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Edited Transcript of FFNT.CD earnings conference call or presentation 31-Aug-20 9:00pm GMT

Q2 2020 4Front Ventures Corp Earnings Call

Sep 2, 2020 (Thomson StreetEvents) -- Edited Transcript of 4Front Ventures Corp earnings conference call or presentation Monday, August 31, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Fisher Thut

4Front Ventures Corp. - CIO

* Jake Wooten

4Front Ventures Corp. - Finance Director

* Joe Feltham

* Karl Chowscano

* Leonid Gontmakher

4Front Ventures Corp. - CEO & Director

* Nicolle Dorsey

4Front Ventures Corp. - CFO

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Conference Call Participants

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* Doug Cooper

Beacon Securities Limited, Research Division - MD and Head of Research

* Eric Des Lauriers

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Graeme Kreindler

Eight Capital, Research Division - Principal

* Neal Gilmer

Haywood Securities Inc., Research Division - Research Analyst of Special Situations

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Presentation

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Operator [1]

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Greetings, and welcome to the 4Front Ventures Second Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Andrew Thut, Chief Investment Officer. Please go ahead.

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [2]

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Thank you, operator, and welcome, everyone, to 4Front Ventures' earnings call for the second quarter of 2020. Understand today that there has been a glitch with some of the newswires in terms of getting our release on every wire because of an uploading problem. So we -- our release is on our website at www.4frontventures.com, and our materials have also been filed on SEDAR. So I apologize for any disruption there.

Before I begin the call, 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 sections of our filings and our disclosure materials. Any forward-looking statements should be considered in light of these factors.

Please also note that 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 welcome, everyone. And with that out of the way, let me quickly introduce the management team today. On the phone with us, we have Leo Gontmakher, our CEO; along with CFO, Nicolle Dorsey; Jake Wooten, who is our EVP of Finance; Karl Chowscano, our Interim President; and Joe Feltham, who is our Senior VP of Operations.

Let me give, as always, a very quick overview of the call today. As always, I am going to start the call reiterating our thesis and strategy. Then I'm going to provide some color on our second quarter results and an update on the significant strides we've made in our business. I will then hand the call over to Leo, who will go into a more detailed review of our business trends, along with highlighting the objectives and milestones we're expecting to achieve in 2020, as we set the table for step-function growth and operating leverage that we expect in 2021. We'll conclude with question-and-answer session, where our entire management team is available for any follow-up.

So starting on Slide 4, as I always do. I know we have a lot of new investors today on the call that are new to 4Front story. So I'd like to start, again, by outlining 4Front thesis and what we, as investors, are playing for. The business fundamentals in the U.S. cannabis industry are accelerating. And they are doing so in the face of a global pandemic that has caused the U.S. economy to dive into one of the deepest recessions in generation. And what I think we are seeing here and witnessing is the emergence of a massive secular growth industry, that's still very much in its nascent stages.

Here at 4Front, we believe the sweet spot for outsized value creation of this industry is really around low-cost production and distribution of cannabis consumer packaged goods. For the past 6 years, 4Front has created a dominant position in Washington State with a full line of products, which are distributed to over 260 retail locations in any given month.

In Washington, our facilities are the #1 edibles manufacturer and the #2 producer of flower with an overall #2 market share, 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.

So our thesis is very simple. We're replicating these tried and true production capabilities, supported by our retail stores in the large and nascent recreational markets of Illinois, Massachusetts, Michigan and California. All in, we serve population addressable market of over 76 million people.

So we're pleased to be able to share today important developments as we execute on this thesis. We are seeing what we refer to internally as a maniacal focus on execution, taking a hold in our business. And the trends have strengthened so far into the current quarter, where we see meaningfully -- meaningful acceleration in revenues, which we expect to continue for reasons that we'll get into in a moment.

For second quarter of 2020, Systemwide pro forma sales, excluding divestitures of all noncore assets, was $19 million, an increase of 1.3% over the first quarter of 2020. Revenues grew sequentially despite what we estimate to be as much as a 10% negative impact from the closure of our dispensary in South Chicago in June due to the damage from looting during the unrest. That store reopened on July 31, and we're pleased to report it's building towards its preclose levels.

We're also very pleased to report that the company generated positive operating cash flow in the month of August, which is within our stated objective of achieving this in the second half of the year, but this was definitely ahead of our internal projections.

