be quite tricky and.
More politics, and then customer support and just like New Jersey. The population is very supportive.
Recreational and so we'll see but so we'll see but as you know with Pennsylvania growing as fast as they can now well over 400000 cardholders you know we would characterize the direct their record the market and Pennsylvania is really already turning back when you look at the population that's there and we see that strength just continuing.
That's great and then just a follow up from Pennsylvania can you speak to.
Competitive dynamics competitive intensity with day, the race and change in control Ah All day of another fairly material wholesaler and retailer and the state do you look and this is being added. So if you look and this is being a threat consensus that change of control or is that just your point that much to go around and that it's it's neither handled there.
That's not true 2021.
Ah, Yes, short and <unk> that the market is very robust and while there's some capacity continue to come on line or the 50% growth and patient growth is is really absorbing everything that's and as we said we just added 25% capacity that is it was immediately sold and absorbed into the market.
And place and you know from a competition and perspective, you know 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 you know the fact that we're in all dispensers and the state does show that we have been very successful at working very hard to compete and habits, great success with that.
And so we we don't you know, we've been competing inc. and or the state with all 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 you know still under 100 dispensary is out of the license to 180. So the market has a lot of room to grow so as others bring on capacity, we still see that.
Shorts for quite some time and again, it's and it's not even racks. So we think there's some real long runway here for us to compete successfully.
That's great and then just a quick final question from me.
On the guide and you know the adjusted EBITDA margin of the 40% flat.
True 2021 on a on a 35 per cent access cash you certainly given some indication on the drive EPS, but could you provide some color on you know what could possibly go wrong. So all go wrong around that 40% margin any sensitivity or in fact, you cash around that case would be it would be really useful just to understand how you I guess.
Talk about it and then determined a you know that that that midpoint, 40% type margin I mean, clearly you have a range there slurries and sunny.
Around that would be great.
Sure and Keith could you tell us.
Yes, sure so so.
So first of all our forecasting internally and it's very much of a bottoms up build so we you know with the we have pretty good line of sight and visibility that the one variable of course is we haven't sold our first product and New Jersey. So there are just a lot of variables around getting out of the gates of course were optum.
Mystic as Jason describes a and it'd be a supermarket, but just getting out of the gates and and ramping that is really the variable, but you look at Pennsylvania, and you look at New Jersey, and the scale that is going to be as a percentage 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 cost continue to go down and that's kind of the formula.
Yeah, Thanks, very much and ads.
The thing I would add as you recall, we've put in place all have they asked you day outside of the stores to build New Jersey without any revenue. So you know, there's a very high level of confidence that as we roll from Jersey without taking on much more G and H, we you know and we'll see that leverage come through.
Thanks, guys and congrats I'll get back into cash.
The next question comes from Glenn Mattson and Ladenburg Thalmann. Please go ahead.
Yeah, Hi, thanks for taking the questions great quarter [noise].
So with Pennsylvania being such a large part of the business now I guess I would you know and you've done a multiple rounds of capacity expansion.
You know that's got 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 to increase production from these assets and you know do you have any further ability to expand that capacity.
In Pennsylvania.
Yeah, Hey, Glen I'm sure. We do there are some there are two core drivers for Pennsylvania, and what three core drivers. One is retail does continue to grow it's just amazing how strong. It is a second is are the yields in the facility and the team distance and used to dial in and the per.
And activity levels per square foot assets continue to rise. So we think that that will continue to add and benefits are too big and 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.
We do intend to increase the capacity. So we do believe that even after this recent increase that there was lots of runway for Pennsylvania to growth.
[noise] Oh, great.
Jeez I missed what you said about when when you when you thought or New Jersey and go to Rick. So if you don't.
Am I repeat net but then can you just let us know like.
Is that factored into the guidance for next year or a <unk> or <unk> wreck upside at this point or just tell you <unk> you know, it's a difficult to time and exactly how you played that into the guidance.
