4Front Ventures Corp

Greetings. Welcome to the Forefront Ventures fourth quarter and year-end 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. 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 will now turn the conference over to your host, Andrew Toot, Chief Investment Officer. Thank you. You may begin.

Thank you, Operator, and welcome everyone to the Forefront Ventures earnings call for the fourth quarter of 2020. I'm joined today on the call by the entire Forefront management team. We have Leo Gontmaker, our CEO, President Carl Toscano, Jake Wooten, our EVP of Finance, Joe Feltham, our COO, and Pete Renard, our interim CFO. 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 factors section of our filings and our disclosure materials. Any forward-looking statements should be considered in light of these factors. Please note, at safe harbor, Any outlook we present is as of today, and management does not undertake any obligation to revise any forward statements in the future. So, with that out of the way, let me give a very quick overview of the call today. We have a lot to get through, and we're extremely excited to share recent developments as our company enters this significant growth phase. As always, I'm going to start reiterating our thesis and strategy as a company. Then I'm going to provide some color on our fourth quarter results and an update on the significant progress we've made in the business. I'll then hand the call over to Leo, who will go into a more detailed review of our operational trends, along with highlighting some milestones we achieved exiting 2020 as we set the table for what we think will be step function growth and operating leverage in 2021. We'll conclude with a Q&A session where the entire management team will be available for 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, by outlining the forefront thesis and what we as investors are playing for. We are entering the golden age for the cannabis industry. As the pace of state legalization accelerates, and reforms at the federal level are appearing to be increasingly inevitable. From a pure investment standpoint, anticipated reforms in the banking laws should be a game changer, leading the way to cost of capital coming down in the space, allowing us to get financing from money-centered banks, and we think that eventually leads to access to U.S. exchanges and broad-based institutional ownership in the industry. You combine that with the fact that 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. Industry momentum continues to build. And what we're witnessing here is the emergence of a massive secular growth story industry that's still very much in its nascent stages. At Forefront, we believe the sweet spot in that value chain in this industry is low-cost production, and distribution of cannabis consumer packaged goods. So for the past six years, Forefront Facilities has emerged into a dominant position in Washington State, with a full line of products that are distributed to 260 retail locations in any given month in Washington. Our facilities are the number one edibles manufacturer in the state and the number two producer of flour, with overall number two market share. We've outperformed over 600 other license holders in one of the most competitive cannabis markets in the world, all achieved while maintaining very attractive margins and profitability. Our thesis, as I always say, is simple. We're replicating these tried and true production capabilities in large and nascent recreational markets of Illinois, Massachusetts, Michigan, and California. All in, we currently serve an addressable market of over 76 million people. We're pleased to share today important developments as we execute on this thesis. So one, we are seeing a maniacal focus on execution taking hold in our business. We put it this way. We have skimmed these from so many times, from so many years competing in the hyper competitive playground of Washington State. And this is a playground that our competitors, you know, particularly in the East Coast limited license states, have never competed against. And from those scars, we are smarter and stronger than ever, and consequently have performed better in our core business than we projected. Two, our Q4 2020 system-wide pro forma sales was 25 million, an increase of 12% sequentially over the third quarter of 2020. Revenue growth was primarily driven by the first full quarter of REC sales in Massachusetts, continued strength in Illinois, where we opened our second dispensary in mid-December, and a solid quarter out of our Washington facilities. Speaking specifically to the fourth quarter, our Massachusetts revenue grew by more than 75% over Q3, again, as we benefited from REC sales, a full quarter of REC sales in the state, and Illinois grew north of 60% quarter over quarter. benefiting from the reopening of our South Chicago store for a full quarter, and as well as opening our second dispensary in Calumet City. Three, we have remained operationally cash flow positive since August, which for the record occurred earlier in the year than we had projected. Our cash flow from operations in the fourth quarter was $3.2 million. Four, Q4 marked our second consecutive positive adjusted EBITDA quarter, posting $5.9 million in adjusted EBITDA, representing a margin of 24%. Adjusted EBITDA is well up from the $3.7 million in Q3 and what was basically flat in Q2 of last year. So very strong progression. Our tight cost controls and accelerating revenues drove strong operating leverage in the back half of the year. and have positioned us incredibly well entering 21. The effective margin is growing weekly as we turn on our Georgetown and Illinois facility upgrades and implement more of our quote-unquote practices, all reflecting our Washington facility standards. Five, we feel great about our balance sheet leaving 2020. In November, we closed an oversubscribed bought deal led by Deacon Securities for $13.2 million. In December, we also closed $33 million deal with IIPR, which provided for sale and leaseback of our cultivation and