Greetings. Welcome to 4Front Ventures Fourth Quarter and Year-End 2020 Earnings 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 turn the conference over to your host, Andrew Thut, Chief Investment Officer. Thank you. You may begin.

Thank you, operator, and welcome everyone to 4Front Ventures earnings call for the fourth quarter of 2020. 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, our COO; and Peter Rennard, our Interim CFO

Thanks, Andrew. Andrew did a terrific job of updating you on the strength we see in the industry and our business. 2020 was a truly transformational year for our company, which was achieved through focus, dedication, and the hard work of all our employees. 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.

Thank you. At this time, we will be conducting a question-and-answer session. . Our first question is from Neal Gilmer of Haywood Securities. Please state your questions.

Hi, Neal.

Good afternoon. How are you guys doing?

Good. How are you?

Good. Good. Thanks. I guess my first question, I guess two, maybe I guess, to start off with. First one is really just your tale and your comments there, Leo, on Q1. I know the books aren’t closed, but obviously you've gone through it. Just wondering whether you can give - provide any more color, obviously, we saw recently in Illinois, some pretty strong numbers coming out of March and sort of give an indication that that was strong state. But across your various different operations, did you – you had good positive trends continuing or any sort of disruptions of COVID-19 that we should be aware of for the Q1 results that we’ll see in May some time?

Yes, Joe or Jake, do you want to handle that one?

Yes, I'm happy to. Hi, Neal, this is Joe. The short answer to your question is the momentum is continuing in Q1. No anomalies or curveballs thrown at us, we're really pleased with the growth we're seeing out of Q1.

Okay, thanks. I appreciate that. And then if I take a look at sort of your Q4 numbers if I annualize that 25 million, you’re at $100 million your guidance for this year is - it implies basically 70%, 80% growth. Any sense you can give us as to, is there one particular state that you're expecting to drive that, like, how should we be thinking of California that ramps up in the second-half of the year? And what sort of expectations you have for maybe Massachusetts? I know, you guys don't give out on a state-by-state basis, but conceptually, where we should we be looking for a good chunk of that 70% to 80% year-over-year growth being driven from?

Yes, so I’ll start…

Go ahead, Andrew.

No, go ahead. Well, I was just going to start by saying, we have a natural lift with our first full-year of rec in Massachusetts. And then the only other thing that's additive to that guidance is, we have the Brookline dispensary opening in Q2, and then California comes online. So there isn't a whole lot incrementally that needs to happen for us to get there. We are feeling great about the business trajectory and are looking forward to getting those two extra properties open. Anything else to add Joe or Jake?

Yes, Neal, just to put a finer point on that. The 25 million in Q4 only included about two weeks of the Calumet City dispensary. So you're looking at a full-year of that facility, which is already meaningfully outperformed our expectations.

That was the only other thing I was going to add.

Well, guys, we should also clarify. This is Karl, we should also clarify the amount that we're projecting to be provided for California that is not that large of a piece of the 170. Can you provide details on that, Jake? Jake Wooten Yes, of that $170 million to $180 million that we've guided to Neal, approximately $20 million is attributed to the California opening.

Okay, appreciate that, guys. I’ll pass it. Thanks very much.

Thanks, Neal.

Our next question is from Graeme Kreindler of Eight Capital. Please state your question.

Hi, good afternoon, guys, and thanks for taking my questions.

Hi, Graeme.

Hi, Andrew. Just wanted to start off with a quick housekeeping note. Can you disclose what the gross margin was in Q4 as I couldn't - I didn't see that in the press release there?

Jake, do you have that handy for - on the adjusted basis?

Not gross margin. I don't have that. I don't know, Pete, if you might happen to have Q4’s gross margin. I just have the EBITDA margin for the quarter.

Yes, we'd have to -- this is Pete. We'd have to circle back on that. I don't have that right in front of me.

Okay, no problem. We circle back on that one. Just then a question wanted to go through a bit more detail with California. You mentioned the first product hitting the shelf in May, but a significant opportunity here to white label, private label. I was wondering, in terms of getting a better sense of that operation, I know it's not a major part of the 2021 guide. But putting that into context with the opportunity of the size of the California market, just curious what sort of distribution partners you're working with right now? Any efforts to expand your sales team in California? Or potentially looking at bringing on more partners, just as we think about where the trajectory of the business in that state could go as you start on-boarding for this facility? Thanks.

