Greetings, and welcome to the 4Front Ventures Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host 4Front Ventures Interim Chief Financial Officer and Chief Investment Officer, Mr. Andrew Thut. Thank you. You may begin.

Thank you, operator, and welcome, everyone, to 4Front Ventures earnings call for the second quarter of 2021. I'm joined today on the call by our CEO, Leo Gontmakher; President, Karl Chowscano; COO, Joe Feltham; and Jake Wooten, our EVP of Finance. Before I begin today, I'm obligated to remind everyone that during the course of this conference call, management may be making some forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These results are outlined in the Risk Factors section of our filings and our disclosure materials. Any forward-looking statements should be considered in light of these factors. Please also note a safe harbor, any outlook we present is as of today, and management does not undertake any obligation to revise any forward-looking statements in the future. So with that out of the way, let me give you a very quick overview of the call today. We have a lot to get through, and we're excited to share recent developments as our company continues to produce strong results while setting the stage for growth to continue well into the future. As always, I'm going to start with reiterating our thesis and strategy. Then I'm going to provide some color on our second quarter results and an update on the significant progress we've made in the business. I'll then hand the call over to Leo, who will go into a more detailed review of our operational trends, along with highlighting some milestones we achieved in the quarter as we continue to build scale and momentum across the business. We'll conclude with a question-and-answer session, the entire management team will be available for any follow-ups. So let me start, like I usually start with a thesis on the industry as a whole. We firmly believe that we're entering the golden age for the cannabis industry. It is the pace of state legalization accelerates and reforms on the federal level appear to be increasingly inevitable. From a pure investment standpoint, anticipated reforms and banking law should be a game changer, leading the way for cost of capital to continue to come down with financing from commercial banks and eventually access to U.S. exchanges and broad-based institutional ownership in the industry. The growth fundamentals of U.S. cannabis remain robust as we witnessed the emergence of a massive secular growth industry. It's still very much in its nascent stages. At 4Front, we believe the sweet spot in the value chain in this industry is low cost, high-quality production and distribution of cannabis consumer packaged goods. For the past 7 years, 4Front facilities have established a dominant position in Washington State with a full line of products, which are distributed to over 260 retail locations in any given month across the state. Our facilities are the number one edibles manufacturer and the number two flower producer with overall number two market share in Washington, outperforming over 600 license holders in one of the most competitive cannabis markets in the world. All achieved while maintaining very attractive margins and profitability. Our investment thesis, as I always say, is really simple. We're replicating these tried and true production capabilities, in the large and nascent recreational markets of Illinois, Massachusetts, Michigan and California. And all in, we currently serve an addressable market of over 76 million people. We're pleased to share today important developments as we deliver on this thesis. One, our focus on execution continues to take hold in our core business, both in terms of strong current performance and setting the stage for robust growth into the future. Momentum from Q1 carried into Q2, further increasing our conviction in both our business model and consumer response to our products. Our operations and construction teams have done an incredible job of controlling everything that they could control as we execute on our strategy of being a scaled finished goods producer in every market we enter. As a result, we have two critical projects, Mass and California that were completed under budget and on time, and we prepared to break ground tomorrow on a third project, what we've been calling Big Daddy in Illinois. In step with the dramatic increase in Illinois retail licenses and consumer demand in that state. These meaningful milestones will lay the foundation for continued growth into 2022, 2023 and beyond. While there is always unpredictability on the timing of final licensing in the cannabis world, we are pleased to be building -- or opening our third Massachusetts dispensary this Saturday, and anticipated a terrific opening weekend in the heart of the Boston University corridor. While Leo will get into further detail on our progress in California, we are pleased to share that our fully automated production facility in Commerce is clearing the final hurdle to licensure, and we couldn't be more excited to enter that market with disruptive low-cost production and a much deepened relationship with Navis, the number two distributor in the state. We have signed an additional agreement where Navis will lease 20,000 square feet of space in our commerce facility, which will not only lower our cost, but allows us to further our working relationship with this partner. We can't wait to bring our proven products and brands to market quickly once we split the switch in California. Point two, Q2 '21 system-wide pro forma sales were $34.4 million, an increase of 10% sequentially over the first quarter of '21 and 