Yes, sure I realize if you like where this is regulation. So we know this is speculation but the indication we can give and that's that the state has the goal of of getting the condition up and running within 30 days of the of the ballot initiative and hopefully within six months, having the Rex written to allow people to operate under the under but.
I think bill. So we've we're we're hoping that June July of next year, we'll be able to operate and at that point, we will already have our dispenser is all three of our dispensers and hopefully open.
So that would give us an advantage. So we have not budgeted rack at all and our numbers are numbers under the medical market or what we forecasted and the budget today.
Great that's helpful and then.
Lastly, just.
The outlook for California, I imagine it continues to be a little bit depressed given the you know there was the wildfires and then there was you know that some some some shutdowns and things and and and and so just kind of your outlook for and for next year and how you're thinking about California.
Oh yeah.
Yeah, you know, California, It's you know, we're very concentrated up and and the ER and the north and our goal is to add you know do some very tactful adds to our our retail presence to go deeper with our on shelf and we've had some good success. You know become these are the number one selling or flowers now the number one so.
Selling and how so we thought well continue to help with our margin structure and California, but given the dynamics in that market place. You know, we continue to remain relatively cautious and our investments and relative to the east coast. So you know I'm very pleased with the progress.
That we've made but you know our investments in that area or more limit that would be where we think the returns are higher and the east coast.
All right great. Thanks for the color and good and congrats again on the quarter.
Thank you.
Your next question comes from and that's the Stanley Beacon Securities. Please go ahead.
Good morning, and thanks for taking my question I guess first with respect to New Jersey those from location I think its push to have pretty limited and your nearby competition and 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 from a buffer you'll have.
From from a potential competition and where their sites maybe going up.
Yeah. So as you know that state is divided into three north central and South. So there's there is a limited number of competition. There's only there's 12 licenses and each region. So there'll be 12 stores for the north where we are and ER and the northwest and has the largest percentage of the population and so.
So yes, there will be competition and I think we're in great locations. We're on.
Within a 30 minute drive of our locations as well over two and half million people from each one of our locations, which are more towards the New York City side. So now we feel we feel really really good about the locations and [noise].
And you know 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 and these are our valuation expectations climbing or are there still reasonably priced assets to be had I guess, given the greenway and so with the a and b election results.
You know that's a very situational thing.
Maryland's was was a divestiture from the merger because of the two licenses. So I do think that we have seen or quite a range and and opportunities, but I think you expect us to maintain some pretty strong disciplines and you know on we're not just trying to get somewhere to be somewhere where we got to make sure. It makes a ton of financial sense. So.
We do see opportunities out there for sure.
Really cautious.
And ER understood on that thank you and and just my final question around Pennsylvania, you mentioned product mix being one of the drivers behind a gross margin improvement I guess can you can you elaborate a bit on dot com.
And then as soon as to how sustainable that aspect is.
Yeah, well most of the the Pennsylvania margin is is it's been actually fairly steady between flower and manufactured goods, roughly 50, 50 plus or minus.
And I apologize I and what's the core driver of.
Growth and margin in Pennsylvania, it's been a factor of adding capacity and leveraging the scale.
And continued and a great performance ever cultivation team and cruising grams per square foot, which has a very strong bottom line performance. So those are the two largest contributors.
To the expansion of the margin.
Excellent thanks for the color and congrats on the 2021 guidance.
Thank you.
And next question comes from and just sample and Ashland capital markets. Please go ahead.
Hello, everyone. Good morning, and congrats on the quarter.
Yeah.
And my my My first question here and your boats delivered you're the first of your production to the New Jersey market and I imagine how did that you're you're reaching out and building out your relationships with potential customers are not state and do you have any comments on the initial indications are demand a bit.
You are seeing for your for your products and that state from third party retailers.
Oh sure I would say that the demand is robust the.
