Greetings, and welcome to 4Front Ventures Third Quarter 2020 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 will 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 third quarter of 2020. I'm joined today on the call by entire 4Front management team. We have Leo Gontmakher, our CEO; CFO, Nicolle Dorsey; Jake Wooten, our EVP of Finance; Karl Chowscano, who is Strategy and Operations; and Joe Felpham has joined in as well. Joe is our newly appointed Chief Operating Officer.

Thanks, Andrew. Andrew did a terrific job with updating you on the strength we’ve seen in the industry and our business. The summer has seen to particularly strong sales trends, including a meaningful uptick in Washington and Massachusetts. It’s been a little over a year since 4Front closed its merger with Cannex, the company I focused -- I founded in Washington. Eight months ago, our Board appointed me as CEO because my deep understanding of cannabis business operations as well as business building capabilities intersected with their desire for this to be an operator-led company. I’ve now joined that role in a culture to that as we say internally is maniacally focused on execution, doing what we say we're going to do. Since March, we've made tremendous progress as a company, right-sizing the cost structure, streamlining our business and pushing deeper into our core states by leveraging our structural cost advantage we developed in Washington and into the rest of our licensed portfolio. Recall our investment thesis. We believe the sweet spot for outsized value creation in this industry is really around low cost production and distribution of cannabis consumer packaged goods. Our facilities in Washington State are the number one edibles manufacturer and the number two producer of flower, with an overall number two market share in the state, outperforming over 600 other license holders in one of the most competitive cannabis markets in the world. We've achieved this while maintaining very attractive margins and profitability. We're replicating these tried and true production capabilities in the large and nascent recreational markets of Illinois, Massachusetts, Michigan, and soon to be California. So the question is, how is the thesis playing out for us so far? Due to low cost cultivation and manufacturing methodologies, products and brands that we've had such success within Washington, scale into other markets. While it’s still relatively early, we're very pleased with the results we're seeing one year in. Let's start with Massachusetts. It's been a little over a year since the opening of our cultivation facility in Worcester, which was started using growing methodologies, and SOPs developed over the years in Washington. Since launch, we experienced no failed harvest and demonstrated annual yields of over 400 grams per square foot. In our acquired Georgetown facility, we continue to make improvements to the growing environment and are currently in the process of upgrading lighting. The retrofitting of the company’s Georgetown facility is complete and ready for phased installation of LED lights, which we expect to drive the yards in line with what we’re accustomed to seeing in Washington and now in Worcester. We've introduced all of our Washington brands in the Massachusetts market as well without exception.

At this time, we will be conducting a question-and-answer session. . Our first question comes from the line of Neal Gilmer with Haywood Securities. Please proceed with your question.

Congrats on the quarter. Thanks for the questions. Maybe start on Illinois and your announcement with respect to further build out there. Obviously, I guess you're just exploring options right now it sounds like. But is there any sort of preliminary timeline that you can sort of give a ballpark range for? Is there anything that we're going to see in 2021? Is that more of a 2022 story? Your initial thoughts on a phased approach or sort of a large build out. Just any sort of further call you can provide on Illinois there?

Yes, I'll turn that over to Karl and Leo. Karl, do you want to take a crack first and then Leo or other way around, either one?

Sure. Hi, Neal. Leo will be able to speak to the phasing if needed in more detail, but our anticipation is probably to lock up some land within the next couple of weeks, part. And start the pre-development process with a view of having phase 1 completed by, I think at the end of Q2 2022. So about an 18 month experience we would think. The initial phase we're looking at right now is 65,000 square feet of canopy with a 75,000 square foot manufacturing-only facility. The total square footage of building that, that would require, phase 1, is probably somewhere in the 275,000 square foot range as I recall. Now as we go through that process, depending upon where the markets at, depending upon the need and the opportunity, we could definitely anticipate starting phase 2 earlier. The pieces of land, the tracks of land that we're looking at are easily developable to take on phase 2 immediately, and either create a campus-style environment or one larger interconnected building. So really, I would say that we're looking -- and Jake, you can correct me if I'm wrong, but I'd say we're looking at end of Q2 2022 to actually be in harvest.