From an adjusted EBITDA standpoint, we posted a slight loss in the second quarter and expect to break well positive in the current quarter. Our tight cost controls and accelerated revenue position the company well to drive strong operating leverage as we move into the back half of the year and into 2021.

Despite being off-line in the month of June and July in Illinois, we continue to see strong trends in all of our markets. As we finished the quarter -- the third quarter looks to the -- excuse me, as we finished the quarter and looked to a strong finish to the year, which sets the table for 2021. We are executing well and are seeing accelerated sequential revenue across the entire portfolio. Recreational approvals in Massachusetts, a meaningful uptick in our Washington operations and coming expansion in Illinois provide additional tailwinds to these trends.

The company also expects to conclude the divestiture of activities of noncore assets imminently with the sale of our final asset in Maryland. We expect the closing to occur in the next couple of weeks here in early September.

Our focus on execution is manifesting itself, not only in sales trends and expense controls, but also in keeping our expansion projects on time and on budget. This is critical as these projects set stage for future growth. Our fully funded expansion plans for our Illinois and Massachusetts production facilities as well as our second Illinois dispensary in Calumet City, remain on track for completion in the fourth quarter of this year. All 3 of these projects position us to capture growing market share in 2 of our key geographies.

Finally, we remain in progressive discussions to further strengthen our balance sheet, increase our financial flexibility by executing to our refinancing and/or sale leaseback of our facilities in the Washington state. We remain actively engaged with several parties and expect to be able to have some things to say on this front in the not-too-distant future.

Moving to Slide 6 and a deeper overview of the second quarter. Our Systemwide pro forma sales, excluding the divested noncore assets, grew 1.3% sequentially to $19 million. As I mentioned earlier, we estimate growth was impacted by as much as 10 percentage points due to the closure of our dispensary in South Chicago in June. After refurbishing and making some security fortification, the store has reopened on July 31, and we're pleased to see it building towards its preshutdown level.

Speaking specifically to the second quarter, our Massachusetts revenue grew more than 50% over the first quarter of this year, which did so while serving the medical market only. Our strategy of introducing our successful products and brands from Washington into new markets is demonstrably gaining traction. And the feedback we have gotten from our customers in Massachusetts has been fantastic.

In Michigan, our Ann Arbor dispensary showed 12% sequential growth as the market there, which turned on for recreational sales in December, continues to mature, and our Washington assets grew 9% in the quarter and continue to benefit from improving pricing as capacity leaves that market and the return of base sales.

As we sit here today, 2 months into the third quarter, we have seen sales across the platform continue to inflect upwards. Our Georgetown, Massachusetts location began serving the adult-use market on August 14, our first location to be approved in the state. We are very pleased with the steady progression of the sales ramp since launch, punctuated by a record weekend leaving the month of August. We expect to be able to make an announcement about our Worcester location, entering the adult-use market in the very near future as well, which could provide further tailwind to growth in the state.

We have also seen sales climb back towards pre-shutdown levels in South Chicago since our reopening on 31st, as I mentioned. We expect Illinois to be a large driver of our growth going forward and look forward to opening our second location in late fourth quarter in Calumet City, which will layer on additional growth as we exit the year.

Last, we've seen our business in Washington gain momentum well -- as well, showing record sales in the month of July, followed by similar strength in August.

Along with sales acceleration, we're also seeing the benefit of our operational focus and the rightsizing of our cost structure. Since late last year, we've reduced our go-forward corporate overhead expense by over 50%. Through reductions of headcount and streamlined operations, the company has generated positive operating cash flow in the month of August. This was several months ahead of our internal goals and speaks to the prioritization and intense focus we have on driving profitable growth.

Our adjusted EBITDA in the second quarter was a loss of $400,000 as compared to a loss of $2.8 million in the first quarter and $5.8 million in the fourth quarter of last year. All of this sets us up for step-function operating leverage as we leave this year and move into 2021.

Moving on to Slide 7. All of our construction projects, which are fully funded, remain on plan, on budget and poised to contribute to our growth next year. As a reminder, we're currently tripling our flower canopy in Illinois for roughly 3,000 square feet to 9,000 square feet as well as upgrading our lighting and our Georgetown mass cultivation operation, which is expected to increase our production by over 50%.

As we announced in the press release of July 30, we received approval for special use permit in Calumet to open our second Illinois dispensary. All 3 of these projects are expected to be completed in the fourth quarter.

