Q4 2020 4Front Ventures Corp Earnings Call
Greetings and welcome to the forefront ventures fourth quarter and year end of 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 and your telephone keypad. Please note. This conference is being recorded and will now turn.
The conference over to your host Andrew Kirk 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 for the entire for from management team.
We have Leo got maker of CEO and President Karl for Scotto.
Jake Wootten, our EVP of finance.
Joe fell from our CLO and P rendered our interim CFO.
Before I begin.
And 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 and 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 our safe Harbor and the outlook. We present is as of today and management does not undertake any obligation to revise any forward statements and 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 and our companies and enters the significant growth phase.
As always I'm going to start reiterating our thesis and strategy of the company.
And then I'm going to provide some color on our fourth quarter results and an update on the significant progress we've made and the business.
And 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 the exiting 2020 as we set the table for what we think will be step function growth and the operating leverage and 21.
I will conclude with a Q&A session, where the entire management team will be available for follow ups.
And 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 the state legalization and accelerates and federal and reforms at the federal level are appearing to be increasingly inevitable.
From a pure investment standpoint, and anticipated reforms and the banking laws should be a game changer.
I'm, leading the way the cost of capital coming down and the space.
Allowing us to get financing for money Center banks.
And we think that eventually leads to access to U S exchanges and broad based institutional ownership and the industry.
You combine that with the fact that the business fundamentals of U S. Cannabis continues to be robust and the face of a global pandemic that has caused a lot of economic uncertainty.
Industry momentum continues to build.
And what we are witnessing here is the emergence of a massive secular growth story industry, it's still the very much and at the nascent stages.
At forefront, we believe the sweet spot and that value chain and this industry is low cost production and distribution of cannabis consumer packaged goods.
So for the past six years forefront facilities of them has emerged into a dominant position and Washington state with a full line of products that are distributed 260 retail locations and any given month and Washington.
Our facilities of the number one edibles manufacturer and the state and the number two producer of flower with overall number two market share.
We've outperformed over 600 of other license holders and one of the most competitive cannabis markets and the world.
All achieved while maintaining a very attractive margins and profitability.
Our thesis is I always say and simple.
We're replicating these tried and true production capabilities, and large and nascent recreational markets of Illinois, Massachusetts, Michigan and California.
All in we currently serve and addressable market of over 76 million people.
We're pleased to share today important developments as we execute on this thesis.
The one.
We have seen a maniacal focus on execution, taking hold and our business.
We put it this way we have skin knees for so many times for for so many years competing and the hyper and competitive playground of Washington State.
And this is the playground that our competitors are you know, particularly on the East Coast Limited license States I've never competed against.
And for most scars, we're smarter and stronger than ever and consequently of performed better and our core business than we projected.
Two.
Our Q4, 2020 system wide pro forma sales was 25 million and increase of 12% sequentially over the third quarter of 2020.
Revenue growth was primarily driven by the first full quarter of Rec sales and Massachusetts.
Continued strength and Illinois, where we opened our second expenses dispensary and mid December.
And a solid quarter out of our Washington facilities.
Speaking, specifically to the fourth quarter of Massachusetts revenue grew by more than 75% over Q3.
And again as we benefited from Rec sales of full quarter of Rec sales and the state and.
And the Illinois grew north of 60 per cent quarter over quarter benefiting from the reopening of our south of Chicago store and.
And and the for a full quarter and as well as opening our second dispensary and and Calumet City.
Three we have remained operational and cash flow positive since August which for the record occurred earlier in the year than we had projected our.
Our cash flow from operations and the fourth quarter was $3 $2 million.
For Q.
Q4 marked the second consecutive positive adjusted EBITDA quarter, posting five 9 million and adjusted EBITDA, representing a margin of 24 per cent.
Adjusted EBITDA and EBITDA as well up from the $3 7 million and Q3.
And what was basically flat in Q2 of last year, So a very strong progression.
Our tight cost controls and accelerating revenues drove strong operating leverage and the back half of the year.
And because they have positioned us incredibly well entering 'twenty one.
The effect of margin is growing the weekly as we turn on our Georgetown and the Illinois facility upgrades and implement more of a quote unquote skin. These practices all of the effect, reflecting our Washington facility standard.