85% year-over-year. All retail locations across the portfolio continue to perform above our expectations, a trend that has continued into Q3. Recreational sales in Massachusetts continue to show strong growth and we have sufficient inventory to supply our next leg of growth with the opening of Brookline. Illinois continues to see strong sales trends as well, particularly in our Kelacity location. We're incredibly thrilled to be sub a scaled producer in the state with our Big Daddy project, which will officially break ground on tomorrow. The first phase of which will have 65,000 square feet of flower in Canopy, and 70,000 square feet of production. In the meantime, our expectation of wholesale will contribute to our results in the state as we continue to dial in our recently expanded existing growth. Point three, Q2 marked our fourth consecutive positive adjusted EBITDA quarter, posting $7.5 million in adjusted EBITDA or 22% adjusted margin, which grew 27% quarter-over-quarter. We experienced a snapback in margins as expected in Q2 with sales from our expanded facility in Illinois flowed through the business. We expect margins to expand meaningfully as we continue to fine-tune our facilities efficiencies as California comes online and we begin leveraging those costs, and we continue to leverage our SG&A line. This business is positioned for step function margin expansion as we exit this year and into 2022. Point four, our balance sheet leading Q2 was in solid shape. As of June 30, we had $11.6 million of cash and $46 million of related party long-term debt, which doesn't come due until May 2024. Cash flow from operations was positive with offsets of $4.6 billion in CapEx, mostly around finishing construction of the Commerce facility and building up packaging inventory in anticipation of our start in California. And despite the apparent disappointment in the capital markets around the lack of progress of banking reforms this year, I've never felt better about our availability to access reasonably priced growth capital. To that end, we are thrilled that Navis Capital has continued its support for from by providing us with a term sheet to lead the financing of a proposed accretive acquisitions to strengthen our position in a key market as the pace of consolidation in the industry picks up. As we move towards signing the definitive agreement, this acquisition once closed, would solidify a scaled position in this core market and would be meaningfully accretive to our EBITDA. Strong operators looking to fund smart and accretive acquisitions have never had better access to fair, minimally dilutive capital. And while the public equity markets aren't paying much attention to U.S. cannabis right now, I can assure you that the private markets are, which brings me to my fifth point and possibly one of the most important takeaways we would like you to have from this call. I think that we're on the cusp of one of the most active M&A environments I've seen in my 7-plus years in the industry. While the timing of movement on the federal side is up for debate, the inevitability of it doesn't seem to be. We will reiterate that our U.S. cannabis remains a state-led story that continues to deliver. The industry is a bee hive of activity as folks move to position themselves properly ahead of legalization and federal rule changes. We have consistently stated that we aim to be a larger company. As a management team, we are somewhat agnostic about whether we maximize value for our stakeholders by continuing to augment our growth with accretive tuck-in acquisitions, or by being a part of a larger platform. In the very near term, we see ample opportunities for accretive acquisitions to bolster our market presence. As we look beyond with just the assets we currently have. Next year, we will have scaled proven operations in Massachusetts, Washington, California, Illinois, with the potential to add a de novo license in New Jersey, all of which would make us a valuable piece in a larger puzzle -- in a more strategic puzzle. We are seeing these opportunities, and we are looking at them all. Lastly, our operations and construction teams have been phenomenal. We are effectively on time and under budget with all our expansion projects, and this is critical as these projects set the stage for future growth. Leo will speak specifically to our imminent and exciting entrants into the California market, along with the opening of our third Massachusetts retail location. We also announced our plan to break ground on our exponentially expanded cultivation and manufacturing presence in Illinois. We're bringing our scaled cultivation and production capabilities to the one of 20 cultivation licenses in that state that allow us for upwards of 210,000 square feet of flowering canopy. We will officially break ground on the project tomorrow and are ready for Phase I to come online next winter with 250,000 square foot building, with 65,000 square feet of flowering canopy and 70,000 square feet of production. So our thesis is proving out. We are successfully introducing the brands, products and best-in-class operational SOPs from Washington into new markets. The feedback we've gotten from our customers in Mass and Illinois has been fantastic. And now we embark on our much anticipated entrance into California, the largest cannabis market in the world. We are pleased with how our business is performing, setting us up for step function operating leverage as we continue through 2021 and into 2022. Having set that stage, I'll turn the call over now to Leo Gontmakher, our CEO, who will build a bit deeper into our assets by state and provide us additional color on our near- and medium-term plans. Leo?