As I mentioned earlier this year, the company announced the sale of noncore retail assets in Arizona, Arkansas, Maryland and Pennsylvania. These transactions not only improve the liquidity of our company, but narrowed our operational focus to go deep into huge addressable markets. We expect the final transaction in Maryland, which has been waiting final regulatory approval, closed in the next couple of weeks.

Last, the company remains in progressive discussions to strengthen balance sheet through a finance sale leaseback of its facilities in Washington.

So having set the stage, I will now turn the call over to Leo, who will delve a bit deeper into our assets by state and provide additional color on our near- and medium-term plan. Leo?

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Leonid Gontmakher, 4Front Ventures Corp. - CEO & Director [3]

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Thanks, Andrew. Andrew did a terrific job of updating you on the strength we see in the industry and our business. Summer has been particularly strong, and we're seeing 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 founded in Washington state. Five months ago, our Board appointed me 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 brought to the role a culture that, as we internally say, is maniacally focused on execution, doing exactly what we say we're going to do.

Since March, we've made tremendous progress as a company, rightsizing the cost structure, streamlining our business and pressing deeper into our core states by leveraging our structural cost advantage, that we developed in Washington into the rest of our license portfolio. Recall our investment thesis, we believe the sweet spot for outsized value creation in this industry is really set around low-cost production and distribution at cannabis consumer packaged goods.

Our facilities in Washington are the #1 edibles manufacturer and the #2 producer of flower, with an overall #2 market share in the high single digits, 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. Our thesis is pretty simple. We're replicating these tried and true production capabilities, supported by our retail stores in the large and nascent recreational markets of Illinois, Massachusetts, Michigan and California.

The question is, how is that thesis playing out for us so far? Due to low-cost cultivation and manufacturing methodologies, products and brands that had such success in Washington scale to other markets. While it's relatively early for us in these other markets, we're extremely pleased with the results that we're seeing 1 year into the business.

Let's start in Massachusetts. It's been a year since the opening of our cultivation facility in Worcester, which was started using the growing methodologies, SOPs and genetics developed over the years in Washington. Since launch, we've experienced no failed harvest and demonstrated annualized yields of over 430 grams per square foot, which is very much in line with our Washington facilities.

In our acquired Georgetown facility, we continue to make improvements at the growing environment and are in the process of upgrading our lighting, which we expect to drive yields in line with what we're accustomed to seeing in Washington and now in Worcester.

We've introduced all our Washington brands to the Massachusetts market with the exception of our [Hubris Ritu] brand, which we expect to launch in the next few months. The reception for our products has been fantastic, and we expect to continue building momentum as word-of-mouth spreads.

We've implemented our extraction methodology and strategies, which enable consistent, repeatable feedstock for all our products. Introduced our production and packaging methods to NA, which helped greatly enhance throughput and reduce labor. We look forward to continuing momentum in Massachusetts with the expected opening of our Worcester location for adult-use and a third location in Brookline in early 2021.

In Illinois, the progress we've made is equally encouraging. Joe Epperson, who formerly led our flower team in Washington, moved to Illinois and took over leadership of our growth facilities in January. And since that time, we've seen the yields in Elk Grove improve from 250 grams per square foot to right around 350 grams per square foot as we sit today.

Our flower strains have been very well received in the market, along with our recently introduced mini-buds value brand. We have several upcoming milestones, which are expected to drive sales growth. We're back on track with the reopening of our South Chicago dispensary. Furthermore, as product becomes more available in the wholesale market, we expect to see retail credit upwards for the foreseeable future.

Our calumet City, Illinois dispensary is also on track to open in Q4 of this year. This, together with our project that's currently underway to expand our Illinois cultivation facility, tripling our production capacity, is expected to strengthen our foothold in the state and paved the way for both top line and bottom line growth.

In Washington, we continue seeing a phenomenal market turnaround from where the industry was 1.5 years ago. We had record months back-to-back in July and August, with July being the first month we've had over $4 million in wholesale revenue.

Flower prices are still trending up over the last 8 to 10 months, and we're currently selling packages delivered flower for $900 a pound on average as compared to $650 a pound just 12 months ago. We're also seeing record sales for our vapes and edibles across the board, without having to lower prices in any of those categories. Really nice to be able to gain some market share on top of gaining revenue from pure profit based on the increase in price. Fantastic momentum on Washington. We feel as we move forward to the back half of the year, we'll continue gaining market share, and there's no signs that pricing is going anywhere but up for the moment.