I would second add. I think in this sort of base build out, in just one addition it would be 65,000 square feet of flowering canopy, in a total 91,000 square feet of canopy. And the processing building would be set up in a way that once we get to the full 210,000 square feet of flowering canopy that we're allowed that the 75,000 square foot building would be able to handle the throughput from that, plus or more.

Maybe sticking on Illinois, just I think it was Andrew, your comments just that it was down 11% over the prior quarter obviously due to the shutdown. So are you back now above sort of that pre-shutdown levels on sort of the month that you lost? And then with the opening of the second dispensary in Illinois, is it fair to assume that you guys got your sort of inventory buildout -- built up, and that's sort of part of why your -- the timing of bringing that on in mid-December is that you are now in a good position to support those two with sort of full product build out heading into 2021?

Yes. So Neal, I'm going to turn that question over to Joe Felpham who is the COO and he can fill you in on what's current trends and what we're thinking in Illinois.

Hi Neal. So probably the only silver lining to the shutdown was, it didn’t lead to the opportunity for us to stockpile for two months. So, we feel really well-positioned with our inventory levels for the two stores, really for the next -- the first couple of quarters of 2021 today. And then when you add on the expansion wheel, we're just going to -- it's going to lead us more opportunities in the wholesale market. And so -- and this first fact what we're really excited about as well with Calumet City is launching the Funky Monkey and Legends brands into the Illinois market. So, we've brought some of the Washington flower brands to the Illinois market, and we've kind of timed the launch of some other brands with the store opening. So, we're hoping to get momentum from that. We're actually launching a couple screens tomorrow and then hoping that, that will then carry us well into the New Year.

Okay. Thank you. Maybe one last one from me, and then I'll pass the line. On California with that launching in Q2 of 2021, now the brands and products that you're sort of launching into that marketplace, is that -- are you bringing that down sort of from Washington State to sort of further expanding the sort of brand awareness and leveraging that? Or are you looking to introduce newer different brands in the California market?

We bringing in brands from Washington State and we're introducing one new brand, will be called which will be a high-end PAX brand that we currently don't make in Washington, just because of the pricing structure there and the lack of volume for expensive products. All the other nine brands that we're bringing are strongest brands in Washington and ones that we felt we could automate close to.

Our next question comes from the line of Graeme Kreindler with Eight Capital. Please proceed with your question.

Just wanted to follow up around the subject of Illinois. Is there any expected budget for that expansion project? And I guess maybe we can focus on phase 1 for the time being. Thanks.

Karl?

Sure. Hi, Graeme. Yes, there is. We're looking at roughly, let's say, between 4 and 6 for land acquisition and another 45 or so for the phase 1 buildout.

Okay, understood. I appreciate that. Any sort of expectations with funding that project? Now I know that's a bigger -- weighed out. And more so on the phase 1 building, is that something that the company would expect to finance internally from cash flow, now that you've reached that milestone as of August? Or is that something you look to get more external funding to support?

Yes. I wish we were burping-out enough cash to take care of that, Graeme, but we aren't. And yes, we -- all I can say is, I'm incredibly confident in our ability to be discussing that financing in the near future.

Okay. Understood. Then just switching topics here. With respect to the revenue growth in the quarter, looking at the restart of retail operations in Illinois, and additional approvals that were received in Massachusetts during the quarter there, can you provide any color in terms of the cadence of that revenue growth or perhaps exiting the end of the quarter there in September, where run rate revenue might stand?

Yes. I -- Graeme I don’t want to get into clarity on how each month sort of ended, but it's certainly something we could take offline. Joe, do you want to speak about sort of trends in general in the business or across the business? Or Leo?

Joe, why don't you don't take a shot at that?