Bart.
We feel great about our balance sheet, leaving 2020.
In November we closed and oversubscribed bought deal with by Beacon Securities for $13 2 million.
In December we also closed 33 million dollar deal with our IPR, which provided for sale and leaseback of our cultivation and production facilities and some water, Washington and Georgetown math.
The proceeds from that deal paid down and outstanding senior debt to GAAP and the Green partners in its entirety.
So as of December 31st we had $18 9 million and cash on the balance sheet and $47 3 million and 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 as these projects sets the stage for our future growth.
As you May recall, we announced and our last earnings call plans, the 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 called Super licenses and the state that allows for 210000 square feet of canopy.
And to fruition.
We will get into more details later in the call. We're incredibly excited for what we internally referred to as phase one of our Big Daddy and Illinois.
And to come online late next year with roughly 65000 square feet of flower and canopy and 70000 square feet of production.
Seven and.
Q4, we also completed the expansion of our existing Illinois outgrow village the facility from 3000 to 9000 square feet of canopy on time and under budget.
As well as the upgrade store of Georgetown facility for the installation of led lights.
Our operations and construction team is firing on all cylinders and we expect those upgrades will be meaningfully additive to 2021 production.
H R.
Our second, Illinois, Dispensary, and Calamint City, Calumet City, and I was pronounced correctly, which opened in mid December with on time and budget and the dispensary from sales perspective is on fire.
It opened strong and that momentum has carried and <unk>.
We're incredibly well into Q1 and it quickly became the second best selling dispensary and our portfolio.
Not for.
Furthermore, we are pleased to announce that the construction of our manufacturing facility and Commerce, California is expected to be completed as early as our April of this month and we expect it to open and the next day 30 to 60 days.
Given the success of our facilities products products, and Washington, where again, we're the number one and number two and the state for edibles and flower respectively.
And the translation of that success that can now be introduced products and brands and into Massachusetts.
The truth and Illinois.
The company is excited and soon to be entering the 3 billion dollar of California market the.
The automated state of the art Commerce facility of 185000 square of feet of manufacturing only and incorporates unprecedented capacity for finished goods manufacturing.
It is similar to the scale of scene and the traditional consumer packaged goods and its industry.
Congress will have the ability to proof of produce over 10 times. The current capacity of forefront of 40000 square foot, Washington and production hub.
Which is currently the number one producer of derivative of cannabis products and Washington State.
We look forward for the first product hitting the California retail shelves and May 2021.
So our thesis is proving out.
We are successfully introducing our brands and products from Washington, and enter new markets.
The feedback we've gotten for our customers and math and Illinois has been fantastic.
And while our Washington facility system wide revenue grew nearly 14% year over year and 2020.
We had an unexpected seasonal dip in Q4.
A major contributor to our facilities success in 2020 is the onset of better wholesale prices and Washington as capacity continues to leave that market, which benefits us.
The 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.
And since late last year, we've reduced our go forward corporate overhead expense by over 50% through reductions of head count and streamlining of operations.
The company and has generated positive operating cash flow since August.
And as I said it was several several months ahead of our internal projections.
All of this again sets the succor step function of operating leverage as we continue into 2020 one.
Having said that I will now I'll now turn the call over to Leah, 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 and.
Andrew do the terrific job of updating you on the strength of you see in the industry and our business 2020 was the truly transformational year for our company, which was achieved through focus dedication and the hard work of all of our employees and.
And the little over a year since our board appointed me CEO because of my deep understanding of candidate business operations as well as my business and building capabilities along with their desire for this to be and operator led company and I have no brought that role and a culture of 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 of the company right sizing the cost structure streamlining our business and pushing deeper and are of course states by leveraging our structural cost advantage, our facilities develop and Washington into the rest of our license portfolio.
Recall, our investment thesis and we believe the sweet spot for outside of the value creation. In this industry is really around low cost of production and distribution of cannabis consumer package goods are.
Our facilities and Washington State of the number one edibles manufacturer and the number two producer of flowers with and overall number two market share and the state we outperform over 600 and license competitors and possibly the most competitive cannabis market and the world.
This while maintaining a very attractive margins and the profitability.
