4Front Ventures Corp

The Forefront Ventures Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Andrew Toot. Thank you. You may begin.

Thank you, Operator, and welcome, everyone, to Forefront Ventures Earnings Call for the Third Quarter of 2020. I'm joined today on the call by the entire Forefront Management Team. We have Leo Gommaker, our CEO, CFO Nicole Dorsey, Jake Wooten, our EVP of Finance, Carl Toscano with Strategy and Operations, and Joe Feltham is joining as well. Joe is our newly appointed Chief Operating Officer. Before I begin, 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 factor section of our filings and our disclosure materials. Any forward-looking statements should be considered in light of these factors Please also note, at Safe Harbor, any outlook we present is as of today. 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 pretty excited about some of the things that we have going on in our business. As always, I'm going to start with reiterating our thesis and strategy. Then I'm going to provide some color on our third 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 the operational trends, along with highlighting some milestones we've achieved exiting 2020 as we set the table for step function growth and operating leverage in 2021. We'll conclude with question and answer session where the entire management team will be available for any follow-ups. So with that, let me begin. I know we have many investors on the call today that are newer to the forefront story. So I'll start again outlining the forefront thesis and what we as investors are playing for. The business fundamentals of U.S. cannabis continue to be robust in the face of a global pandemic that has caused a lot of economic uncertainty. With additional states voting overwhelmingly to approve cannabis laws in this month's election, industry momentum just continues to build. And what we are witnessing here is the emergence of a massive secular growth industry that's still very much in its nascent stages. At Forefront, we believe the sweet spot in the value chain for outsized value creation in this industry is really around low-cost production and distribution of cannabis consumer packaged goods. For the past six years, Forefront facilities have created a dominant position in Washington State, with a full line of products which are distributed over 260 retail locations in 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. We've achieved all this while maintaining very attractive margins and profitability. So our thesis, as I always say, is very simple. We're replicating these tried and true production capabilities supported by our retail stores in large and nascent recreational markets of Illinois, Massachusetts, Michigan, and California. All in, we serve an 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 internally refer to as maniacal focus on execution taking hold in our business. Q3 2020 system-wide pro forma sales was 22.3 million, an increase of 18% sequentially over the second quarter of 2020. Our revenue growth was primarily driven by recreational sales launching in Massachusetts during the quarter, the reopening of our Mission South Chicago store in late July, and continued strength out of our Washington facilities. The company generated positive operating cash flow in the month of August, well within our stated objective of achieving this in the second half of the year. But even this was ahead of our expectations. We also had our first positive adjusted EBITDA quarter, posting 3.7 million in adjusted EBITDA after what was basically a break-even second quarter. Our tight cost controls and accelerating revenues have driven strong operating leverage as we move into the back half of this year. It positioned us incredibly well. As a company, we're feeling great about where our balance sheet sits leading 2020. Last week, we closed an oversubscribed bought deal led by Beacon Securities for $13.2 million US. The company also announced that it's entered into a definitive purchase and sale agreement with Innovative Industrial Properties, providing for sale and leaseback of our cultivation and production facilities in Tumwater, Washington and Georgetown, Mass. The $30 million sale is on track to close by mid-December. and will be used by the company to pay down outstanding