In Michigan, we delivered -- we launched our delivery in Q2 and expanded our hours in Q3 from 3 days a week to 7. The gross margin went from 39% to 49% by making some strategic purchases, and we expect continual improvement. Overall, we continue to stay bullish on the Michigan market and are encouraged to see the rate at which our retail store is growing. We also continue to keep Michigan in our pipeline as a state we look to enter on the production processing side sometime down the road.

The Pure Ratios wellness brand continues to rebuild momentum after supply chain issues in Q1 and early Q2 impacted our results, and it's expected to contribute healthy revenue growth in 2020 with more production and sales of its CBD derivative products. We're encouraged by recent progress at Pure Ratios, which is now finally benefiting from a more resilient supply chain as well as a more aggressive marketing strategy going forward.

Moving on to Slide 9. I'd like to outline our top priorities for 2021, now that we have the platform and corporate structure to accelerate our growth. Our goal is to leave 2020 in the position to drive significant revenue growth and operating leverage in 2021, with all 5 states in our Pure Ratios business contributing to improved financial results. Consistent with our mantra of maniacal focus on execution, we've set up operational bogies and are knocking them down.

In Massachusetts, we expect the turn on adult-use sales at both our retail locations in the second half of 2020 as well as finalize the expansion of our Georgetown, MA cultivation and production facility. Georgetown retail went live for adult-use sales in August, and we expect Worcester to be following very close behind it.

We expect to generate positive operating cash flow in the second half of this year and have hit that target ahead of schedule. All expansion projects are on schedule well for completion this year, setting the stage for additional growth as we move into 2021. The plan on being in a position to update you on further strengthening our balance sheet in the very near future. And we've begun the design and preliminary construction planning for the completion of our processing facility in Commerce, California, which we also expect to contribute meaningfully to next year's growth.

With that, I'll now turn the call over to the operator to open the lines for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Graeme Kreindler with Eight Capital.

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Graeme Kreindler, Eight Capital, Research Division - Principal [2]

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I wanted to start off with respect to -- so on the news of reaching cash flow positive from operations in August, thinking that true for the remainder of the year. Can you provide some detail on the expected CapEx initiatives that we're going to see throughout the rest of 2020? And as we're thinking through the various facility expansions, what type of working capital investment is going to be required from that? Just to think of the bridge from the cash flow positive to operations to ultimately reaching free cash flow positive.

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [3]

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Yes. So Graeme, let me sort of get into some definitions here. And very simply put, the cash flow generated from our operations, before we cover our interest not from our debt, is positive in the month of August. As we roll forward to September, our interest not is about $600,000 a month. We expect to be covering that as well. So when we talk about cash flow, we're talking about cash flow from our operations.

In terms of the CapEx, for the remainder of the year, I'm going to turn that over to Jake Wooten, who's our EVP of Finance, to sort of walk through where we are for the Calumet, the Calumet build, our expansion and outgrowth and the upgrades in Georgetown.

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Jake Wooten, 4Front Ventures Corp. - Finance Director [4]

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Thanks, Andrew. So for the remainder of this year, we expect CapEx requirements to be just under $6 million in total. As Andrew alluded to, those are primarily for the 2 facilities -- 2 additional dispensaries, 1 in Calumet City in Illinois, 1 in Brookline, Massachusetts for right around $1 million a piece, and the balance of that number is then going towards the Georgetown light upgrade and the Illinois cultivation expansion, which is underway.

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Graeme Kreindler, Eight Capital, Research Division - Principal [5]

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Okay. Great. And then finally, the last part of the question was with respect to to working capital, how intensive is that investment going to be as you're undergoing these facility and dispensary expansions here?

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [6]

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Go ahead, Jake.

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Jake Wooten, 4Front Ventures Corp. - Finance Director [7]

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Yes. We don't expect a meaningful working capital investment, given that the 2 facilities -- that the 2 additional dispensaries are located in states that we are vertically integrated in. We will have most of the product already on hands to be able to set those dispensaries up. I just want to reiterate that those projects, the CapEx projects for the remainder of this year are all fully funded with existing balance sheet cash.