And we're replicating these tried and true production capabilities and the large and nascent recreational markets of Illinois, Massachusetts, Michigan and soon to be California. So the question is how is the steep thesis is playing out for us so far.
Due to low cost of cultivation and manufacturing methodologies and again, our maniacal focus on execution, we successfully and profitably scale products and brands from Washington, and the Massachusetts, and Illinois were very pleased with the results, we're seeing one year and.
Let's start with the Massachusetts, it's been 18 months since the opening of our cultivation facility and with the which a conception and we were able to institute growing methodologies and S. O P use of developed over the years and Washington.
Since our first crop and Q3 2019, we've experienced no field harvest and demonstrated annual yield of well over 400 grams per square foot and.
And the required Georgetown facility, we continue to make improvements of the growing environment, including upgrading the led lights, which have driven yields in line with what we're accustomed to seeing and Washington.
The introduced all of our Washington brand and the Massachusetts market without exception.
The reception of our products has been fantastic and we expect to continue to build momentum as the word of mouth spreads we've seen the brands that we brought the market pretty quickly take market share from the previous in how the in house brands that were being sold that of Georgetown, which is of great sign and we continue to see the sales volume.
Implemented our extraction methodology, which enables consistent repeatable feedstock for all of our products and introduced our production and packaging and methodologies with greatly enhanced throughput and reduce labor as we move forward, we looked the continuing momentum and Massachusetts as both of our what's the and Georgetown facilities continue to ramp up.
Our third, Massachusetts retail location and Brookline is still expected to open for recreational sales in Q2, we've had to contend with the minor permitting delays, but our team has done a fantastic job of pushing the project and controlling everything we can control again, the speak store and maniacal focus on execution and we currently expect to be making our first sales in Q2.
Our upgraded the cultivation and Massachusetts and sure that we'll have plenty of inventory to hit the ground and Brookline running hard and we're excited about the store.
Washington and 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 and the summer showing the big uptick in general in Washington, and across the board on flower and derivatives and pricing is holding well and its volume and that's why we haven't had to drop price being across the board on any products, which is extremely encouraging because usually coming into Q4 and outdoor harvest you start seeing a bit of of draw.
And flower pricing and the little bit of slow down and sales. So we're extremely excited about that trend and hope that going into 2020, one that we'll be able to hike prices, a little and hold steady.
And Michigan, we're pleased with how our team navigated the very choppy supply chain and increased competition downtown and Arb is not the same and 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 of some of the other retailers and the state the relationships. Our team has made over the past eight years and business, we're able to carry this last year and beyond the despite seeing competition doubled since 2019, and having less product available to us we're still able and we were still able to almost triple sales during our first full year of adult use sales.
And the Illinois, our south shore of Michigan retail reopened at the very end of July the continues to ramp up steadily month over month and we're pleased with the results. We're seeing as of March 'twenty 'twenty. One we're back to the revenue numbers, we were seeing before the break in the last night.
Further our Elk Grove village facility continues to see progress our Washington facilities team took over leadership of this building and January 2020 and since that time, we've seen our yields clubs climb from 290 grams per square foot to right around 375 grams per square foot pre expansion of flower strains and brands have been very well received.
And to the market along with our recently introduced flagship flower brands Funky Monkey and legends expansion and the El grew up was substantially completed on time and under budget.
Also and more exciting as Andrew mentioned earlier, we're preparing to commence construction of phase one of our build out of project Big Daddy after of replicating our facilities, the best practices from Washington, and the Massachusetts, and our existing Illinois growth, we have a tremendous amount of confidence that our scaled production techniques travel well and the big Daddy will be yet.
Another significant and the continued validation of our thesis my.
And my team and I couldn't be more excited to bring our scale low cost cultivation and manufacturing into the state and also couldn't be more excited to be able to compete for some of the bigger msos that also have the super licence and yet haven't played and our Blake round, let alone skin and their needs.
Lastly, but certainly not least in December 'twenty, and 'twenty or second, Illinois location opened for retail and calling and the city, which is approximately one mile from the Indiana border the.