Market is very underserved and new Jersey, and most all of the dispensers that have opened and 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 and the state and so once we see the performance of our first dispensary will decide how much to push out and.
And the other and so the wholesale market, but no I I have absolutely no concerns about the ability to sell outs and our production and demand is very strong that's fairly underserved at the moment.
I appreciate those comments and and sounds excellent and.
Also just trying to get a sense of how SG and Amy build from Q3 and I guess one other question marks and my thinking is whether on New Jersey, The New Jersey operations were fully stopped out and Q3.
Or whether there might be in and and additional as Ginny.
Investment needed a in Q4 to get that actually get that fully up and running.
Okay and kicking around.
Sure. So so yeah, there will be some additional build out and as gene a and in New Jersey.
And in other areas. So so look and well continue to see the dollars Roe, but definitely a non.
Not at the same rate as our revenue is growing so.
So we continue to expect to see the the rate come down gradually over time.
Okay. Thank you for that and just a final question. If I may I noted earlier and Jason your comments on a day.
<unk> increased production capacity and Pennsylvania, you know it sounds like that that is selling out I'm. Just wondering if you would look to further expand your Pennsylvania facility.
And 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.
So it would be our intention we're not announcing any specific plans are 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 can continue to absorb it and when they're still going to be a doubling of free.
Dispensary base and the state.
And still operating under medical markets and we feel very good about that and you know were in office dispensers and the state today, but you know there's a lot of people are still asking for more product.
Thanks for taking my questions.
Sure.
And next question comes from and accelerating and Craig Hallum Capital Go ahead. Please go ahead.
All right 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's no new Jersey adult your sales and your 2021 guys.
That is correct.
But putting and perspective I think about this in two ways, we do believe that whether its record warm and our capacity and production.
[laughter] will be fully absorbed and the market under either condition and.
I think where you might see a stronger upside that's not is at a retail level and we assume wherever and medical market and our forecasts and if that goes rack I think that's where we would see a much stronger upside, which would mean that we would be pushing more products through our own channels and getting a higher price somebody looks at the wholesale channel. So that's how I might see us.
You know how it might affect our numbers from what we budgeted.
Okay, Great that's helpful.
And then just switching gears to a and lira and Pennsylvania. So I know there was already a very well run organization when you acquired and.
And now we're seeing further increase yields.
Jason I know you're always are 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 do you see room for further cost management or yield improvement I, maybe automation or I don't know, but you know.
And then I guess finally, just as it does.
Our directly translatable to New Jersey, and now Maryland.
Yeah, Thanks for pointing that out and give me a good chance to give a big shout out to Andrea and Greg.
Greg who runs Hilarie and and he was there had to cultivate or yeah. There [laughter], they're killing it I mean I think if you look at the culture that we've built which is just never resting.
You know the sites continue to be pushed and and one of the great things that we're able to do is we have several facilities is really trying to bring you know who's doing the best and that's different areas, which creates and great motivation to chase each other in a very Conway. So yeah I think the team just doesn't stop a they're doing a great job and they are really hitting numbers you know every month and seeing better.
A better yield so they're just time and energy didn't don't forget we've only been operating in the marketplace for.
Sure you know three years and you know you learn and continuously learn a lot about the genetics and about other aspects from the growing so yes, we've got a lot of runway to continue to improve and absolutely and New Jersey, and you know our first crops or were actually better than expected and so we're very pleased and yeah, we fully expect to bring.
Shared experience to our Pennsylvania, we've got a great grilling team also I, Ricky who is running that out and in New Jersey, and so I feel pretty good that will make continued progress and the team really works well together.
All right that's great to hear and then.
Last one from me and also great to hear about the prepayments and barrels on the lira earn out and I can mention that 30 million and free cash flow potential or can you just help us understand how you guys are thinking about debt versus equity I guess, you know both a with the earn out specifically and then I just have a bit more.
And generally speaking going forward.
Yes, Sir Keith would you take up yeah sure. So I think.