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Graeme Kreindler, Eight Capital, Research Division - Principal [8]

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Okay. Great. I appreciate the color there. And then just on another subject here. You mentioned that you're looking to give a further update on the balance sheet in due course. But I was just wondering, for the time being, considering the Massachusetts divestiture and the sale leaseback in Washington, is there any sort of a ballpark or range of figure we should be anticipating for potential -- for proceeds to come in as we think of what the balance sheet might look like towards the end of the year?

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [9]

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Yes. Graeme, we can sort of walk through some of the puts and takes of the balance sheet off-line. But we are really comfortable that we are going to exit this year with very nice cushion from our cash balance. And that starts to build here as we get into the coming months. So we can get off -- into some of the puts and takes off-line.

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Graeme Kreindler, Eight Capital, Research Division - Principal [10]

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Okay. Understood. And then I wanted to ask about the gross margin, which has historically been strong. At first glance, it looked like it degradated a bit quarter. So I'm wondering, is that predominantly from the operations that were off-line during the period? And as we think through these other expansions, are you expecting any material drag on the gross margin as you're bringing up some of that capacity, the cultivation capacity and carrying some of the preopening expenses on the retail?

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [11]

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Jake, do you want to take a crack at that?

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Jake Wooten, 4Front Ventures Corp. - Finance Director [12]

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Yes. I can take a crack at the -- especially going forward, Graeme, we actually expect the opposite. Given that these noncore assets were in states where we exclusively held retail, we didn't have the benefit of vertical integration. So we actually expect an uptick in gross margin as the majority of our sales retail will be in vertically integrated states in Illinois and Massachusetts.

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Graeme Kreindler, Eight Capital, Research Division - Principal [13]

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Okay. Got it. And then last question here. Just with respect to the comments you had in Massachusetts and having great traction so far in the brands you pulled over from the West Coast. Do you have any sort of sense of whether it's market share or velocity of the products on the shelf or penetration across the state, any sort of pivots like that available to put that further into context?

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [14]

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Yes. We have Joe Feltham, who is our SVP of Operations on. And maybe Joe can have some perspective on that.

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Joe Feltham, [15]

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Sure. So I think just continue -- we're continuing to see yield -- both the yield growth that we've talked in about, but also just a quality and consistency, that's also coming with these genetics as we drive things in, dial things in. And so the thought is that we'll just continue to main our pricing and margin and really be able to hold the line as we just continue with the consistency and the quality, that's improving. The yield is one big component of it, and now we're dialing in some of the other remaining pieces.

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Operator [16]

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Your next question comes from the line of Neal Gilmer with Haywood Securities.

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Neal Gilmer, Haywood Securities Inc., Research Division - Research Analyst of Special Situations [17]

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So I wanted to start maybe with Leo, I guess, on some of your comments in Washington with respect to the price increases you've seen. Though, I think your comment was $600 to $900 a pound. And that the view is that if there's any bias on direction, it's upwards. Like maybe just provide a little bit of your perspective on what's led to that sort of increase? And what you're seeing in those market dynamics that lead you to believe that if it's going anywhere, it's going to nudge upwards from here?

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Leonid Gontmakher, 4Front Ventures Corp. - CEO & Director [18]

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Sure, absolutely, and great question. And I'd start with the fact that the Liquor Board last legislative session put into effect a new rule that takes away and retires any production licenses that have been dormant for 12 months or longer. This is the first time in the history of the operations of the state where canopy is actually being taken off the board. So seeing canopy come off definitely makes us feel that the supply demand curve is moving in the right direction. We've also seen 3 waves now of failure in the state over the last 2.5 years, where there's a good amount of companies that just couldn't figure it out all the way, and they went under. And you also had a decent amount of companies that took whatever they had left, close down shops and went to try their luck in a different state that was less competitive or more limited licensing. That combined with the feedback we're getting from our retailers on where they see supply available and how much supply is out there, just leads us to believe that the market is finally shaping up to be a healthier curve of how much canopy is licensed versus what the actual demand is.

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Neal Gilmer, Haywood Securities Inc., Research Division - Research Analyst of Special Situations [19]

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Okay. That's helpful. Maybe my next one is more just like a clarification question, maybe to you, Andrew. When you state -- and sorry, I guess I was one of those people that didn't get the chance to see the stuff before the call started. The pro forma sales of $19 million, excluding the noncore assets, to make sure I'm understood. So that excludes Maryland, et cetera. That's just basically what you're going to have on a go-forward basis once that last transaction closes?