Rand opening occurred on December 15th 2020, and the results have been absolutely fantastic column. It has quickly become our second biggest revenue dispensary behind Georgetown and MAA and the momentum of Q1 has been amazing and California, and finally coming up on Showtime, we're extremely pleased to be able to reiterate the timing of our.
Entrants into the 3 billion plus California market the company's fully funded the state of the art hundred and 85000 square foot manufacturing facility and Congress will be operational and Q2, 2020 one with the full line of Edibles tinctures and the vape products to be on California of retail shelves by end of May 2021.
This facility will have unprecedented automation and low cost production capabilities white label, and private label opportunities and the overall scale of that doesn't exist across the rest of our portfolio.
California is the state we're extremely excited about for multiple reasons and the facility here was something that was planned the attack a market of 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 strategies baked 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 and Q4 and and implemented both further cost cutting and significant marketing partner improvements, which we are giving a short leash to show significant improvements.
So consistent with our mantra of maniacal focus on execution, we set up operational bogies and are knocking them down.
Really hard work and 2020 of the 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 topline 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.
We remain very comfortable with our previous guidance of system wide per forma revenues of $170 million to $180 million and adjusted EBITDA of 40 to 50 billion and 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 and we believe if we only what's on our license plate as of today, we have at least of $650 million revenue opportunity and the 250 million of adjusted EBITDA opportunity.
With that I'll now turn the call over to the operator, the open the lines for Q&A.
Yeah.
Thank you at this time.
And you'll just conducting a question and answer session.
Ask the question. Please press star one on your telephone keypad confirmation tone will indicate your line is and the question queue. You May press star two and if he 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 stacking.
One moment, please while the polling for questions.
Our first question is from the Neal Gilmer Haywood Securities. Please state your question.
Yeah.
And ill get off good afternoon, and how are you guys doing.
Good how are you.
Thanks.
I guess my first question I got two maybe of I guess, let's just start off with the first one is really just your tail end of your comments there Leo on Q1, I know the books arent closed, but obviously you've gone through it.
And wondering whether you can give or provide any more color. Obviously, we saw recently and Illinois, some pretty strong numbers coming out of March sort of give and indication that that was the strong state, but you know across your various different of operations did you you had good positive trends continuing or any sort of disruptions of COVID-19 that we should be.
The.
I'm aware of for for the Q1 of them.
So, we'll see and may sometimes.
Yeah.
Okay.
Yeah, Joe or Joe or Jay do you want to handle that one.
Yeah.
Yeah, I'm happy to Hi, Neil. This is this is Joe the short answer to your question is the momentum is continuing in Q1.
And no anomalies.
And our ore curve balls thrown at us we're really pleased with the growth we're seeing out of Q1.
Okay.
And at that and then if I take a look at sort of you know your Q4 numbers by annualized that the $25 million you're at $100 million, you're the guidance for for this year is.
You know and probably it basically 70, 80% growth.
You know any sense of people give us as to is there one particular state and you're expecting the drive that like you know how should we can take the of California as that ramps up and the second half of the year.
And you know what sort of expectations you have for and you know maybe Massachusetts I know you guys don't give out part of the state by state basis, but you know conceptually where should we be looking for you know a good chunk of that 70, and 80% year over year growth being driven for them.
Yeah. So.
Well, it'll add and get them.
Go ahead, and well I was just going to start by saying you know we we have you know a natural lift with you know our first full year of Rec and in Massachusetts.
And then the only other thing that the that's additive.
To that guidance.
Is.
We have the Brookline and dispensary opening in Q2, and then California comes online.
So there isn't a whole lot of incrementally that needs to happen for us to get there we.
Our feeling great about the business trajectory and are looking forward to getting those two extra the two extra properties open and anything else to add Joe or Jay Yeah, and Neil just to put a finer point on that with the $25 million and Q4 and only included about two weeks of the Calumet City dispensary, So youre looking at it.
All year of that facility, which is already meaningfully outperformed our expectations.
That was the only of the thing I was going to add.
Got it and yes, it all the sales clarify this.
This is Karl we should also clarify the amount that we're projecting to be for.
Provided for California that is not that large of a piece of the 170 and provide details on that day.
Yeah, all of that 170, and 180 of that we've guided to Neil are approximately $20 million is is the attributes of the California opening.