production facilities in Palmwater, Washington, and Georgetown, Mass. The proceeds from that deal paid down outstanding senior debt to Gotham Green Partners in its entirety. So as of December 31st, we had $18.9 million in cash on the balance sheet, and $47.3 million in related party long-term debt, which doesn't come due until May of 2024. This sets us up with ample flexibility on the balance sheet. Six, we are effectively on time and under budget with our expansion projects. This is critical that these projects set the stage for our future growth. As you may recall, we announced in our last earnings call plans to exponentially expand our cultivation and manufacturing presence in Illinois. We're pleased to announce last month that the finalization of plans and funding to bring our scaled cultivation and production that comes from one of our 20 super licenses in the state that allows for 210,000 square feet of canopy to fruition. Leo will get into more details later in the call. We're incredibly excited for what we internally referred to as phase one of Big Daddy in Illinois to come online late next year with roughly 65,000 square feet of flowering canopy and 70,000 square feet of production. Seven, in Q4, we also completed the expansion of our existing Illinois Elk Grove Village facility from 3,000 to 9,000 square feet of canopy on time and under budget. as well as the upgrades to our Georgetown facility for the installation of LED lights. Our operations and construction team is firing on all cylinders, and we expect those upgrades to be meaningfully additive to 2021 production. Eight, our second Illinois dispensary in Calumet City, Calumet City, I always pronounce that incorrectly, which opened in mid-December, was on time and budget, and the dispensary from a sales perspective is on fire. It opened strong, and that momentum has carried incredibly well into Q1, and has quickly became the second best-selling dispensary in our portfolio. Nine, furthermore, we're pleased to announce that the construction of our manufacturing facility in Commerce, California is expected to be completed as early as April this month, and we expect it to open in the next 30 to 60 days. Given the success of our facilities products in Washington, where again we're the number one and number two in the state for edibles and flour respectively, and the translation of that success that could now be introduced products and brands into Massachusetts and Illinois, the company is excited and soon to be entering the $3 billion California market. The automated state-of-the-art commerce facility of 185,000 square feet of manufacturing only and incorporates unprecedented capacity for finished goods manufacturing. It is 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 our thesis is proving out. We are successfully introducing our brands and products from Washington into new markets. The feedback we've gotten for our customers in Mass and Illinois has been fantastic. And while our Washington facilities system-wide revenue grew nearly 14% year-over-year in 2020, we had an expected seasonal dip in Q4, a major contributor to our facility success in 2020 is the onset of better wholesale prices in Washington. as capacity continues to leave that market, which benefits us. To finish up, along with the solid sales trends, we continue to see 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 operations. The company has generated positive operating cash flow since August, and as I said, It was several months ahead of our internal projections. All of this, again, sets us up for step-function operating leverage as we continue into 2021. Having said that, I'll now turn the call over to Leo, our CEO, who will delve a bit deeper into our assets by state and provide us additional color on 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. 2020 was a truly transformational year for our company, which was achieved through focus, dedication, and the hard work of all our employees. It's been a little over a year since our board appointed me CEO because of my deep understanding of cannabis business operations, as well as my business building capabilities, along with their desire for this to be an operator-led company. I've now brought that role in a culture that, as we say internally, is maniacally focused on execution, doing exactly what we say we're going to do. Since March of last year, 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 our facilities develop 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 package fits. Our facilities in Washington State are the number one edibles manufacturer and the number two producer of flour, with an overall number two market share in the state. We outperform over 600 licensed competitors in possibly the most competitive cannabis market in the world. We've achieved this while maintaining very attractive margins and profitability. We're replicating these tried and true production capabilities in the large and nascent recreational markets of Illinois, Massachusetts, Michigan, and soon to be California. So the question is, how is this thesis playing out for us so far? Due to low-cost cultivation and manufacturing methodologies, and again, our maniacal focus on execution, we've successfully and profitably scaled products and brands from Washington into Massachusetts and Illinois. We're very pleased with the results we're seeing one year in. Let's start with Massachusetts. It's been 18 months since the opening of our cultivation facility in Worcester. which at conception, we were able to institute growing methodologies and SOPs developed over the years in Washington. Since our first crop in Q3 2019, we've experienced no failed harvest and demonstrated annual yields of well over 400 grams per square foot. In our acquired Georgetown facility, we continue to make improvements to the growing environment, including upgrading to LED lights, which have driven yields in line with what we're accustomed to seeing in Washington. We've introduced all of our Washington brands in the Massachusetts market without exception. The reception of our products