Greetings, and welcome to 4Front Ventures First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Andrew Thut. Thank you. You may begin.

Thank you, operator, and welcome everyone to 4Front Ventures earnings call for the first quarter of 2021. I'm joined today on the call by the entire 4Front management team. We have Leo Gontmakher, our CEO; President, Karl Chowscano; Jake Wooten, our EVP of Finance; Joe Felpham, COO; and our Interim CFO; Pete Rennard.

Thanks, Andrew. Andrew did a terrific job of updating you on the strength we see in the industry and our business. 2020 was a transformational year for our company, which was achieved through focus, dedication and the hard work of all our employees. We carried that momentum into the first quarter of this year and it's continued in Q2. It's been a little over a year since our board appointed me CEO, because of my deep understanding of cannabis business operations, as well as my business building capabilities, along with their desire for this to be an operator led company. I've now brought that role in a culture that as we say internally is maniacally focused on execution, doing what we say we're going to do.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Neal Gilmer with Haywood Securities. Please proceed with your question.

Hey, Neal, thanks for joining us on a Canadian holiday here.

Yeah. Good afternoon. Yeah, happy to and congrats on the quarter. You guys get your holiday next Monday. So, I understand. Maybe I'd start with your 26% quarter-over-quarter growth, sort of outstripping some of your peers. Was that largely driven through that, I guess not 100%, I think you said growth in Illinois? Or, we felt that you just sort of outperformed across most of your state markets compared to at least I guess some of your peers that have reported so far some of their Q1 numbers.

Yeah, I'll hand the call over to Jake Wooten to answer that one.

Hey, Neal. No, I think your instincts were correct. It's exemplary performance from our Calumet City dispensary, which opened in mid-June, as Leo alluded to. However, there's also some incremental gains in our Massachusetts facilities as well. Washington was kind of consistent with what it typically has been for the last few quarters, and Michigan as well. And pure ratio is the same. So it's larger the Illinois dispensary opening, and then some incremental gains in our Massachusetts facilities.

Okay. Thanks, Jake. This might be towards you again, Jake, but just on the gross margins, looks pretty solid in the quarter. And then if I understand the comments with respect to Illinois and the ramp up in production they're having an impact on cost per gram, fair to assume that normalized even slightly higher adjusted gross margins. And the second part to that question would be, as you bring on your California operation, will that have again, a short-term impact on margins, potentially, as you just sort of absorb that into your portfolio?

No, great question. Without getting into too detailed specifics, we do believe there were a few 100 basis points that could have been had in the quarter, with respect to gross margin, at our Illinois facilities has been able to harvest in the quarter and get some of that product in through the Calumet city expansion. So that's with respect to that question. In terms of California, we're currently expecting our California margins to be relatively in line with what we're currently doing in our other states. So, no material changes as we look to roll California online in Q2, and Q3.

Okay. Maybe final one for me, and then I'll pass the line for questions. And just sort of if I take a look at the midpoint of your guidance on both revenue and EBITDA, I get to sort of between 25% and 26% EBITDA margin, 19% this quarter, and obviously, with some of those impacted. I guess, it seems to me that the bias would be towards the upside of that margin range, because as you progress through the year and have those efficiencies come online, that's sort of a safe way to say perspective to have as you move into the second-half of the year?

Yeah, Neil, I think that, Leo sort of said it best, we're really comfortable with where we are from a guidance standpoint. And we do think there's potential for upward bias as we move throughout the year.

All right. Well, thanks very much. I appreciate the questions. Thank you, man.

Thank you. Our next question comes from Graeme Kreindler with Eight Capital. Please proceed with your question.

Hey, Graham.

Hey, Andrew. Hey, guys, thanks for taking my questions this afternoon. I've got two follow-ups regarding the previous set of questions here and just wanted to start on the gross margin side of things. Can you disclose what the gross margin looks like on a on a systemwide basis as we try and assess both the revenue and adjusted EBITDA just to bring that full circle?

Jake, you want to hop in there?

Yeah, of course. Graeme, we don't disclose it on a systemwide basis. As you know, the Washington financials, we cannot consolidate them under U.S. GAAP. So if you want to look at the financials on a standalone basis, excluding the Washington operations, you can remove the real estate income line from revenue, and simply take a gross profit against our revenue from sale of goods to kind of get you an understanding of what the margin is for the THC, and I should say that the pure ratio of business as well. But, the operations that we directly operate, own and can consolidate from a financial standpoint.

Okay, understood. And then with respect to discussing the potential for upward bias on the guidance, if I'm reconciling all the comments made on the call and in the Q&A. That would lead me to believe that there's really a lot of leverage that could be found on the gross margin side of things. That's putting aside any potential shift or acceleration of trends that we might see that impact the top-line. But, is the expectation that from the fixed cost expense side of things that's going to remain relatively flat throughout the year? Is that a fair assumption?

I think that is a fair assumption. And I think what you're also seeing is a greater proportion of our sales moving through the second-half of the year, coming from vertically integrated operations as we open our Brookline location, and as Calumet city continues to ramp.