Thank you, Andrew, for updating us on the strength we see in our business and in the industry. As mentioned, in the second quarter, we continued to build on the strong momentum we saw in Q1. That momentum really began in early 2020 and is a direct result of the focus, dedication and hard work of all our employees. Our maniacal focus on execution is working as intended and is showing great initial results. We're already off to an excellent start to the third quarter. We continue to make tremendous progress as the company, streamlining our business, improving cost structure and leveraging the structural cost advantages that our facilities in Washington developed to scale profitability in the other states within our license portfolio. To reiterate, our investment thesis states that the sweet spot for outsized value creation in this industry is around the low-cost, high-quality production and distribution of cannabis consumer packaged goods. Our excellent Q2 results and our steady growth quarter-over-quarter show that our strategy of replicating low-cost production methods can rapidly scale in the most attractive markets in the country, and we're just getting started. Let's begin with Massachusetts. We're happy to report the continued success and profitability in Massachusetts following the initiation of adult sales in the state in late 2020. We are seeing a pattern of positive reception on the ground from our customers and our in-house brands are rapidly outpacing the previous brands that were being sold out of the Georgetown and Wester locations. This is a great sign, and we continue to see the sales climb. After minor permitting delays, Mission Brookline, our third adult-use dispensary in Massachusetts will be opening this weekend. I'd like to thank our team once again for their fantastic job of pushing the project forward and being on top of everything under our control. As Mission Brookline ramps up, we aim to further expand our Massachusetts footprint and expect performance to increase as our high standards, low-cost cultivation and efficient production methodologies begin to scale in this challenging but attractive market. Illinois continues its strong pace. Best highlighted by our recent announcement of the closing of the first phase of the build-out of our highly anticipated cultivation and production facility, we call Project Big Daddy in Matson, Illinois. We're thrilled that construction on Phase 1 will officially begin tomorrow and can't wait to come online in Q1 of 2023. As we break ground on this up to 558,000 square foot cultivation and production facility, we have a tremendous amount of confidence that our scaled production techniques travel well, and Big Daddy will be yet another significant continued validation of our thesis. Phase 1 of the Matson facility will have a flowering canopy that is 30% larger than our existing facilities in Washington combined. And we expect yields at a Big Daddy to be closer in line with our more recent and more efficient Massachusetts cultivation operations, producing over 400 grams per square foot. The 4Front team and I could not be more excited to bring our scaled low-cost cultivation and manufacturing to Illinois and compete head-to-head with some of the largest MSOs in this competitive market. In California, our fully funded state-of-the-art 170,000 square foot manufacturing only facility in Commerce is now complete, and operations are expected to commence later this month following a brief delay in the local regulatory approval process. Once operational, our Commerce facility will provide our suite of high-quality branded products to license dispensers throughout the state, and we expect it will soon become the premier multiproduct manufacturer in the country due to its scale and efficiencies. Our first suite of available products will include gummies, hard candy, caramels, fruit juice, mint, tinctures, vapes and infused pre-rolls, including brand favorites like Marmous, Pebbles, Chewy's, Hybris, Rider and perpsticks. Our ongoing partnership conversations to fully leverage the scale of this facility have been incredibly excited about what's to come. In that vein, our signed agreement with Navis, a leading distributor of cannabis products in California covering 99% of licensed retailers in the state at more than 750 dispensaries, gives us full confidence to provide statewide last mile coverage of our products to retail locations on day 1 of production. This, in addition to our 5 person sales team that has been boots on the ground since the beginning of the year, including dedicated NORCAL and SOCAL East. We've had very positive response in the over 800 retail stores contacted so far, several dozens of whom have already toured our facility in Commerce. Everyone involved is chopping at the base to get going. The facility was completed on time and on budget. But as mentioned, we saw a delay in the issuance of our certificate of occupancy because of multiple rounds of comments by the L.A. County Fire Department. This department has seen multiple legal and legal extracted explosions over the years, including a blast in 2020 that injured 11 firefighters. So it's understandable that they've taken extreme caution with the facility that has the size and scale of Commerce. We submitted our fifth round of comments back to the department on August 3 and are optimistic their inspection is coming to a close. All other departments have signed off on construction, and we expect our certificate of occupancy from the Commerce building deferment within days of the fire department's approvals. With the combination of the relocated team from Washington, complemented by the additional hiring of an extremely experienced team previously hailing from Yoplait and the leadership of Josh Crane, our VP of Operations in California, we're thrilled with the unprecedented progress that's been made thus far on the industry's most complicated kitchen line to date. Moving on to Washington. Washington remains relatively stable with wholesale prices having rebounded from their lows in 2018. Our facilities have seen very consistent performance despite having more outdoor products in the market causing us to pause on intake price. Demand has remained robust, though, and we continue to hold serve, which is a testament to the market reception for our products and the focus of the team in Washington. In Michigan, we're pleased with how our team navigated a very stocky supply chain and increased competition. Downtown Ann Arbor was not the same in 2020 as years pass due to closures downtown because of COVID-19 and no University of Michigan students for most of the year. Even though we don't have the same purchasing power as some of the other retailers in the state, the relationships the team has made over 8 years in business, were able to carry us last year and beyond. Availability of product has improved mightily over the last year, however. And we look forward to students being back on campus, hopefully, this fall for the first time since we've been adult use. College football weekends being back in full swing have us feeling good about sales ramping up as we head back into September. As a management team, we strive to ensure that we are allocating all of our resources, focus, time and money into our highest return opportunities, of which we have many. While we took swift and decisive action around our noncore pure ratio CBD business to ensure we lost no money and we were not counting on any meaningful profit for this business this year. It is becoming increasingly clear to us that focusing all of our energy on our myriad of higher returns, project is appropriate at this time. As Andrew mentioned in his earlier remarks, it's a very attractive M&A market right now for all things cannabis. I think it'd be appropriate to assume that Pure Ratios is a part of our near-term M&A discussion as we continually refine our portfolio to maximize returns for shareholders. To conclude, since early 2020, we have worked to focus our business model on replicating our large-scale, low-cost cultivation and production capabilities into large and nascent recreational markets. We couldn't be more pleased in our efforts to date executing on that plan. With the footprint and capabilities we are putting in place, we are increasingly confident in our ability to drive sustainable growth and capture a significant share of every market we enter. 4Front is very well positioned to be a major part of the cannabis landscape for years to come either as a standalone or as part of a bigger platform. We think it's going to be an eventful end of the year for our company. We're excited to add to our strong business momentum with our California and Brookline openings, establishing our presence in a new key market and continued improvements in our other core states. As for guidance this year, we provided a range of system-wide pro forma revenues of $170 million to $180 million and adjusted EBITDA of $40 million to $50 million, which we knew would be back-end loaded. We're reiterating that range today. Additionally, although we're not guiding for 2022, we are pleased to report that we have confidence in a stronger '22 ramp than our previous estimates. With our projects continuing to ramp up, it seems a good time to remind investors of what we're playing for. We believe we have at least a $650 million revenue opportunity and a $250 million adjusted EBITDA opportunity in the licensed markets in which we already operate. And we're taking our scalable efficiencies even deeper into the states we currently have. We can't wait to share our continued progress with you following the close of Q3. And with that, I will now turn the call over to the operator to open the lines for Q&A.