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Jake Wooten, 4Front Ventures Corp. - Finance Director [20]

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Neal, I think we might have lost Andrew for a minute, but this is Jake Wooten. I can answer. Yes, you're spot on with your assessment of what that metric is representing. The sales of our ongoing operations as we stand today and as we expect to stay on following the close of the Maryland divestiture.

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Neal Gilmer, Haywood Securities Inc., Research Division - Research Analyst of Special Situations [21]

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Okay. And then, obviously, maybe just for you Jake as well. You made some great progress with respect to your operating expenses and lowering those to bring in your EBITDA loss to where it was. Safe to assume that basically you pulled all the levers you can as far as rationalizing the size of operations, and that this is sort of the bottom level of OpEx and that as you invest a little bit to grow the business, we could see trends very slightly upwards from here.

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Jake Wooten, 4Front Ventures Corp. - Finance Director [22]

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I think I'd be remiss if I didn't say that I'm sure there are further bolts to be tightened. And our operations team, Leo would probably agree that you just are constantly searching for improvements. But it is fair to say that going forward, we expect that cost structure to improve incrementally, if anything else, but certainly not get worse.

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Neal Gilmer, Haywood Securities Inc., Research Division - Research Analyst of Special Situations [23]

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Maybe my last one here. And sorry, I just maybe -- I know you can look it up, but I asked the question here. You've commented in Illinois about the tripling of your capacity. So what will that take your capacity to as you enter into 2021?

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Jake Wooten, 4Front Ventures Corp. - Finance Director [24]

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Yes, Leo, do you want to address that one?

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Leonid Gontmakher, 4Front Ventures Corp. - CEO & Director [25]

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Absolutely. So we're currently at 3,000 square feet of flowering, and the upgrade will take us to 9,072 square feet of flowering states going into 2021. On a production basis, we'll go from about 100 pounds of finished flower to 300 pounds of finished flower monthly.

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [26]

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I am back in, Jake.

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Operator [27]

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Your next question comes from the line of Doug Cooper with Beacon Securities.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [28]

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A couple of things. Chicago closure, you said cost about 10%, and that was for 6 weeks. I guess I'm just trying to get to run rate. Is it running close to $4 million a quarter with South Chicago?

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [29]

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It was a little over 4 weeks, and we were ramping up into that -- we're sort of ramping up into that final quarter or into that final month. So we anticipated that we probably lost as much as 10% of sequential -- 10 percentage points in sequential revenue growth there. And as we turn back on, we've seen sort of steady increases. We had a very strong kind of first week and the -- we've sort of been chugging along and having as good a days during the week, but kind of the upside hasn't been there quite yet. So we are pretty pleased not that what the trajectory looks like, but we are still gaining steam. And I think -- I mean let Joe Feltham sort of take a crack at that, too, if you could give any color.

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Joe Feltham, [30]

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Sure. So part of the acceleration that we think will come is launching more of the Washington flower brands. So we're just launching the Washington Popcorn brand, mini-buds, which we think in our area is going to be really popular. And then shortly thereafter, our Legends and Funky Monkey. And as Leo referenced earlier, Joe Epperson has been kind of dialing in the genetics. So just kind of consistently throughout rest of this year and into next year, we have more flower brands, more strains and, of course, more production coming online. So that's where we're expecting to get back to those growth numbers from before and then start to exceed them.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [31]

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I guess what I'm trying to get is just -- you think by the end of this year, is this a $20 million run rate store?

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Joe Feltham, [32]

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Yes. I mean we were -- so months or some of the busy months in COVID, where we were shut down that time period where people were setting their sale records. We just don't know if Illinois was going to do $2 million, a little over $2 million. So if you take some of our best month from before the shutdown, $1.5 million, $1.6 million. And you think we can stretch a little bit more out of it. I think, Doug, it's going to be really, really close to that. But Jake and Andrew, please chime in and correct me anywhere.

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [33]

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You're spot on.