Okay. That's helpful and I appreciate that guys and I'll pass the line thanks very much.
Thanks Neil.
Our next question and it's been grant Graeme Kreindler eight capital.
State your question.
Hi, good afternoon, guys and thanks for taking my questions.
And I was just wanted to.
Andrew.
Just wanted to start off with a quick housekeeping note and can you disclose what the gross margin was in Q4 and as I couldn't I didn't see that and the press release there.
Yeah.
Okay.
Yeah.
Jay do you have that handy for for on the adjusted basis.
Not gross margin.
And I don't have that I don't know Pete.
Might happen to have Q4's gross margin I, just I just have the EBITDA margin for.
The quarter, yeah, we'd have to we'd have to and this is Pete.
We'd have to circle back on that and I don't have that right in front of me.
Okay, No problem and circle back on that one I'm just a been a question wanted to go through a bit more detail with with California. You mentioned, the first products hitting the shelves and may but a significant opportunity here of Q.
True to White label private label I was wondering you know and in terms of getting a better sense of that operation and I know it's not.
And you know a major part of the 'twenty, one guy, but putting that into context with the with the opportunity of the size of the California market.
And I'm, just curious what sort of distribution partners of yours.
Working with right now.
And any efforts to expand your sales team and California.
Or potentially looking at bringing on more partners just as we think about you know where where the trajectory of the business and that state could go as.
As you start on boarding for this facility.
Sure guys and I'll take the first crack at this and.
I think what we've built and California is no pure manufacturing and processing of 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 of daily with Big partners and big retail chains and California.
And there will be the opportunity for us to do some private label, specifically for retail and as we move along and build relationships with our distributor who is NAV is at the current moment. We'll also be looking at smaller partners that make noncompete and skus to start where we can present, a white label opportunity that makes sense for everyone.
But the start we're definitely very excited about and heavily concentrated on spreading our own and house brands. We selected the top 10 brands that we have in terms of sales quality and the ability to fully automate and really bring them the scale.
And we're completely ready to go all of the machineries onsite and we feel very good about the timeline, we've presented and about the conversations that we're having.
On a daily basis with the different players and that market and just the yeah.
So.
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 and our business model of day. One. So we can actually go ahead and start producing right and when we get open while we ramp up our sourcing material in terms of flower and trim and start making our own oil.
Yeah.
Okay, I think the assays.
Yes, sorry.
I mean, Greg just maybe a little bit more context for you and just for the group. So the the number of that Jake was mentioning.
Net 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 of them machines running for two shifts a day.
So for all revenue numbers are based off of.
And 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 and the market. So you know.
And 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 I appreciate the color there and.
And then another question here with respect to and the expected opening of the Brookline location, how sensitive is the 2021 guidance.
To that opening.
It to happen.
Towards the end of Q2, if that were to happen and you know, perhaps a couple of weeks earlier or if that worked out of it slipped more so into Q3, how much sensitivity is built within within that guide, which I know has that better and has it.
$10 million range of their for.
For the for the opening of and Brookline and thank you.
I think the answer's low sensitivity this is Joe again I.
I was actually a little surprised that the guys. Let me ramp up the revenue for 2021 and Brookline when I did kind of the year and projections. So.
We had a slow ramp and Brookline if for.
The client does what are other stores did or Brookline does what Calumet City does heck, we could not open Brookline till September and still hit our revenue numbers.
Okay.
Okay understood. Thank you very much for that that's it for me guys.
Our next question is on the Eric the Laurie.
Craig Hallum capital grants and please state your question.
Thanks for taking my questions guys.
And because of how you're doing Andrew.
Good.
And again.
And I wanted to.
Touch on your guys', low cost production and and and margins for a second here. So.
Obviously, that's one of your big competitive advantages that that's one of the reasons, we're able to outperformed so many license holders and in such a competitive state like Washington, and it's great to see that continue and the newer markets that you are vertically integrated in and.
And Illinois, and Massachusetts, but as.
As we look and California.
And that manufacturing only asset and how.
And how should we think about those manufacturing only margins and I suppose on a normalized basis and then.
Should we expect any initial and slower ramp those for getting to that sort of sustained margin area.
Okay.