Yes, sure. So we set internal goal. So from our internal kind of goal and benchmarking perspective, and like Andrew said, without getting into all of the details, with our team and with kind of Leo and Karl, we think we set pretty aggressive monthly goals for the team. And we have a cadence in reporting, in the Graeme teen -- high teens, monthly growth rates, and things like that for, we understand what a new store in a rec market should look like for us and we set aggressive growth rates around that initially that first 45 days, and set rates around the 20s, and then phase that into the teens. And really, we've been able to hit that in our two stores in Massachusetts. We were able to get back to those levels in Illinois. Some of it is adjusted a little bit with the lack of stimulus, we think. And we've seen that a little bit. So we've done a little bit of adjusting for that. But another goal that we set for ourselves is just how many brands we launch. We have this awesome portfolio in Washington to tap into. We set pretty aggressive goals of launching four to six brands a quarter in new markets. And so for us, that's kind of a KPI that we look to. It's hard at this stage in the industry to look to real revenue numbers or trends for what Marmas is doing since we launched that 120 days ago in Massachusetts. But all of the anecdotal is really strong. And we feel as long as we're hitting our goals for launching new brands on time, that right now that's a good indicator for us.

Our next question comes from the line of Eric Des Lauriers with Craig-Hallum. Please proceed with your question.

Well congrats on the strong results, guys. Really impressive operating leverage and great to see that you have passed through profitability. Really excited for what's to come in '21 and beyond here. So as far as I can tell, you guys do have industry-leading costs of production and yields per square foot. We've seen that yields can be difficult to maintain as companies go from smaller craft cultivation to large scale cultivation. Can you help those on the line understand the factors that contribute to yields going down as scale goes up, and what you guys are doing to address those factors? Ultimately wondering, how you expect your yields per square foot to shake out in Illinois, and if those yields per square foot are achievable in Illinois at 210,000 square feet?

Yes, sure. I'll take that one. So for scale cultivation it’s really environment and how we make our split. Once you get bigger, you have a higher chance of pest infestation or something that can ruin a harvest, and really you see yields go down because when someone's scale as they potentially lose one or one and a half of their harvest and not having that would drastically drag down that grams per square foot number. I think also on the perpetual harvest and the managing of people in a schedule to make sure you're harvesting daily, weekly versus every two months is something that it's harder to manage and harder to keep on track as sale gets bigger and that's something that we've done a good job of building a system on and maintaining our sheets correctly so that we make it as simple as possible and giving our people very clear direction on how to make sure we stay on top of scheduling, which is in my opinion, one of the most important things in the growth outside of the . So for us looking at something like 210,000 square feet in Illinois, since it's going to be phased starting with 65, that's basically just a little more than we have in Washington between our two facilities. So we feel confident we can build it and divide it in a way where it'll be in 25,000 to 30,000 basically replicating what we have in Washington, just multiple sections inside of a building or multiple buildings.

And then maybe one more for me, just kind of a little bit more color on the location of the Brookline, essentially that's set to come online here. I think it's a pretty heavy foot traffic area. So if you could just help us understand just a little more color around the location there and I guess sort of what to expect from that one?

So Joe I will -- I believe, so Eric being a BU guy, it's about 300 yards down the street from BU’s hockey arena, sort of right in the middle of the BU campus, and in that come all scenarios. But it’s obviously a Brookline dispensary, but the front sidewalk is on -- is Boston proper. And so in terms of the timing and what we expect, I'm going turn it over to Joe and he can give you a little bit more granularity there.

Sure. So Andrew hit the description, correct. And location we're really excited about. It's next to other retail and restaurants that we're excited about. And we are on the agenda in December, I believe it's December 17th for the kind of next step with the planning. And for us, this will be a relatively quick build out, maybe about three months, so if all goes well here in mid-December with Brookline that should allow us to start construction early in the year and hit a spring opening. And that we're really excited for. And it's something that we've been planning for from a cultivation and production standpoint and timing some brand launches around the Brookline opening as well.

That’s great. It sounds like an A-plus location and I'm looking forward to it. Congrats, again, guys.

Our final question comes from the line of Doug Cooper from Beacon Securities. Please proceed with your question.

Start with the Big Daddy, $650 million rev opportunity, $250 million adjusted EBITDA opportunity from your current footprint. Is that the full build-out of the Illinois facility that you've talked about and what kind of timeline, would that be sort of 2023, '24, '25 or what do you think there?

Yes, I mean, I think first beyond just a big build out in Illinois to the full 210,000, we're talking about fully mature market in California and we're talking about a more mature market in Massachusetts and opportunity to expand there as well. But as far as Illinois goes, I think it's a combination of how much square footage is built out in the state versus what the demand is, and just keeping an eye on the market and making sure that we're adding square footage and spaces correctly as the market eases and if that's the right way, that’s a year or two down the line, that works also. But forward-looking maybe something like 2025 to the full 210,000, 2024, 2025. Again, that could change with the market dynamic.