has been fantastic, and we expect to continue to build momentum as word of mouth spreads. We've seen the brands that we brought to market pretty quickly take market share from the previous 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. and introduced our production and packaging methodologies, which greatly enhanced throughput and reduced labor. As we move forward, we look to continuing momentum in Massachusetts as both of our WSTA and Georgetown facilities continue to ramp up. Our third Massachusetts retail location in Brookline is still expected to open for recreational sales in Q2. We've had to contend with some minor permitting delays, but our team has done a fantastic job of pushing the project and controlling everything we can control. Again, this speaks to our maniacal focus on execution, and we currently expect to be making our first sales in Q2. Our upgraded cultivation in Massachusetts ensures that we'll have plenty of inventory to hit the ground and Brookline running hard. We're excited about this store. Washington continues to stay steady with improved top-line growth as wholesale prices have rebounded from their lows in 2018. Our facilities had a record quarter in the summer, showing a big uptick in general in Washington across the board on flour and derivatives. Pricing is holding well, and as volume has climbed, we haven't had to drop pricing across the board on any products, which is extremely encouraging because usually coming into Q4 and outdoor harvest, you start seeing a bit of a drop in flower pricing 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 and hold steady. In Michigan, we're pleased with how our team navigated a very choppy supply chain and increased competition. Downtown Ann Arbor was not the same in 2020 as years past due to closures downtown because of COVID-19 and no University of Michigan students for most of the year. Even though we didn't have the same purchasing power as some of the other retailers in the state, the relationships our team has made over the past eight years in business were able to carry us last year and beyond. So despite seeing competition double since 2019 and having less product available to us, we were still able to almost triple sales during our first full year of adult e-sales. In Illinois, our South Shore Mission retail 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. As of March 2021, we're back to revenue numbers we were seeing before the break in last May. Further, our Elk Grove Village facility continues to see progress. Our Washington facilities team took over leadership of the building in January 2020, And since that time, we've seen our yields climb from 290 grams per square foot to right around 375 grams per square foot pre-expansion. Our flower strains and brands have been very well received in the market, along with our recently introduced flagship flower brands, Funky Monkey and Legends. Expansion in Elk Grove was substantially completed on time and under budget. Also, and more exciting, as Andrew mentioned earlier, we're preparing to commence construction of Phase 1 of our build-out of Project Big Daddy. After replicating our facility's best practices from Washington into Massachusetts in our existing Illinois grow, we have a tremendous amount of confidence that our scaled production techniques travel well, and Big Daddy will be yet another significant and continued validation of our thesis. My team and I couldn't be more excited to bring our scaled low-cost cultivation and manufacturing into the state, and also couldn't be more excited to be able to compete with some of the bigger MSOs that also have a super license. and yet haven't played in our playground, let alone skin their knees. Lastly, but certainly not least, in December 2020, our second Illinois location opened for retail in Calumet City, which is approximately one mile from the Indiana border. The grand opening occurred on December 15th, 2020, and the results have been absolutely fantastic. Calumet has quickly become our second biggest revenue dispensary behind Georgetown MA, and the momentum of Q1 has been amazing. In California, It's finally coming up on showtime. We're extremely pleased to be able to reiterate 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 and commerce will be operational in Q2 2021 with a full line of edibles, tinctures, and vape products to be on California retail shelves by end of May 2021. This facility 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 this industry and across our portfolio in general. Our distribution and attack market strategy is based, pardon the pun, and we're chomping at the bit. It's a big project for us, and we couldn't be more excited about that market. In terms of our CBD business, we're not satisfied with its progress in Q4 and have implemented both further cost-cutting and significant marketing partner improvements, which we are given a short leash to show significant improvements. So consistent with our mantra of maniacal focus on execution, we set up operational bogeys and are knocking them down. Our really hard work in 2020 has beautifully set the table for a strong 2021, and I'm pleased to report that our strong business momentum has continued through the first quarter. While we are still closing the books, we know we had a record Q1 on the top line with strength across our portfolio and expect profit to follow suit. As we enter Q2, we're excited to add to this momentum with the opening of our Brookline location and turning on California. We remain very comfortable with our previous guidance of system-wide performer revenues of $170 to $180 million and adjusted EBITDA of $40 to $50 million. We anticipate these numbers could have an upward bias as we move through the year. With projects falling into place, it seems a good time to frame for investors what we're playing for. We believe if we only what's on our license plate as of today, we have at least a $650 million revenue opportunity and a $250 million adjusted EBITDA opportunity. With that, I'll now turn the call over to the operator to open the lines for Q&A.