So we have the as I mentioned in that 95 million. We believe this is what we have and.
Suffice to say, we believe were under Levered or you look at our balance sheet, it's pretty clean.
ER and the only debt on the balance sheet and is the canopy alone, which is tied to synthetic convert warrants. So so we're very clean and underlevered and I'm very confident that the weak and raise the capital and make that final payment and and.
And any other needs for future expansion.
And next question comes from and share price venue at Stifel. GMP. Please go ahead.
[noise] [laughter], thanks for taking my questions and congrats and the great quarter guys and.
And as well the initiation on 2021 guidance.
Maybe just a little bit of a housekeeping item.
Did you do you have any can you talk a little bit about the tax implications that may have occurred in Q3, we loose you've heard from a lot of operators that some tax was deferred.
From Q2 and RBC.
Obviously that that comes into play when talking about you know measuring your operational cash flow in the quarter.
Or or free cash flow going forward.
Sure Good morning, Andrew <unk>, Yeah, that's true and and you can group us into that dynamic. So we didn't have any taxes that were paid in Q2, we had a.
Around 9 million that we paid her between 19 and per estimated payments in Q1 that.
And then we made in Q3, so that affected obviously, our cash the cash flow from operations and not and in Q3.
So yeah.
Okay and.
Just maybe switching gears on on New Jersey, and how our production will ramp up there.
And <unk> could you talk a little bit about what we should expect in terms of you know the pace of that ramp up.
Could it be.
No over a course of several quarters or.
Could it be similar to.
The Pennsylvania, where you know the majority was in the first two quarters.
You know a little bit of cadence color would be helpful.
Oh sure. So a we have a kind of three phases for the growth and you have a first 40000, which was cultivation only so that as flower producing and and so that's about half of our flower production [noise].
And so that's available our second phase of the 80000 square feet, it's being completed at the end of this month.
So that's also where our manufacturing and indoor growth is.
So as a as we see that our opportunity is a more for introducing half of our flower sales into the first quarter and then the ramp up of our second batch of flour and are manufactured goods, but really kinda come towards the end of the first quarter. So you would expect that we'd be more ramped up fully and the second quarter.
With our full suite of products.
And as were entering and that's the ramp and then retail.
We had 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 and we're really giving guidance and the first half it will be up and you'd expect wants to be closer to you know the answer the first quarter and the other one closer to the and and the second quarter. So I think you'll see a ramp over the three quarters or as we kind of get fully up and running.
Thank you that's very helpful and.
And maybe.
Maybe just following on on the debt to equity comments.
You.
You know you your stock has done extremely well over the past six months going up by 300% you know and the M&A environment.
And there's a lot more expansion that you could do probably and and the state picture and are.
Our neighboring States you know how do you see you.
You know using that as as leverage so that you know partners can participate on the upside with you.
And you know it could you talk a little bit about sentiment and the market for that as well.
And sorry, my phone came out Keith would you take that because I actually missed sure of the question Yeah. Yeah sure. So I mean, there are multiple levers as as we mentioned in the prepared remarks. So I I mentioned and you know we believe were under leveraged. So that's that's one and just want to kind of also put it out there.
That we have a number of of warrants that are out there.
That are you know that that will likely bring and a few hundred million Canadian that's a big number.
And and then yes, we have the equity lever that's out there that we would continue to evaluate ER and and measure up against our needs.
So multiple options and and we're always exploring all the all the opportunities and and and yes. The final part of your question just from continuous discussions that we have with the capital markets.
We're just getting a lot of Ah receptivity and interest.
That that's building so that's positive, though it's not both on the debt side and and the equity side. So we're.
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 you know sentiment and.
Increasing towards.
You know, except the equity as a as a.
From a consideration and now how how have you felt the sentiment in terms of deal activity as well.
And any color on that.
Oh, Yeah, I guess, what I'd say is that yes, Oh, you know every everything truly a situational and depending upon the situation and the different groups, but I would say that there are absolutely our cash driven transactions and they are absolutely are people who.