Our first question today comes from Graeme Kreindler with Eight Capital.

Congrats on the quarter here. I wanted to ask a question, Leo made comments about reiterating the guidance and having a stronger back half ramp. So just looking at some back and pin math here, it looks like you got to average about 30% sequential growth over the next 2 quarters to hit that guidance range and understanding it's going to be a higher ramp than what we just saw here in the quarter. But with respect to what you're modeling in on that guidance. Just curious about the split on the specific levers. You have Commerce coming online, you have Brookline coming online versus what already sits in the portfolio. How much of that is new assets really coming along line and hitting the stride versus the existing portfolio continuing to get more and more dialed in?

I'll turn that over to Jake Wooten.

Graeme, so in answering that question, we do still expect strong growth from our existing assets in Illinois, Massachusetts, Washington is relatively stable as we've alluded to. However, as I think you're looking into -- there is step function growth anticipated from the introduction and the onlining of the Brookline dispensary as well as the California location. So I'd say, it does tend to -- the gap between kind of where today's run rate is and the guidance to the end of the year is largely dependent on the lining of those assets. We feel very confident in those numbers and where they're tracking, particularly with the near-term openings, Brookline next weekend and California imminently. But it is -- it does index into those additional assets coming online.

Okay. Understood. I appreciate the comments there. Then just to pivot here, question regarding the remarks made for M&A. So congratulations on the announcement here that you've secured some financing. I want to get a better sense of how imminent a transaction is for you guys? And to the extent that you can disclose -- any details on the scale of that transaction, the stage of where it is in its business and where in the value chain as well as geographies, that would all be appreciated to get an idea of if that's something that's going to expand the portfolio a little broader or perhaps deepen it in some of the core markets here?