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Jake Wooten, 4Front Ventures Corp. - Finance Director [34]

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No. I think that's great color. And obviously, we aren't in a position to guide for the business right now, Doug. But we have big expectations for that dispensary and what we're building in Illinois in general to with Calumet coming on in late November, early December as well.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [35]

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Okay. Taking into consideration what you just said about not being able to guide particularly, but I'm going to try my best anyway. So Illinois, you're moving from 3,000 to 9,000 square feet. You have obviously the ability to go to 210,000 square feet, if you have the capital to do it, so there's the opportunity there. Massachusetts, can you just remind us how many square feet of canopy you're going to have ultimately in Georgetown? Or what you want to have over the next little future here?

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Leonid Gontmakher, 4Front Ventures Corp. - CEO & Director [36]

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Sure, Doug. So currently, in Georgetown, we have 8,800 square feet of flowering canopy. And what we're doing there right now is not adding canopy, but just adding in lights, so we can have more uniform par and lumen readings, and we can get better light penetration than what we have sitting there today. We also have an expansion in Massachusetts, which is not funded and something that we're looking to do further down the line and -- which would allow us to take the Georgetown building to 33,000 square feet of flowering canopy, 43,000 total canopy. That's something that's not in the books for this year or for next, but it's a project that we have on board and something that we'll be looking to get funded down the line.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [37]

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Okay. And then -- so I guess I'm just trying to get the sort of exit run rate. What was -- sorry, what was Michigan in Q2 revenue, Michigan? Did I miss that?

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Nicolle Dorsey, 4Front Ventures Corp. - CFO [38]

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I can take that. This is the Nicolle. In Michigan, Q2 was $1.5 million compared to $1.3 million at Q1, roughly 12% growth quarter-over-quarter.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [39]

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Okay. So I guess I'm just trying to look forward, and you talked about exiting 2020 strong and in a position to drive significant operating leverage. And I'm just trying to, I guess, get a feel to the extent you can talk about it, what your exit revenue run rate might be on a Systemwide basis? You're obviously annualized in Washington, closing in $45 million to $50 million. You got the Massachusetts, Illinois, Michigan Pure Ratios. What is -- can you give us any guidance on what you're hoping to exit the year on a run rate basis?

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [40]

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Karl, do you want to take a crack at that?

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Karl Chowscano, [41]

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Sure. I don't have the model up in front of me, Doug. But I think we're currently run rating around $100 million, and our anticipation in December with Calumet only getting ramped up a little bit. So we won't have its full contribution is around $112 million.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [42]

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By year-end. Okay. And ultimately, given the assets you have and you can see in front of you, what kind of EBITDA margin would you be talking about as you move into kind of mid- 2021?

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Karl Chowscano, [43]

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Yes. And we're not guiding, right?

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [44]

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Yes, of course, we're not guiding.

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Karl Chowscano, [45]

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So Jake, maybe you want to take. I mean that's without the Commerce project. Looking at the end of this year, Doug, I think run rate and EBITDA of $25 million to $30 million is probably what we're looking at. Come the 1H of 2021, we'll be adding Brookline and a full Calumet, and those 2 are going to contribute obviously significant to the EBITDA number. But Jake, do you want to run what our percentage, what we're kind of targeting to be our percentage from midyear next year?

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Jake Wooten, 4Front Ventures Corp. - Finance Director [46]

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Yes. Of course, as we -- Doug, as we get into Q2 and Q3 of next year, we're targeting mid-30s from a consolidated EBITDA margin.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [47]

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Great. Okay. And I guess my final one, obviously the Illinois asset seems to be the most tantalizing, given the makeup of the market there and the ability to build a big structure. Sale leaseback would get you part of the way there. Can you just sort of walk us through, assuming you get a sale-leaseback and ease a bit of the financial, not burn is not the right word, but maybe you can start more strategically thinking. How should we think about the potential of that asset? And then I'll leave it there.

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Karl Chowscano, [48]

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Do you want me to speak to the financing aspect of the that, Andrew? I think we probably lost Andrew. So I will (inaudible). Can you guys hear me?

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [49]

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I can hear you. Karl.

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Karl Chowscano, [50]

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Great. So Doug, in terms of the sale-leaseback financing of Washington, we have -- we sound a little repetitive on this point. Over the last few weeks is -- obviously, we've spoken 6 weeks ago and probably 6 weeks before that. We've been having significant discussions with numerous parties regarding the cleanup of the balance sheet. And as we get deeper into these discussions, we are seeing the opportunities to be much more holistic in the way in which we approach this next step.