Who are interested and the equity and and bold and their position. So I do believe that that and it's very fair to say that that you know stock is definitely a currency that we could.
Take advantage us regarding transactions for sure.
Thanks for taking my questions Congrats again.
And again.
Thank you. The next question comes from non Atkinson <unk> Securities. Please go ahead.
Hi, good morning, guys.
Well done and Q3 and thanks for taking your questions.
For the New Jersey.
Auction facility.
Just on sort of the first 40 and the next day 80, that's coming on line here. So you got a 120000 square feet.
Can you talk at all about and always the.
Production revenue capacity and that.
Amount of space versus what you have in Pennsylvania.
Sure and all.
Yeah. So the.
All right, there's two ways and one is our capacity out of New Jersey is it's probably around that 75% to 80% of what Pennsylvania is.
And but we also have a price is that are probably 20 cost per cent higher and new Jersey, and there aren't Pennsylvania.
And yeah, and we also as you know similar you know three beach and license and similar to Pennsylvania and.
And despite how strong the Pennsylvania stores are you know we have expectations that new Jersey will be even stronger given that it's relatively under stored compare to Pennsylvania. So players are seeing much stronger. So I think between the three stores, we expect much stronger retail demand and with the price as you know bill will be will be not as much but and.
Sure and and don't forget we have an additional 100000 square foot print footprints that could take us up to north of 200000, a day in New Jersey, which would make it a larger than the Pennsylvania footprint.
Okay great.
And secondly, so to that and that's a great segue. So what are you looking for for 2021 Capex range.
Keith.
Oh, we were not giving specifics on that but I think weve conveyed to the projects that we're looking into that we havent made final decisions on yet so we would look to potentially further expand and Pennsylvania.
If we see that unfolding and and then New Jersey that Jason just mentioned and.
And Oh, we have Maryland that that we're looking at so there are several new projects that can generate a significant amounts of revenue and profit that's that's not.
They would come online and beyond 2021.
And so yeah, but we're not we're not going to provide specific amounts from on the capex at this point [noise] from what I would what I would add though is that that forecast for next year.
The vast majority of the Capex that supported that internal growth is already a largely been spent with some amount and to the first quarter with this with the stores and a and finishing up our facility. So the capex that we would be adding would be additive or you know growth to the but and you know to the business that we would see in the back to the following year after.
That so so this year and most of that money is spent for you know 2021 results.
That's great Okay, perfect and then lastly.
Just can you talk a little bit about how merrell and fits into your flow. So it's it's a pretty big market right. You got over 100000 registered patients at like 600 million sort of run rate market size.
Are you focusing on selling there or is there potential and dispensaries there as well.
Yeah, So we purchase day cultivation and processing license.
The facility the facility is within an hour shot of or Pennsylvania facility and the.
Huge believer and you know and you know put on the ground Isight management, so our ability to get there 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 and we plan on bringing the entire branch of suites there.
We don't have a at the moment and he dispensary licenses, but we are a lot and are bought to have up to four dispensary in the state. So we would expect a very similar playbook to Pennsylvania, and New Jersey, where were more dominant share 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 was that keeps our pulse on the and the local customer and its a brand and manufacture if you really want to be touching customers as well on the front line and so that's that's our intention.
Okay, great. Thanks for taking my questions.
Thank you there are no further questions I will now turn the call back over to Jason I come and for closing remarks.
Right.
Alright, Thank you, everyone and and and the analysts for all the support and the questions. This will conclude it and again I have to again give a big shout out to everyone on the Terrace and team you guys are fantastic and you guys are killing it and I really appreciate all the hard work from.
From everyone on the team up and down and so thanks, and we look forward to speak and again.
Right.
Ladies and gentlemen, this concludes your conference call for today and we thank you for participating and we ask that you. Please disconnect your lines.