Thank you. 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. The 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 necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. Our first question is from Neil Gilmer of Haywood Securities. Please state your question.

Hey, Dale. Good afternoon. How are you guys doing? We're good. How are you? Good.

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

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

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

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

Yeah, so I'll start. Go ahead, Andrew. Okay. Oh, go ahead. Well, I was just going to start by saying, you know, we have, you know, a natural lift with, you know, our first full year of rec in Massachusetts. And then the only other thing that's additive to that guidance is we have the Brookline dispensary opening in Q2, and then California comes online. So there isn't a whole lot incrementally that needs to happen for us to get there. We are feeling great about the business trajectory and are looking forward to, you know, getting those two extra properties open. Anything else to add, Joe or Jake?

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

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

Well, guys, we should also clarify. This is Carl. We should also clarify the amount that we're projecting to be provided through California that is not that large a piece of the 170. Can you provide details on that? Okay.

Yeah, of that 170 to 180 that we've guided to, Neil, approximately 20 million is attributed to the California opening. Okay.

That's helpful. Appreciate that, guys. I'll pass the mic. Thanks very much. Thanks, Neil.

Our next question is from Graham Crindler of Eight Capital. Please state your question.

Hi. Good afternoon, guys, and thanks for taking my questions. Graham. Hey, Andrew. I just wanted to start off with a quick housekeeping note. Can you disclose what the gross margin was in Q4? I didn't see that in the press release there.

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

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

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

Okay, no problem. We can circle back on that one. Just then a question, wanted to go through a bit more detail with California. You mentioned the first product hitting the shelf in May, but a significant opportunity here to white label, private label. I was wondering, you know, in terms of getting a better sense of that operation, I know it's not, you know, a major part of the 21 Guide, but putting that into context with the opportunity of the size of the California market, I'm just curious what sort of distribution partners you're working with right now, you know, any efforts to expand your sales team in California or potentially looking at bringing on more partners, just as we think about you know, where the trajectory of the business in that state could go as you start onboarding for this facility. Thanks.

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

Sorry.

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

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

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

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

Our next question is from Eric Delorier of Craig Hallam Capital Group. Please state your question.