Leo I was to going to flip it over to Jake Wooten, our EVP of Finance. To just sort of give you the construct around that, because it is a number that we put out in the guidance and we're purposeful in putting it out there to kind of frame the opportunity for folks. And so, let's turn it over to Jake for a second to get a little bit more granular.

Yes. Thanks, Andrew. And thanks for the question, Doug. So to frame that 650 million, it really boils down to our key phase that we are in right now. The Illinois project is by far our largest long-term blue sky opportunity. And we think that, that revenue potential from that fully built out facility is somewhere in the $300 million to $350 million range, and that's wholesale sales. So, exclusive of what we would be doing to our captive retail locations. The California market, we believe that, that facility, despite the fact that its production capacity will exceed revenue potential of $200 million to $250 million, we kind of see that as a $150 million longer-term opportunity. When you add-in $50 million from Washington, you add in $100 million from both wholesale and retail sales in Massachusetts, and then any incremental revenue that we can generate from our Michigan operation, as well as the Pure Ratios business, that's really how we frame up that $650 million total opportunity.

Sorry, what was the Mass number historically?

A 100 million for Massachusetts.

$100 million. Okay. And you said, it was your -- even though the production capacity is $250 million I think in California, you're talking about a $150 million?

Correct.

Okay. And then just to help me, considering 10,000 square feet of canopy in your square foot, is that a piece of number to use, 63 million grams at $5 a gram, is that just sort of math that we should be toning with?

70% of those grams will be actual flower and 30% would be in the form of trim for derivative goods.

Maybe just sticking on California for a second. And I think Andrew said 10 times...

Yes. If you don't mind, I just want to clarify that the numbers that Jake was speaking to, when we looked at the capacity of both Illinois and California and what we've done in the past, and do currently in Washington, the numbers that came out to us were a little unreasonable. And so, putting into place, not only price degradation, but also, the percentage of the market that we see being there that would be represented by what we can make is unreasonable. So we gave it serious haircut. So that's a 50 coming up, plus 45% haircut on each of Illinois and California. So when you do the math, you're going to get a bigger number.

On the California, just to stick there for a second. Andrew I think you said you preamble that it was 10 times the capacity of Washington. Can you just give us an idea of what kind of throughput you're doing in Washington right now?

Yes, absolutely. So we're currently selling about 100,000 finished 10 packs across our edible brands, and about 60,000 to 70,000, 1 gram vape cartridges per month. And our production capacity in Washington for the 10 packs of edibles with a 23 person staff is 3500 finished 10 packs per day. And the automation for the full kitchen line that we have in Commerce can produce 33,000 finished 10 packs per day in an eight hour shift, utilizing only four people, so we're looking at 10x production capacity and to stick with the crew.

10 times the production 20% of the cost of labor anyway.

Of labor for sure. And vapes in general something that is extremely scalable when needed. We can sell more vapes than we currently sell in Washington and we’ve seen our market share in that quantity grow month-over-month and we haven't had to add any labor as we scale that.

And what's the pricing differential right now between California and Washington for similar product lines?

The pricing is actually not that far off, California being higher in some categories and being even with Washington in other categories. So really not too much price differentiation, I think the biggest difference in price is on flower. That's not a sector that we're competing on, initially, aside from pre-rolls. So we feel pretty good about the pricing structure and about our ability to produce at a lower cost than we do in Washington and take advantage of that from a sales strategy in California.

Right, so you guys have obviously done a ton of work there in terms of the market opportunity. From a pricing strategy perspective, do you plan to go in at a sort of 20% discount, 30% discount? Like what is the pricing strategy to gain that shelf space right on the get go?

The pricing strategy is a discount. I think it'll vary product-by-product depending on how saturated that category is, and what the top players are and what their pricing looks like. But I think in between 20% and 40% below we believe our competition is for products is a fair number.

Okay. You don't think there's any issue getting the raw material.

In California, raw material is definitely not a problem, especially in the form of finished distillate, which both store advantage because we can buy the oil and start producing right away, while we look to source relationships with the right feeder firms for the future, we want to use flower biomass versus finished goods -- or finished oil.