Joe and Leo I'll, let you guys dive into that one yeah.
Yeah, I'll I'll I'll take the first crack so the.
We I truly believe we truly believe that cultivation is sooner than later and 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.
Well you know looking at the prices as they sit in the market today, it actually fits our business model really well and we can source the distillate.
We can source of distillate, let's say for prices that are below what we predicted and our business model and we feel really good about the quantity. That's there and we've also began having conversations with multiple farms that are ramping up production for this year's outdoor harvest.
Tober, and we feel good about our ability to source of material at a cost below what we produce it for indoors and 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 about the input and on the derivative side the margins are actually always.
Better on derivative, good and they are and flower and when you're talking about the competitive market like Washington, or like what California is turning into.
Okay, great. So I guess, it sounds like a and it could be.
Similar to your current and I guess similar to your Washington margins, and then potentially some some room for improvement.
The improvement beyond there as the as.
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 that needs to be absorbed where perhaps we could see some some margin compression from from Q1 to Q2 or is that do you.
Guys anticipate absorbing that pretty quickly and not having a material impact there.
Yes.
We anticipated the everbank.
Sure go ahead Jake.
Yeah. So there will be a kind of a sliding scale EBITDA margin with that project Eric has as more capacity comes online you know we're looking at the end of the the first year and that of opening in 2020 one across.
Across all of the call quarters about of 25% EBITDA margin from the four wall for California, a blend.
Blending into a high thirties, low forty's EBITDA margin as the.
Facility really gets up and running within the first probably 12 months.
Yeah.
Okay and that's that's very helpful. I appreciate that and then just last one for me here and I know you guys have plenty of very exciting expansion projects.
And on your plate already but as we look at Georgetown and I think you guys have.
Decent room for expansion, there I think maybe 20000 square feet or something and.
You know I'm sure the are.
You guys have bigger fish to fry at the moment, but would just love to hear if you guys have a comfortable putting out any timing for them you know when when you guys might expand production and Massachusetts and that's it for me. Thanks.
Carl you want to take that one.
Yeah sure hierarchy, it's Carl.
<unk>.
Yeah. So we are daily contemplating the way in which.
You know, we can add assets to the kind of proven thesis seems to be working quite well for us I you know over the last let's call. It couple of months, you've had plenty of exposure to other teams understanding what other entities are doing and I guess the all I can say is we're incredibly happy with our team.
And we're incredibly happy with the thesis, we're incredibly happy with the way, it's proving out and therefore.
And I'm kind of similar of that seen in the Bureau, dark 30, where the CIA boss comes out and says do your job give me more people to kill obviously, we don't want to do that but we want more assets to kill and so, Massachusetts is incredibly important to us there.
And getting ourselves and a place, we're bringing and we're bringing our products to the Massachusetts market at scale quicker is incredibly important and one of the opportunities that is available to us obviously is to build out of facilities. There are other some we're looking at all of them and we find a we consider Massachusetts and hitting.
And it's harder now that the proof of concept has proven the way it has with the acceptance of our products were going to ask for 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.
Okay.
Our next question is from Jason Berg of PSA.
And Sean Please state your question.
Hi, Jason how are you.
And doing very well first of all the congratulations on a great quarter and good to see that you executed well in Q4 and it sounds like Q1 is along the same vein.
A question that I had was.
Just a little bit of follow up on Graham's question in terms of gross margins.
Your I guess your your annual number just under 55 per cent for your gross margins are and accounting basis, not including obviously the system wide sales.
Wanted to know sort of what you know what you would expect to be able to squeeze in terms of additional margin and and how how old the California business. Given that you. You know you had sort of indicated and your 120th of the of its overall potential will fall into this year.
How will that affect margins and might be a positive impact still or.
Will you grow into a higher margin profile as you as you build out the.
I'll put production.
And I can take that one so our Q4 margin profile and overall for the year was really strengthen on the back of much more of our revenue being put through the our vertically integrated locations. So having you know the two locations and Massachusetts come on line of adult use and in late Q3 early Q4 and.
And then you know more of our sales coming from Illinois, and those those two adult use dispensaries as we left the year.
Really bolster and margin as we look to California.
<unk> purely and a wholesale market.