senior debt to the affiliates of Gotham Green Partners. So as of November 30th, 2020, pro forma for the close of the pending sale leaseback transaction, and including proceeds from the recently closed bought deal, the company will have approximately $16 million of cash and $43 million of long-term debt on the balance sheet. It doesn't come due until May 2024. This sets us up with an incredible amount of flexibility on the balance sheet. In keeping with our strategy of going deeper into large nascent adult use markets, we're sharing this afternoon the company is finalizing plans to exponentially expand its cultivation and manufacturing presence in Illinois. We're obviously incredibly excited about this. The company is looking to bring its scaled cultivation and production Um, that comes with one of its 20 cultivation licenses in the state that allows for 210,000 square feet of flowering canopy. And we're currently acquiring acres to construct the cultivation and state-of-the-art, uh, manufacturing facility, which significantly adds to the blue sky of our, of our already established presence in Illinois. Um, and Leo will, Leo will go into more of that later. Leo and Carl will opine more on that later. Our focus on execution is also 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 the stage for future growth. Construction of our fully funded expansion plans for our Illinois, our current Illinois, and Massachusetts cultivation facilities is largely complete, as well as construction for our second Illinois dispensing, Calumet City, which is scheduled to open by mid-December of this year. Furthermore, we were able to announce last week the anticipated timing for the completion of our manufacturing facility in Commerce, California, which we expect to open in Q2 of 2021. Forefront has successfully introduced its products and brands into Massachusetts and Illinois and soon to be entering the $3 billion California market. The automated state-of-the-art commerce facility incorporates unprecedented capacity for finished goods manufacturing. similar to the scale seen in the traditional consumer packaged goods industry. Commerce will have the ability to produce over 10 times the current capacity of Forefront's 40,000 square foot Washington production hub, which is currently the number one producer of derivative cannabis products in Washington state. We look forward to the first product hitting California retail shelves in May 2021. So very quickly, speaking specifically to the second quarter, Our Massachusetts revenues grew by more than 47% over Q2, which included partial quarter of adult sales in the state. Our strategy of introducing our successful brands and products from Washington into new markets is demonstratingly gaining traction. And the feedback we've gotten from our customers in Mass and Illinois has been fantastic. In Mission, our Ann Arbor dispensary showed 15% sequential growth as the market there continues to mature. Our Washington system-wide revenue grew 12% in the quarter and continues to benefit from improving pricing as capacity leaves that market. Our revenue in Illinois declined 11% quarter over quarter, only largely losing a month of the quarter in July and Mission South Shore ramping back up after we reopened it in late July after it was closed during the riots. Illinois will have additional tailwind leaving this year with our second retail location opening in December. and the opening of our expanded capacity in Elk Grove hitting sales early part of next year. So to finish up, along with the solid sales trends, we've also seen the benefit of our operational focus and the right sizing 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 streamlining of the operations, the company has generated positive operating cash flow in the month of August. And as I said, it was several months ahead of our internal plan. Our adjusted EBITDA on the third quarter was 3.7 million versus what was basically break even in Q2. And also as compared to a loss of 2.8 million in the first quarter of this year and a loss of 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. So having set the stage, I'll now turn the call over to Leo Gauntmaker, our CEO, who will delve a bit deeper into our assets by state and provide an additional color on our near-term and medium-term plans.