Sure, guys. I'll take the first crack at this. I think what we built in California is pure manufacturing and processing at scale. And our number one objective will be to make sure that we get outsized shelf space for our in-house brands. As we go about that and we've already had a few discussions and continuing discussions daily with big partners and big retail chains in California. There will be the opportunity for us to do some private labels specifically for retail. And as we move along and build relationships with our distributor who is nervous at the current moment, we'll also be looking at smaller partners that make non-competing SKUs to start where we can present a white label opportunity that makes sense for everyone. But the start, we're definitely very excited about and heavily concentrated on spreading our own in-house brands. We've selected the Top 10 brands that we have in terms of sales, quality, and the ability to fully automate and really bring them to scale. We're completely ready to go. All the machineries on site. We feel very good about the timeline we've presented and about the conversations that we're having on a daily basis with different players in that market. And just -- yes, also, we feel very good about our supply chain there and have had conversations and have product lined up to be delivered at prices that work very well in our business model day one. So we can actually go ahead and start producing, right when we get open while we ramp up our sourcing material in terms of flower and trim and start making our own oil. Joe, anything to add?

I mean, Graeme, just maybe a little bit more context for you and just for the group. So the number that Jake was mentioning is approximately $20 million for Cali. We actually think that that's about 5% of the revenue that we could do if we had all our machines running for two shifts a day. So for -- our revenue numbers are based off of kind of some small penetration rates for our brands. But we plan on filling this machine capacity with more of white label and private label opportunities as they pop up in the market. So, we – from a machine capacity standpoint, we have a ton of room to layer in white label and private label deals, all of which would be upside revenue for us.

Okay. Thank you very much. Appreciate the color there. And then another question here with respect to the expected opening of the Brookline location. How sensitive is the 2021 guidance to that opening expected to happen towards the end of Q2. If that were to happen perhaps a couple weeks earlier. Or if that were to slip more so into Q3, how much sensitivity is built within that guide, which I know has, but it has a $10 million range in there for the opening in Brookline? Thank you.

I think the answer is low sensitivity. This is Joe again. I was actually a little surprised that the guys let me ramp up the revenue for 2021 in Brookline when I did kind of the year end projections. So, we had a slow ramp in Brookline. If Brookline does what our other stores did, or Brookline does, what Calumet City does, we could not open Brookline till September and still hit our revenue numbers.

Okay. Understood. Thank you very much for that. That's it for me guys.

Our next question is from Eric Des Lauriers of Craig Hallum Capital Group. Please state your question.

All right. Thanks for taking my questions, guys. How you're doing, Andrew?

Good.

Good. So, wanted to touch on your guys, low cost production and margins for a second here. So, obviously that's one of your big competitive advantages. That's one of the reasons you're able to outperform so many license holders in such a competitive state like Washington. And it's great to see that continue in the newer markets that you are vertically integrated in Illinois and Massachusetts. But as we look at California, and that manufacturing only asset, how should we think about those manufacturing only margins as far as on a normalized basis? And then, should we expect any initial slower ramp pace before we get into that sort of the same margin area? Thanks.

Joe and Leo, I'll let you guys dive into that one.

Yes. I'll take the first crack. So, we -- I truly believe -- we truly believe that cultivation is sooner than later going to become a commoditized agricultural crop. So, we welcome the opportunity to not have to grow our own input like we do everywhere else. We're looking at the prices as they sit on the market today. It actually fits our business model really well. We can source distillate. We can source distillate, let's say, for prices that are below what we predicted in our business model. And we feel really good about the quantity that's there. We've also began having conversations with multiple farms that are ramping up production for this year's outdoor harvest in October, and we feel good about our ability to source material at a cost below what we produce it for indoors, because California has so much outdoors, so much greenhouse and the weather and sun patterns there are very favorable as compared to other markets that we're in. So, we're feeling really good about the input. And on the derivative side, the margins are actually always better on derivative goods than they are on flower when you're talking about a competitive market, like Washington, or like what California is turning into.