All right. Thank you for taking my questions, guys. I'm good. How are you doing, Andrew? I'm good. Good, good. So I wanted to touch on your guys' low-cost production and margins for a second here. So, you know, obviously that's one of your big competitive advantages. That's one of the reasons you're able to outperform so many license holders in such a competitive state like Washington. And it's great to see that continue in the newer market that you are vertically integrated in, you know, Illinois and Massachusetts. But as we look at California and that, you know, manufacturing-only asset, you know, how should we think about those manufacturing-only margins, I suppose, on a normalized basis? And then should we expect any initial, you know, slower ramp phase before we get into that sort of sustained margin? Thanks.

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

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

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

We anticipate absorbing it. Sure, go ahead, Jake.

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

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

Carl, you want to take that one?

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

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

Hey, Jason. How are you? I'm doing very well. First of all, congratulations on a great quarter. Good to see that you executed well in Q4. It sounds like Q1 is along the same vein. A question I had was just a little bit to follow up on Graham's question in terms of gross margins. I guess your annual number is under 55% for your gross margins on an accounting basis, not including obviously system-wide sales. Just wanted to know sort of what, you know, what you'd expect to be able to squeeze in terms of additional margin and how will the California business, you know, given that you, you know, you sort of indicated that your 120th of its overall potential will fall into this year, how will that affect margins? Will that be a positive impact still or will you, you know, grow into a higher margin profile as you build out the output production?

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

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

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

Okay. And do you have a target number of SKUs at this point? I know we're getting into some details before you've actually started selling, but just some curiosity on that.

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

Okay, great.

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

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

Our next question is from John DeCourcy of Viridian. Please state your question.

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

Joe?

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

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

Nice, like nice tailwind is more how I would describe it.

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

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

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

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

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

Thank you.

Thank you.

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

There he is. Hi, good afternoon, guys. Hey, there he is.

How are you doing?

Congratulations. Good, man. Congratulations on the Q4. Just hasn't been mentioned really a lot here, but the Big Daddy project. So you announced, obviously, a couple weeks ago the funding's in place, $45 million for the Phase 1 build-out, $6.5 million for the land. Leo, what did you say the timing was? When do shovels go in the ground, and when would you expect that to come online?

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

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

Jake, you want to take this one?

Yeah, Doug. So just speaking in round numbers, with that first phase of the facility, we think it's going to be additive, you know, in the neighborhood of $100 million. You know, it manifests itself in one of two ways, either through additional products available for sell-through in our two dispensaries or, you know, in the balance of that product being put to the wholesale market.

What would you do with No Grove after that? I mean, do you keep that on, or when would you do that?

Sorry, could you repeat that, Doug?

I don't know if it cut out just for me or for everyone else. Just your existing cultivation and outgrowth. You'd keep that to 9,000 square feet and this would be additive or would you just move everything into Big Dad? We would move everything over. Okay. I'm looking forward to that, obviously. So for those of us in the call and, you know, when you build it out to the scale at the end of phase one, well, how does that compare to the existing size of the facilities of the other MSOs out there right now?

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

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

I guess I'm just trying to see where you land in the grand scheme of things in Illinois at the end of this. Are you the sort of top five player kind of thing?

Oh, I don't think anyone was. So, I mean... Big differences are greenhouse versus indoor, right? So I don't think, I think we would be the premier indoor flower producer in the state, right? All the other big boys, all the max licenses are all greenhouse, all rural parts of the state. So if we can execute, we have an opportunity to really carve out a solid niche as the premier flower producer. And then, you know, we'd like to think that our on the production side will repeat what we do in other markets. and be extremely, you know, our downstream products will be extremely competitive too. But the biggest differentiator has to be we've got indoor flower. They are growing in kind of greenhouses in different parts of the state. Okay.

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

Sufficient for phase one. Yeah.

Sufficient? Okay. And my final question, CBD, Leo, you indicated you were disappointed. So what is the plan? When you're looking into the guidance for fiscal 2021, is that forecast to be a break-even product additive to EBITDA, or at this point is it a drag on earnings?

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

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

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

Thanks, Doug.

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

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

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