Leo? Thanks, Andrew. Andrew did a terrific job of updating you on the strength we see in the industry and our business. The summer has seen particularly strong sales trends, including a meaningful uptick in Washington and Massachusetts. It's been a little over a year since Forefront closed its merger with Canix, a company I founded in Washington. Eight 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 now brought that role and a culture to that, as we say internally, is maniacally focused on execution, doing what we say we're going to do. Since March, we've made tremendous progress as a company. right-sizing the cost structure, streamlining our business, and pushing deeper into our core states by leveraging our structural cost advantage we developed in Washington into the rest of our licensed portfolio. Recall our investment thesis. We believe the sweet spot for outsized value creation in this industry is really around low-cost production and distribution of cannabis consumer packaged goods. Our facilities in Washington state are the number one edibles manufacturer and the number two producer of flower with an overall number two market share in the state, outperforming over 600 other license holders in one of the most competitive cannabis markets in the world. We've achieved this while maintaining very attractive margins and profitability. We're replicating these private true production capabilities in the large and nascent recreational markets of Illinois, Massachusetts, Michigan, and soon to be California. So the question is, how is the thesis playing out for us so far? Do the low-cost cultivation and manufacturing methodologies, products, and brands that we've had such success with in Washington scale to other markets? While it's still relatively early, we're very pleased with the results we're seeing one year in. Let's start with Massachusetts. It's been a little over a year since the opening of our cultivation facility in Worcester, which was started using growing methodologies and SOPs Since launch, we've experienced no failed harvests and demonstrated annual yields of over 400 grams per square foot. In our acquired Georgetown facility, we continue to make improvements to the growing environment and are currently in the process of upgrading lighting. The retrofitting of the company's Georgetown facility is complete and ready for phase installation of LED lights, 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 of our Washington brands to the Massachusetts market as well, without exception. The reception for our products has been fantastic, and we expect to continue to build momentum as word of mouth spreads. We've seen the brands we brought to market pretty quickly take market share from the previous brands, in-house brands that were being sold out of Georgetown, which is a great sign, and we continue to see the sales climb. We've implemented our extraction methodology, which enables consistent, repeatable feedstock for all our products. Introduced our production and packaging methodologies, which greatly enhance throughput and reduce labor. As we move forward, we look to continuing momentum in Massachusetts as both our Worcester and Georgetown facilities continue to ramp up with the expected opening of our third retail location for adult use in Brookline in Q2 2021. In Illinois, as Andrew mentioned, we're finalizing plans to greatly expand, something we're calling Project Big Daddy. We're buying land to utilize our super license in the state and begin phase one of our build-out. Myself and our team couldn't be more excited to bring our scaled low-cost cultivation and manufacturing to the state and also couldn't be more excited to be able to Our Elk Grove facility continues to see progress. Joe Everson from our Washington team took over leadership of this facility in January and since that time we've seen our yields climb from 250 grams per square foot to right around 360 grams per square foot as we sit today. Our flower strains and brands have been very well received in the market along with our recently introduced MiniBugs Value brand. Expansion at Elk Grove which will increase the flowering canopy from 3,000 to 9,072 square feet, is substantially completed on time and under budget. Our South Shore Mission retail store reopened at the very end of July. It continues to ramp up steadily month over month, and we're pleased with the results we're seeing. Last but certainly not least in Illinois, the December opening of our second Illinois location for retail in Calumet City, which is approximately one mile from the Indiana border, looks to be on time for December 2020. Construction and dispensary substantially completed and final inspection scheduled for December 7th with the grand opening currently anticipated on December 15th, 2020. California, we're extremely pleased to be able to announce last week the timing of our entrance into the 3 billion plus California market. The company's fully funded state of the art 185,000 square foot manufacturing facility commerce will be ready in q2 2021. projects on target to be completed in mid-april and the company's planning for the full line of its product line of edibles tinctures and fake products to be on california retail shelves by end of may 2021. this facility will be will have unprecedented automation and low-cost production capabilities white label and private label opportunities an overall scale that doesn't exist across the rest of our portfolio. California is a state we're extremely excited about for multiple reasons, and the facility here was something that was planned to attack a market at scale with automation that's far and above what we've seen in the industry and across our portfolio in general. Big project for us, and we're extremely excited about that market. Washington continues to stay steady for us. We had a record quarter, and the summer really showed a big uptick in general in Washington across the board on flour and derivatives. Pricing is holding well, and as volume has climbed, we have not had to drop pricing across the board on any of our products, which is extremely encouraging because usually Coming into Q4 and outdoor harvest, you see a little bit of a drop and a little bit of slowdown in sales. So we're extremely excited about that trend and hope that going into 2021, we'll be able to hike prices a little bit more and hold steady. In Michigan, we launched delivery in Q2 and expanded our hours from three days a week to seven in Q3. We continue to keep Michigan in our pipeline as a state that will lift to enter on the production processing side down the road. The Pure Ratios wellness brand is one we continue to optimize. After supply chain issues in Q1 and early Q2 impacted sales, Q3 showed healthy results growing 50% quarter over quarter. We continue to tweak the business model to increase the consistency and visibility of growth in this business. Our goal was to leave 2020 in a position to drive significant revenue growth and operating leverage in 2021. With all five states, our Pure Ratios business contributing to improved financial results. Consistent with our mantra of maniacal focus and execution, we've set up operational bogeys and are knocking them down. Our hard work over the years put us in a position to initiate guidance for the year 2021. In the coming year, the company expects to drive system-wide performer revenues of $170 to $180 million and adjusted EBITDA of $40 to $50 million. This guidance is fully funded and contemplates only current operations and projects that we have a clear line of sight on. including the December opening of the Calendid City retail location, the opening of our retail in Brookline, Massachusetts, and the Commerce Production Facility in May 2021. With projects falling into place, it seems a good time to frame for investors what we're playing for. Forefront believes we have at least a $650 million revenue opportunity and a $250 million adjusted EBITDA opportunity, bringing our low-cost scaled operations to only our current operations. With that, I'll now turn the call over to the operator to open the lines for Q&A.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be nice for you to pick up your handset before pressing the star keys. One moment, please, as we vote for questions. Our first question comes from the line of Neil Kilmer with Hayward Securities. Please, do with your question.