Okay, great. So I guess it sounds like it could be similar to your current, I guess, similar to your Washington margins, and then potentially some room for improvement beyond there as you guys kind of scale up here. And then, with that being such a large facility, is there any sort of initial overhead that needs to be absorbed where perhaps we could see some margin compression from Q1 to Q2? Or is that you guys anticipate absorbing that pretty quickly and not having a material impact there?

We anticipate absorbing pretty -- sure, go ahead, Jake.

Yes. So there will be a kind of a sliding scale EBITDA margin with that project, Eric, as more capacity comes online. We're looking at the end of the first year of opening in 2021, across all the core quarter is about a 25% EBITDA margin from the core wall for California, blending into a high 30s, low 40s EBITDA margin as that facility really gets up and running within the first, probably 12 months.

Okay, awesome. That's very helpful. Appreciate that. And then just last one for me here. I know you guys have plenty of very exciting expansion projects on your plate already. But as we look at Georgetown, I think you guys have decent room for expansion there, I think, maybe 20,000 square feet or something. I'm sure that you guys have bigger fish to fry at the moment. But we'd just love to hear if you guys have -- our comfortable putting out any timing for -- when you guys might expand production in Massachusetts. And that's it from me. Thanks.

Karl, do you want to take that?

Yes, sure. Hi, Eric. It's Karl. Yes. So we are daily contemplating the way in which we can add assets to this kind of proven thesis that seems to be working quite well for us. Over the last, let's call it a couple of months; we've had plenty of exposure to other teams, understanding what other entities are doing. And I guess all I can say is we're incredibly happy with our team. We're incredibly happy with the thesis. We're incredibly happy with the way it's proving out. And therefore, kind of similar to that teams of Zero Dark Thirty where the CIA boss comes up and says, do your job. Give me more people to kill. Obviously, we don't want to do that. But we want more assets to kill. And so, Massachusetts is incredibly important to us there. And getting ourselves in a place we're bringing our products to the Massachusetts market at scale quicker is incredibly important. One of the opportunities that is available to us, obviously, is to build out our facility. There are others, and we're looking at all of them. And we find -- we consider Massachusetts and hitting Massachusetts harder now that the proof-of-concept is proven the way it has with the acceptance of our products, we're going after it. I can't really give you a timeline. But I can say we are going to be moving as quick as is reasonably possible for us to ramp up in Massachusetts.

Our next question is from Jason Zandberg of PI Financials. Please state your question.

Hi, Jason. How are you?

I'm doing very well. First of all, congratulations on a great quarter. Good to see that you executed well in Q4 and sounds like Q1 is along the same vein. And question what I had was just a little bit to follow up on Graeme's question in terms of gross margins. I guess your annual number just under 55% for your gross margins on accounting basis not including obviously Systemwide sales. Just wanted to know sort of what you'd expect to be able to squeeze in terms of additional margin? And how will the California business -- you've given that you'd sort of indicated that you're 1/20th of its overall potential will fall into this year? How will that affect margins? Will that be a positive impact still or will you grow into a higher margin profile as you build out the production?

Yes. I can take that one. So our Q4 margin profile and overall for the year was really strengthened on the back of much more of our revenue being put through to our vertically integrated locations. So having the two locations in Massachusetts come online as adult use in late Q3, early Q4. And then, more of our sales coming from Illinois. And those two adult use dispensaries as we left the year. They really bolster our margin. As we look to California, participating purely in a wholesale market, you don't receive as much of the benefit from being vertically integrated, obviously. So the margin profile is a bit less than our existing footprint in Massachusetts and Illinois. That said, it's a bit more attractive than it is in Washington. So just to correct something that I think, Eric had previously said in his last question. The margin profile of California does project to be better than Washington, due largely to the amount of automation that we're bringing into that market, bringing out a bit of the labor, and then just the efficiencies of scale that we can get with that machinery. So when it first starts, California, will be a bit of a drag on gross margin. That said, as you move into real production capacity, and you're able to generate more operating leverage on the existing fixed costs in that state, we do expect it to kind of still be on the lower end relative to a Massachusetts and Illinois, but certainly much more attractive than you would just think about a wholesale market in a large adult use state like California.