But based on where the distillate pricing is and based on sort of going in between a 20% and 40% discount, what kind of gross margin would you anticipate for this product line?

50% plus across the board.

Okay. Moving to yields, you're the only one -- one of the only ones I think who speak to yields quite frankly than the big U.S. guys. What do you attribute your better yields to besides experience and understanding in LED lights? Is that something you need to and you're funding because you're obviously finding that to be a better experience. And that's why you're putting the stuff in Washington -- sorry from Washington and into Illinois and Massachusetts?

Yes. It's funny. Two years ago, if you asked me, about LEDs I would have told you're crazy and they're never going to work inside of the grill. We’ve been using LEDs for a while in the mother and clone rooms and they have been great. And we've continued over the past, going on six years now, to run individual experiments with different sets of LED lights at a decent scale 35 to 50 lights per room. We've been lucky enough to have a large scale and be able to come to different companies and companies come down, basically trade a set up three lights for the data that comes off of those harvests and doing that we just continually track and try to work with different partners to tell them what we're seeing. And what we think these lights needs to be successful, more recently in a company that we've been working with for harvest now. We finally felt comfortable enough seeing the data, seeing that it’s more efficient on the power. It's easier to control the tracks and we’re finally seeing yield numbers incredible into or above the same yields we were….

Two more quick ones. Balance sheet obviously much…

….we feel very good about moving forward.

Thanks, Leo. Two quick ones to finish. Balance sheet, obviously much improved. So will the Gotham piece be entirely gone at the end -- by the end of the year?

Yes Doug.

And so California is fully funded. You have -- forgetting the major Big Daddy project in Illinois, the rest of the projects you have, including Brookline and Calumet City and whatever else you have to do in Michigan or elsewhere, are those all fully funded?

Yes, everything is fully funded, Doug. And I want to be clear in terms of the inclination of the funding for the Big Daddy. I want to be clear that it will be non-dilutive funding. Yes, there on track, on the budget.

And my final one, just to circle back with the question was earlier, maybe I can come out a different way. In Massachusetts, when you turned adult use on, what kind of lift did you see in revenue versus when it was medical-only?

Yes, I think, Joe, I think you can probably speak to the question was recently put in terms of cadence. If you can kind of speak to the lift that we expected in terms of revenue from our Worcester and Georgetown locations and what we actually experienced and the direction which it’s headed?

So the biggest expectation, think like an Illinois or a state Massachusetts, when rec first happens, we see a 4x medical to adult use pot and something like Massachusetts, where when they have a rolling state, you then start working your way back from 4x. We thought 2x was reasonable for the timing and then grow from there. And that was essentially what we saw. We more than doubled at one location. We slightly less than double that another, you add them up together, it was kind of right in line with our expectation there.

I'll turn it back to you, Leo.

I was just going to add for Doug that, we just had our best weekend ever overall in Massachusetts across the board in retail.

Yes. Last two best weekends.

That is correct. The last two best weekends.

And with that, we have reached end of our question-and-answer session. And I would like to turn the call back to Leo Gontmakher for any closing remarks.

To wrap up, we have a very promising investment thesis and have incredibly exciting in our development. The cannabis industry is quickly emerging as a powerful secular growth industry, showing accelerating fundamentals during the pandemic and uncertain economic time. We believe that over the long-term, low cost production and distribution of cannabis consumer packaged goods is the sweet spot in the industry. In Washington, we've proven our capabilities in this area as we created a dominant position in the state with the full line of products, which are distributed to over 260 retail locations. Our facilities are the number one edible manufacturer and number two producer of flower with an overall number two market share in Washington. We're now focused on replicating our tried and true production capabilities, supported by our retail stores in the larger nation recreational cannabis markets of Illinois, Massachusetts, California, and Michigan. This constitutes an addressable market of over 76 million people, including Washington State. We're fully funded and are strengthening business fundamentals. We're on pace to show significant operating leverage in 2021. With inside ownership nearing 47%, we're fully aligned to maximize shareholders value as execute on the strategy and take advantage of the major opportunity ahead of us. With that, I will turn the call back to the operator to close the lines.

And with that, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.