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

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

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

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

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

Yeah, so Neil, I'm going to turn that question over to Joe Feltham, who's our COO, and he can fill you in on what's current trends and what we're thinking in Illinois.

Hi, Neil. So probably the only silver lining to the shutdown was it did lead to the opportunity for us to stockpile for two months. So we feel really well positioned with our inventory levels for the two stores, really for the first couple quarters of 2021 today. And then when you add on the expansion, we'll... It's going to lead us more opportunities in the wholesale market. And this first batch, what we're really excited about as well with Calumet City is launching the Funky Monkey and Legends brands into the Illinois market. So we've brought some of the Washington Flower brands to the Illinois market, and we've kind of timed the launch of some other brands with this store opening. So we're hoping to get momentum from that. We're actually launching a couple strains tomorrow and then hoping that that will then carry us well into the new year.

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

We are bringing in brands from Washington State, and we're introducing one new brand. It will be called Dattle, which will be a high-end fax brand that we currently don't make in Washington just because of the pricing structure there and the lack of volume. All the other nine brands that we're bringing are our strongest brands from Washington and ones that, you know, we felt we could automate the most.

Okay. Great. Thanks very much, guys. Appreciate the questions. Thanks, Neil. Our next question comes from the line of Graham Krenle with 8 Capital. Please start with your question.

Hey, Graham. How you doing? Hi. Good afternoon. Hey, good. How are you, Andrew? Thanks for taking my questions this afternoon. Just wanted to follow up over on the subject of Illinois. Is there any expected budget for that expansion project? I guess maybe we can focus on phase one for the time being. Thanks.

Carl? Sure. Hi, Graham. Yes, there is. We're looking at roughly, let's say, between four and six for land acquisition. and another 45 or so for the phase one build-up.

Okay, understood. Appreciate that. Any sort of expectations with funding that project? Now, I know that's a bit of a ways out, and more so on the phase one building. Is that something that the company would expect to finance internally from cash flow now that you've reached that milestone as of August, or is that something you'd look to get more external funding to support?

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

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

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

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

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

Okay, I appreciate the call. Thank you very much.

Our next question comes from the line of Craig Delaurez with Craig Hallam. Please, see what your question.

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

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

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

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

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

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

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

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

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

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

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

Okay. And you said it was your, even though the production capacity is 250, I think in California, you're talking 150. Correct. Okay. And just for those, you know, just to help me, if it's 210,000 square feet of canopy and you're 300 grams a square foot, is that a half decent number to use? 63 million grams at, Five bucks a gram, is that the sort of math that it should be toying with?

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

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

Doug, if you don't mind, I just want to clarify that the numbers that Jake was speaking, this is Carl, the numbers that Jake was speaking to When we looked at the capacity of both Illinois and California and what we've done in the past and do currently in Washington, the numbers that came out to us were a little unreasonable. And so, you know, putting into place not only price degradation but also, you know, the percentage of the market that we see being there that would be represented by what we can make um, seems unreasonable. So we gave it serious haircut. So that's 650 is coming at a plus 45% haircut on each of, um, Illinois and, and, um, California. So when you do the math, you're going to get a bigger number.

Yeah.

That's just, I was sort of getting that from him.

Yeah, for sure. Yeah. No, I can tell you're going there. Okay. The California, just to stick there for a second, Andrew, I think you said in your preamble that it was 10 times the capacity of Washington. Leo, can you just give us an idea of what kind of throughput you're doing in Washington right now?

Yeah, absolutely. So we're currently selling about 100,000 finished tent packs across our edible brands and about 60,000 to 70,000 one-gram bait cartridges per month. And our production capacity in Washington for the 10 packs of edibles with a 23-person staff is 3,500 finished 10 packs per day. And the automation for the full kitchen line that we have in commerce can produce 33,000 finished 10 packs per day in an eight-hour shift utilizing only four people. So we're looking at 10x production capacity and a fifth of the crew.