Sure. Okay. That's great color. Just to follow-up on California. In terms of your product placement in the California product landscape. Are you aiming to be sort of a lower priced product, a premium product, a mixture of all just sort of any color you can provide on in terms of where you expect to be in terms of that product spectrum in California would be helpful?

Sure. So our roots in our core is to provide high quality products at very affordable prices. That being said, within our brands and our product lines, we will have everything from low cost quality and affordable to high end premium, depending on the product line and what we're targeting.

Okay. And do you have a target number of SKUs at this point? I don't want to get into some details before you've actually started selling. But just some curiosity on that?

Sure. Off the bat, once we get to full capacity with the 10 brands that we decided to bring to market, we're looking at upwards of 250 SKUs.

Okay, great.

And I will say, Oh, just sorry, Jason, just a little color to add to that. This is Joe. Leo had mentioned it. We've got these 10 brands that we're really focused on. We've got about approximately a 30-brand portfolio. So we really did some pretty intense SWOT analysis, which we update every 60 days on the California market for the Top Five brands in these categories. And so, we have our initial 47 SKUs that we're making next month. We will be quickly ramping up that as Leo referred to. And we believe that we are pricing these skews to be anywhere from 20% to 40%, below the current category leader at the same quality. So it's very much a targeted surgical approach on specific brands, specific SKUs at a specific price, that from our preliminary conversations is going to lead to sales traction quickly, but we've got to, of course, execute on that.

Okay. That's great. We're very bullish on the California markets as I know you are as well. So looking forward it to the developments in there. Anyways, that's the end of my question. Thanks very much.

Thanks.

Our next question is from Jon DeCourcey of Veridian. Please state your question.

Hey Jon.

Congratulations. How are you? Congratulations on the quarter. And looking forward to following up here. Just a couple quick questions, as some good ones have already been asked. First off, can you just touch on how much -- I know, you didn't give specific color, but the Q1 record results? How much of that is kind of seeing a stimulus boost? I'm hearing from a lot of other companies that, especially on the retail side of things that there's big boost in stimulus receipt. Any color on that?

Joe?

Yes. We definitely noticed that, particularly from kind of February to March. December and January were pretty strong. They usually are retail wise. January was a little stronger than usual without stimulus. But yes, we have seen those stimulus. We have seen people spend their stimulus money at our stores last month for sure.

Okay. And then, kind of following up on that, looking at subsequent quarters. How does -- do you anticipate that the receipt of that was enough to kind of negate regular seasonality? Or would you still -- is that just a nice -- kind of a nice tailwind to start the year?

Nice. Like nice tailwind is more how I would describe it.

Okay, great. Alright. And then it kind of looking at CapEx plans here for this year. Can you remind me or us, how much is kind of left to spend on the California facility or left at this point, maybe it was in the first quarter, but how much was spent for 2021 in the California facility as well as the Brookline dispensary opening. And essentially asking, what kind of dry powder do you have to make either acquisitions or to touch on that Georgetown cultivation expansion.

I can take that one. So, when you look at the 18 and change on our balance sheet in cash, approximately $10 million of that was earmarked for California. Where we stand today, we've got that balance down to about $4 million left to spend in California. Our Brookline facility will cost about $750,000 in CapEx. And then, we have another $1.5 million in CapEx. Just in basic upgrades to our Georgetown cultivation and production facility. And just to add to that, we are also generating positive operational cash flow each month for the ability to us to either finance additional CapEx projects, or as you alluded to potential M&A acquisitions as well.

Okay. And then, one final question for me is, any issue in kind of walking in flower for the California production facility? Is that going to be kind of a challenge as get things up and running like governor on growth or anything like that? Or is that not really an issue?

Sure. I can take that one. So flower has not been an issue yet. And in full transparency, flower is the first input that we're sourcing and that we're interested in. There's an abundance of categories we fully tested, clean distillate, that's 90% plus THC and potency that's floating around the market at very favorable prices and in large quantities. So, we feel very confident about being able to purchase and have delivery on day one of a ton of input materials. While we shore up the supply agreement contracts for future flower and trim that we've been working on for the last several months here.