So I guess what I can say is we have received term sheet guys that have solved some of our problems, but not all of our challenges. I think we are coming very close to being able to find a more holistic solution. By far, the Illinois project is our greatest opportunity that sits right in front of us. And we are very focused on trying to be able to get the financing for that project, hopefully, all at one go, either way, making sure that our balance sheet is clean, getting ourselves in an opportunity to be able to project finance, both [it] and Commerce are our #1 and #2 priorities for us.

So I think all I can say is we're no longer on the 5-yard line, but we're not across the goal line yet. But I'm very confident. We're all very confident that we're going to be in a good position in a very short period of time.

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Operator [51]

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Your next question comes from the line of Eric Des Lauriers with Craig-Hallum Capital Group.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [52]

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Less of a modeling question for me and more just high level. So you've mentioned over 430 grams a square foot yields first in Washington and now repeated in Massachusetts. We don't really see anyone else exceeding even 200 grams a square foot. Can you help investors understand where this yield advantage is coming from? And then to the extent that you can answer, how does your cost per gram then compared to even the illicit market?

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Andrew Fisher Thut, 4Front Ventures Corp. - CIO [53]

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Leo, you want to take that?

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Leonid Gontmakher, 4Front Ventures Corp. - CEO & Director [54]

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Yes. I will take this one, Leo here. So I think that the easy part to the first part of your -- the easy answer to the first part of your question is genetics, environment, feed and process. I think the real answer to that question is 6 years of time and business, a whole lot of skin, knees and gray hair. A lot of time working with the same team, having success, having failure and figuring out ultimately what led to that success and how to replicate it and make it more efficient. So those would be the main factors and what allows us to produce the way we do. It's a plant. So you have to really dial in each of these strains completely differently. And it may take a year for some strains. It may take 3 or 4 for others. But knowing your genetics, knowing how to feed them correctly, knowing how to diagnose disease early on and take care of it, are all big contributors in how we reach that yield. And really, it's just a team effort all around starting in the mother room and ending with postharvest. It's hard to pinpoint one thing. I think it's a combination of all those things, primarily leaning heavily on time and business.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [55]

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Okay. That's helpful. And then I'm not sure how much data you guys have on your illicit competition. But maybe even just anecdotally, how does your cost per gram with such high yields? Like how does that compare to the illicit market or elicit competition?

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Leonid Gontmakher, 4Front Ventures Corp. - CEO & Director [56]

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That's an extremely tough question. It's -- you have a illicit growers who take power and plug it into the pull-out side. So their effective cost for energy is 0, almost an impossible question for me to answer. I think that as compared to our peers in the industry, we sit at $0.65 per gram for indoor production. That's pre testing. That is finished dried cured flower. We really have no idea -- I have no idea.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [57]

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Yes. Yes. No, that's certainly fair. And I just didn't know if you were privy to any kind of sort of illicit data or anything out of Washington, obviously a more crowded environment might help you answer that, but $0.65 per gram indoor obviously very impressive. I would imagine that's competitive with despite anyone on the illicit market. Congrats on a very good quarter, guys.

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Operator [58]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Leo Gontmakher for closing remarks.

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Leonid Gontmakher, 4Front Ventures Corp. - CEO & Director [59]

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Hey, guys, sorry, I just realized I was talking on mute. Thanks for turning it back. To wrap up, we have a very promising investment thesis and are at a crucial point in our development. The cannabis industry is an emergent secular growth industry, showing accelerating fundamentals despite a recession and a pandemic. We believe that over the long term, low-cost production and distribution to cannabis consumer packaged goods is a real opportunity in this industry.

In Washington, we've proven our capabilities in this area, have been created a dominant position in the state with a full line of products, which is distributed to over 260 retail locations. Our facilities are the #1 edibles manufacturer and the #2 producer of flower with an overall #2 market share in the state. We're now focused on replicating our tried and true production capabilities, supported by our retail stores in the large and nascent recreational cannabis markets of Illinois, Massachusetts, California and Michigan. This constitutes an addressable market of over 76 million people, including Washington state.

Our corporate overhead is now lean. We're fully funded and strengthening business fundamentals show we're on pace to show significant operating leverage in 2021. With inside ownership nearing 40%, we're all fully aligned to maximize shareholder value, as we execute on this strategy and take advantage of the major opportunity ahead of us.

With that, I'll turn the call back to the operator to close the lines. Thank you.

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Operator [60]

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