Got it. Understood. And then my last question here, just as we talked about the capital position and with $18 million in cash, and a lot of the facilities reaching a point where they're more efficient or being commissioned in Q2 here. What is their CapEx balance look like, for the remainder of the year? And if you can potentially provide it by what project has been dedicated to that would be appreciated? Thank you very much.

Yeah, I'll take that one as well. Where we stand as of today, as Andrew mentioned, we left the quarter with just under $18 million in cash on the balance sheet. And where we sit today, we have about $2.5 million of CapEx remaining for the year, plus or minus a couple $100,000 for maintenance CapEx as projects arise. What you're largely looking at is $2 million of that being spent in the Commerce facility, and then $0.5 million being spent in the completion of the Brookline location. The construction is largely there, it's just simply catching up of those open balances.

Okay, understood. That's it for me. Thank you very much, and congrats on the quarter.

Thanks, Graeme.

Thank you. Our next question comes from Eric Des Lauriers with Craig-Hallum Capital Group. Please proceed with your question.

Eric, how you doing?

Taking for taking my question, guys. I'm good. How are you, Andrew?

Thanks for listening in.

Absolutely. So, congrats on the Nabis agreement in California, certainly exciting to have that distribution with such large capacity coming online shortly here in Commerce. I was intrigued by the white labeling comments and wondering if you could just expand a bit on sort of the market for white labeling opportunities there. How far along you guys are in with any discussions, if any? And just any sort of comment on that opportunity there and how we should be thinking about it? Thanks.

So, I'm going to turn the call over to Leo. He and Joe can answer that one.

Sure. I'll give it my first crack and Joe, please fill in whatever I miss here. It's a great question. Getting our own brands and products onto the shelf is definitely priority number one for us. But, as we take a look at what's going on in the market, and as we continue to have conversations with competitors and friends alike, we see that there's a large opportunity for white label and private label, in terms of there not being enough processing capacity online to handle bulk orders. We're also seeing opportunity and interest from bigger retail chains in having their own private label. And they're having trouble finding a one-stop-shop that can produce them a variety of items and multiple skews, deliver on time and deliver consistently. And our facility is purpose built to make stuff like that happen. So, as we go along and entertain different kinds of conversations, it's something that we're open to, and something that we're definitely set up and ready for.

That sounds very exciting. Switching gears over to Massachusetts. Could you talk about the revenue split between a first-party and third-party brands within your Massachusetts retail stores? I think you had a comment of your brand's taking share there. And we're just wondering roughly what your current split is? And if you have the production capacity to sort of maintain that split with Brookline opening shortly here? And I guess just enrolling in general, any comments on how you sort of think of that ideal mix between first and third-party brands would be great. Thanks.

Yeah, I think that's a good one for Joe Felpham, our COO.

Hey, Eric. Sure. So right now the mix is about 90% of our retail sales are products. We have -- and sales at the retail level continue to increase. We have the capacity to support them as they increase. And that of course takes into account Brookline opening, right. And it's expect that 90% ratio is expected to kind of carry over in Brookline as well. If we continue to receive inbound requests on a weekly basis, and for wholesale into other stores that's where we're maybe being a little bit more selective. No issue supplying our own stores. But, we're going to just keep expanding our wholesale footprint in Massachusetts over the coming quarters.

Great. Appreciate the color. Thanks.

Thank you. Our next question comes from Naman Daga with Hedgeye. Please proceed with your question.

Hey, there, how are you?

Good. How are you?

Great to have new voices on the call. Thanks for joining in.

Yeah, definitely. Thank you. So, I just had a quick question about the Commerce, California facility. How are you guys going to be able to manage to have 10 times the -- was it the capacity or efficiency of the current Washington planet? They're about the same size.

Go ahead, Leo.

Sure. Are you referring to the size of the facility?

Yeah.

The Washington facility is right around 40,000 square feet, and the Commerce facility is 170,000 square feet. So a little bit of a difference in size. But, mainly, it's automation and efficiency. We've put in automation as far and beyond anything we have in Washington, and really far and beyond anything we've seen in the industry to-date. Those efficiencies, automation and size combined allow us for that 10x capacity.

Got you. Thank you.

And Leo, maybe it will make sense to sort of hit anecdotally on pick a skew like a Marmas, what the production out of our Washington facility is and what the delta would be in terms of output at California as we're running on a shift.

Sure. I think on Marmas or just any edible in general is a good one to make, because the edible machinery that we've put in Commerce is our machinery that we're most proud of, and that's the most highly automated. So in Washington in a single shift, we have 30 people working in the kitchen that can produce about 3,500 finished 10 packs of edibles. In that same single shift, the machinery in Commerce with five people working align can produce 30,000 to 35,000 finished 10 packs. Whether that's a Marmas, Hard Candy or a Chewees, just any edible that we produce.

Thank you.

Thank you.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to Leo Gontmakher, for any closing comments.

Thanks. I just wanted to thank everyone for their continued support and for joining us on today's call. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.