Okay, great. That's it for me. Thanks for taking the questions, guys.

Thank you.

Thank you.

Our final question is from Doug Cooper of Beacon Securities. Please state your questions.

There he is.

Hi. Good afternoon, guys.

Here he is. How you're doing?

Congratulations. Good man. Congratulations on the Q4. Just hasn't been mentioned really a lot here. But the Big Daddy project. So, you announced, obviously a couple of weeks ago, the fundings in place, $45 million for the phase one build out, 6.5 million for the land. What was it? Leo, what did you say the timing was? When the shovels go in the ground? And when would you expect that to come online?

We're extremely close to finalizing everything until allow us to put shovels in the ground. And we're looking at 18 months from that point. At this point, we're looking at end of Q4 next year.

So, end of Q4 2022. And what are you assuming pricing then what it is now? What kind of revenue would that 65,000 square foot, I guess, canopy and 70,000 square foot manufacturing? What kind of revenue would that generate you think?

Jake, do you want to take this one?

Yes. So just speaking in round numbers. With that first phase, the facility, we think it’s going to be additive in the neighborhood of $100 million. It manifests itself in one of two ways, either through additional product available for sell through in our two dispensaries or in the balance of that product being put to the wholesale market

What would be number after that? I mean, you'd keep that on or what would you do that?

Sorry, could you repeat that? Doug, I don't know if it cut out just for me or anyone else?

Just your existing cultivation in outdoor, would you'd keep that the 9000 square feet and this would be additive? Or would you just move everything into big data?

We will move everything over.

Okay. Looking forward to that obviously. So for those of us in the call and when you build it out to the scale at the end of phase one. How does that compare the existing size of the facilities of the other MSOs out there right now?

Joe, do you want to take a crack at this one?

Yes, I -- Well, Doug, we know they're expanding. So, kind of our understanding is that no one had kind of was cultivating in greater than 100,000 square feet of canopy kind of at the end of the year, but that more canopy was coming online every month. So if we had to kind of predict what people are going to be at by the end of Q4 next year. I mean, we are thinking, we're kind of anticipating that at least five or six folks have kind of gone out to the max capacity at that time.

I guess, I'm just trying to see what -- sorry Joe, I was trying to see where you land in the grand scheme of things in Illinois at the end of this year, this sort of ?

No. I don't think anyone -- so, I mean, big differences are greenhouse versus indoor, right? So I don't think -- I think we would be the premier indoor flower producer in the states, right? All the other big boys, all the max licenses are all greenhouse, all rural parts of the state. So if we can execute, we have an opportunity to really carve out a solid niche as the premier flower producer. And then, we'd like to think that our on the production side will repeat what we do in other markets and be extremely -- our downstream products will be extremely competitive too. But the biggest differentiator has to be -- we've got indoor flower, they are growing and kind of greenhouses in different parts of the state.

Okay. And that $45 billion that you've got funding for is that sufficient for phase one, do you think or would? Or would you need more capital?

Sufficient for the phase one? Yes.

Okay. And my final question, CBD. Leo, you indicated, you are disappointed. So what is the plan? Is it is this when you're when you're looking into the guidance for fiscal 2021, is that forecast to be a breakeven products additive to EBITDA or at this point is it? Is it a drag on earnings?

It’s forecast slightly additive, the EBITDA in 21? Doug, I'll let Leo and or Joe give talk any more specifics about kind of the direction of that business, but with respect to its contribution to 21 guidance, it's pretty nominal from both top line and EBITDA standpoint.

Yes, we're watching it closely, yeah, sure, what we're watching closely, you know, we've been disappointed with what we thought the potential the business had. And that being said, we're not losing money on the business. And we're keeping a very close eye on where it goes and how this new marketing partner is able to provide a different angle and we're going to keep a close eye and make sure that the business stays positive. And as we move forward, we figure out which direction we want to push it in.

Okay, great. Thanks, guys. That's it for me.

Thanks, Doug.

We have reached the end of the question-and-answer session. And I will now turn the call over to Leo Gontmakher for closing remarks.

Thank you guys for joining. We're extremely excited about the growth of our business. And we look forward to sharing our Q1 results after the quarter closes. Thanks again. Thanks, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.