You don't receive as much of the benefit from being vertically integrated obviously and so the.
The and the margin profile is the is a bit less than our existing footprint and Massachusetts, Illinois that said it it's a bit more attractive and it is in Washington and.
So just to correct something that I think Eric had previously said in his last question.
And 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 and when it first starts California.
Will will be a bit of of a drag on gross margin that said as you move into real production capacity and you were able to generate more operating leverage and you know on the existing fixed cost and that state. Yeah. We do expect it to kind of still be on the lower and relative to a of Massachusetts, and Illinois, but certainly much more attractive then you would just think about a of wholesale market.
But and and and a large adult use state like California.
Sure. Okay. That's that's great color.
Just to follow up on the on California in terms of your your product placement and.
And the California.
You know product landscape are you aiming to be sort of a you know of.
And low lower priced product of premium products, you know a mixture of of you know.
The mixture of all just sort of any of any color you can provide on in terms of where you expect to be in terms of that product spectrum, and California would be helpful.
Sure. So our routes and our core is to provide high quality products at very affordable prices that being said within our brands and our product lines and we will have everything from low cost quality and affordable to the high end premium depending on the product line and what we're targeting.
Okay and do you do you have a target number of Skus at the at this point and I know, we're getting into some details before you've actually sort of telling but just just some curiosity on the on that.
Sure off the bat and once we get the full capacity with the 10 brands and we decided to bring the market. We're looking at upwards of 250 Skus.
Okay, Great and I would say Oh.
Oh, just sorry, Jason just a little color to add to the this is Joe It's Leo had mentioned it we've got these 10.
The brands that were really focused and we've got about approximately of 30 brand portfolio. So we really did some and pretty intense SWOT analysis, which we update every 60 days on the California market for the top five brands in these categories.
And.
And so we have for our initial 47 skus that we're making next month, we will be quickie ramping up that as Leo referred to and we believe that we are pricing these skus to be anywhere from 20% to 40% built.
Flow the current category leader at the same quality.
So it's very much a target edge.
Surgical approach on specific brands specific skus out of specific price that from our preliminary conversations is going to lead to sales traction quickly, but we've got of course execute on that.
Yeah.
Okay, that's great where we're a we're very bullish on the California markets as I know you are as well so looking forward to the developments and there anyway. So that's the end of my questions. Thanks very much.
Yeah.
Thanks.
Our next question is from John Day of course.
And please state your question.
Hey, guys and congratulations Hey Ho.
Congratulations on the quarter and are looking forward. The following up here just a couple of quick questions and some good ones have already been asked.
First off can you just touch on how much of.
And that you Didnt give specific color, but the Q1 record results.
And how much of that is kind of seeing a stimulus day east and hearing from you know a lot of other companies that are especially on the retail side of things Theres big boost and stimulus the receipt of any any color on that.
Okay.
Hi, 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 start we have seen people spend their stimulus money at our stores last month for sure.
Okay, and then kind of following up on that looking at the subsequent quarter and you know how the.
Yeah do you anticipate that the receipt of that was enough to.
Kind of negate regular seasonality or would you still or is that just the nice.
And of a nice tailwind to start the year.
And nice like nice tailwind, it's more of how I would describe it.
Okay, Great Alright, and then kind of looking at Capex plans here for this year and.
Can you remind me or us and how much is kind of left to spend on the California facility or are the left at this point of video and in the first quarter, but how much was spent for 2020, one and the California facility as well and the Brookline dispensary openings.
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 and cultivation expansion.
And I can take that one.
So when you look at the 18 and change on our balance sheet and cash approximately $10 million of that was earmarked for California, and where we stand today are we we've got that balance down to about $4 million left to spend and California.
<unk> of our Brooklyn, and facility will cost about $750000 and Capex and then we have another $1 5 million in Capex and I just didn't in the basic upgrades to our our Georgetown cultivation and production facility.
And just to add to that we we are also generating positive operational cash flow each month for the ability of us to either finance no additional capex projects or as you alluded to potential M&A acquisitions as well.
Okay and then one final question and that to me is the you know any issue.
In and it kind of locking and flower for that California, and the production facility and.
And you know is that going to be kind of a challenge and get things up and running like you know the governor on growth or anything like that or is the.