Yes. Thanks, Graeme. I'm going to turn this over to Karl to talk specifically about what's happening in the very near term. But the general comment on M&A, we've been talking in this industry for years about consolidation and when will it come? And I would say, from what we're seeing, there are a lot of players that are even nontraditional players who are trying to position themselves for the coming legalization in the U.S. So not just MSOs, but some of the other types of players that you would think out there, including the LPs from Canada. So very live conversations from the broader, bigger picture consolidation. But I'm going to turn it over to Karl for the specific near-term opportunity. Karl, you there?

Sorry, guys. I'm afraid my connection might be bad. I was wondering, can you hear me now?

We can.

Okay. Great. Apologies for the delay. Graeme, I heard most of your question. Some of it broke off, but what I assumed you're asking for some of the meat on the bone for the details around this current opportunity. And all I can say is we are very close to getting ourselves to -- get ourselves through due diligence and into execution of definitives, but we have not yet executed definitive so we are hesitant to go into too much detail. Here's what I can tell you. I think since the end of Q3 last year, we've been identifying kind of some excitement about how we built our engine. I think is the best way to put it. And the traction that our products are getting in our markets and our desire for '21 to be able to find strategic fuel, I guess, to add to the engine in our limited license markets. So without getting into any great detail, we have been kicking a lot of tires and we've been doing our homework over the first half of the year. And we're pretty excited about an opportunity that we see in front of us, and we are striving and running full speed towards getting ourselves to an execution of definitive, which is when we'll be able to provide a lot more details. It's an accretive transaction. It's a transaction we're excited about. I think we're all -- we're equally excited about the support that is being shown to us through our significant and long-term investors, maybe in particular, as you could see in the announcement committing to lead in the financing of the cash portion of the transaction. I can tell you that the transactions have cash, how stock basically pretty much close to that and the financing arrangements that we've had in addition to the Navis lead, lead us to a more traditional real estate type financing on anything that's left over after the Navis lead and really not a dilutive or minimally dilutive financing of the cash portion of the deal. I anticipate we're going to be executed in definitives, probably within 3 weeks, maybe 3 and change. And everything due diligence is very positive. So I don't know if that's enough detail for you, but it's almost probably all I can give you.

Okay. Understood. Appreciate that, Karl. Then just last one before I hop back in the queue here. Just with respect to the capital position, as you say, wondering if you could outline the CapEx plans for the back half of the year here as you're wrapping up some major capital projects.

I'll turn that over to Jake as well.

Sure, Graeme. So I think as we previously stated on calls, our CapEx in 2021 was quite a bit front-loaded into the first half of the year. Getting commerce completed with substantially most of our plans for this year. That's basically done. Getting Brookline completed the same. We'll have kind of some nominal maintenance CapEx showing up in Q3 and Q4 in our cultivation facilities in Massachusetts but nothing that's really -- nothing that's meaningful relative to what we showed in the first half of the year. The Illinois project I should caveat will -- a lot of that CapEx is going to be occurring off balance sheet of cash flow from 4Front standpoint will start to manifest itself in the form of lease payments out as we draw down and spend the money, but it won't kind of show up in the typical cash flow from investing portions of our cash flow statement.

At this time, there are no further questions. It looks like we actually have one more question coming from Colin George from Haywood Securities.

Congrats on the quarter, guys, just feeling in for Neal Gilmer today. I just have one quick question here. You made a comment about how you expect margins to continue to materially expand and actually step up in the future? Do you expect there to be some sort of volatility or ups and downs as that goes on as you bring in the new Commerce facility online? Or is it -- would that have any drag in the short term to optimize in the long term?

Jake?

Yes, I can take that one. So we do expect -- when Commerce comes online, there to be a slight ramp period associated with slightly lower margins than it will have that maturity. That said, any smaller margins from Commerce, California facility will be outweighed by further contributions from Massachusetts. As we get our third location up and running, Massachusetts will start to meaningfully contribute more and a higher percentage of both revenue and gross profit. So those higher margins should outweigh the rollout of Commerce, as well as continued growth of our Illinois facilities. So yes, if that answers the question.

Yes. No, that's definitely helpful. Help me get a better understanding of that. And I think my other questions were answered there prior. Once again, congrats on the quarter and looking forward to the growth here in the second half of the year.

Thank you.

Thanks.

And at this time, I'm showing no further questions. So I would like to turn the call back over to Leo Gontmakher for closing comments.

We're extremely excited to move the company forward and what's ahead of us. I'd like to thank all of you for joining. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.