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

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

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

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

You guys have obviously done a ton of work there in terms of the market opportunity. From a pricing strategy perspective, do you plan to go in at a 20% discount, 30% discount? What is the pricing strategy to gain that shell space right out of the get-go?

The pricing strategy is a discount. I think it will vary product by product depending on how saturated that category top players are and what their pricing looks like. But I think in between 20 and 40% below who we believe our competition is per product is a fair number. Okay. And you don't think there's any issue getting the raw material? In California, raw material is definitely not a problem, especially in the form of finished distillate, which, you know, boasts our advantage because we can buy oil and start producing right away while we look to source relationships with the right feeder farms for the want to use in flower biomass versus finished oil.

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

It's 50% plus across the board.

Moving to yields, you're one of the only ones I think who speaks to yields, quite frankly, out of any of the big US guys. What do you attribute the better yields to besides experience and understanding in LED lights? Is that something unique to you and you're finding because you're obviously finding that to be a better experience and that's why you're putting the stuff from Washington and into Illinois and Massachusetts?

Yeah, it's funny. Two years ago, if you asked me about LEDs, I would have told you you're crazy and they're never going to work inside of a grow. We've been using LEDs for a while in the veg and in the mother and clone rooms, and they've been great. And we've continued over the past going on six years now to run individual experiments with different sets of LED lights at a decent scale, 35 to 50 lights per room, Um, you know, we've been lucky enough to have large scale and, you know, be able to come to different companies and companies come to us and basically trade a set of free lights for the data that comes off of those harvests. And doing that, we've just continually tracked and try to work with different partners to tell them what we're seeing and what we think these lights need to be successful. And more recently than not, um, more recently than not, the company that we've been working with for four harvests now, um, we finally felt comfortable enough seeing the data, seeing that it's more efficient on the power, it's easier to control the HVAC, and we're finally seeing yield numbers equivalent to or above the same yields we were... Okay.

Two more quick ones. Balance sheet, obviously much improved. ...felt very good about moving forward. Okay. Thanks, Leo. Two quick ones to finish. Balance sheet, obviously much improved. So will the Gotham piece be entirely gone by the end of the year? Yes, Doug. Okay. And so California is fully funded. Forgetting the major Big Daddy project in Illinois, the rest of the projects you have, including Brookline and Calumet City and... and whatever else you have to do in Michigan or elsewhere, are those all fully funded? Yes.

Everything is fully funded, Doug, and I want to be clear in terms of the inclination of the funding for the Big Daddy. I want to be clear that it will be non-dilutive funding.

Okay.

But, yes, everything else is taken care of, on track, in terms of the budget.

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

Yeah, I think, Joe, I think you can probably speak to the question was originally put in terms of cadence. If you can kind of speak to the lift that we expected in terms of revenue from our WSDA and Georgetown locations and what we actually experienced and the direction which it's heading.

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

Okay, I think that's it for me, guys. Congratulations. That looks great.

Oh, go ahead.

Yeah, turn it back to you, Leo.

I was just going to add for Doug that we just had our best weekend ever overall in Massachusetts across the board in retail. Yeah, last two best weekends. That is correct, the last two best weekends.

And with that, we've reached the end of our question and answer session, and I would like to turn the call back over to Leo Gottman for any closing remarks.

To wrap up, we have a very promising investment thesis in our incredibly exciting time in our development. The cannabis industry is quickly emerging as a power for secular growth industry, showing accelerating fundamentals during a pandemic and uncertain economic times. We believe that over the long term, low-cost production and distribution of cannabis consumer packaged goods is the sweet spot in the industry. In Washington, we've proven our capabilities in this area, having created a dominant position in the state with a full line of products which are distributed to over 260 retail locations. Our facilities are the number one edible manufacturer and the number two producer of flour, with an overall number two market share in Washington. We're now focused on replicating our tried and true production capabilities 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. We're fully funded and our strengthening business fundamentals were on pace to show significant operating leverage in 2021. With inside ownership nearing 47%, we're fully aligned to maximize shareholder value as we execute on the 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.

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