Is that not really nice yet.
Sure I can take that one of them. So flower has not been an issue at and in full transparency of flower is the the first input that we're sourcing and that we're interested in and there's an abundance of category three fully tested clean distillate and it's 90% plus THC and potency that's floating around the market at very favorable.
Mrs and and large quantities, so we feel very confident about.
Being able to purchase and have delivery on day, one of a ton of input materials, while we shore up.
And the supply agreement contracts for future of flower and trim that we'd been working on for the last several months here.
Okay, great that's.
Is it for me and thanks for taking the question Scott.
Thank you.
<unk>.
Our final question is from Doug Cooper of Beacon Securities. Please state your question.
There is good afternoon, guys hey areas.
And you're doing congratulations and good man congratulations on the Q for the.
Just hasn't been mentioned really a lot here, but are the big Daddy project. So you announced with obviously a couple of weeks ago and the findings and plays $45 million for the phase one build out six and a half million for the land.
And what what's the what did you say the timing of was one of the shovels go and the ground and when would you expect.
That to come online.
We're extremely close to finalizing everything and to allow us to put shovels and the ground and we're looking at 18 months from that point of you know.
At this point, we're looking at end of Q for next year.
The end of Q4, 2020, two and what what are you assuming.
Pricing is there and what it is now what kind of revenue would that 65000 and square footage.
And I guess canopy, and 70000 square foot manufacturer and what kind of revenue with the generally do you think of it.
Jay do you want to take this one.
Yeah, Doug So just speaking in round numbers for that first phase of the facility and we think is going to be additive.
In the neighborhood of $100 million and manifest itself and one of two ways either through additional product available for sell through and our two dispensaries.
Or you know and the balance of that product being put to the wholesale market.
What we did with the world after that.
And you would keep that on her.
And what would you do that.
Yeah.
Sorry could you repeat that I don't know if it would cut out just for me or for anyone else.
And just your existing does your existing cultivation and outgrow, but you'd keep that the 9000 square feet and this would be additive door would you just move everything into the into Big day.
We would move everything over.
Okay.
Well looking forward to to that obviously and so.
For.
For those of us and the call and you know well.
When you build it out to the scale of the end of phase one, but how does that compare to the existing size of the facilities of the other msos out there right now.
Yeah.
Yes.
Okay.
Joe you want to take a crack at this one.
Yeah I.
Yeah.
Well, we know the we're expanding so you don't kind of all of our understanding is that no. One had kind of was cultivating and of a greater than of hundreds of thousands square feet of can it be kind of at the end of the year, but that more canopy was coming online.
Line every month, so if we had of kind of predict what people are going to be at by the end of Q for next year. I mean, we were thinking we're kind of anticipating.
And that at least five or six folks have kind of gone out to the Max capacity at that time.
I guess I'm, just I'm, just trying to see what sorry.
Sorry, Joe I was just happens just trying to see where you land and the Grand scheme of things and Illinois. It ended up smoothed the sort of top five player and linker.
Oh, I don't think any one so I mean big differences are of greenhouse versus and door right. So I don't think I think we would be the premier indoor flower producer and the states right all of the other Big Boys all of the Max licenses are all greenhouse all rural parts of the.
The state. So if we can execute we have an opportunity to really carve out a solid niche and.
As the premier flour producer.
And then we'd like to think that are on the production side, we'll repeat what we do and other markets.
And the extremely.
Our our downstream products will be extremely competitive too, but the biggest differentiator has to be we've got indoor flower and they are growing and kind of greenhouses and different parts of the state.
Okay and that $45 million that you've got funding for the that sufficient for phase one do you think or what would you need more capital.
Sufficient for what should I use for phase, one and Yep Yep.
The vision, Okay and my final question, the CBD and Leo you indicated the you were disappointed.
So what is the plan and is it is it one of your when you were looking into the the guidance for fiscal 'twenty. 'twenty. One is is that for it has to be of breakeven products are additive to EBITDA or at this point is it is it a drag on earnings.
It's for.
Slightly additive to EBITDA in 'twenty one Doug.
I'll, let Leo or <unk>, Joe give talk anymore specifics about timing of the direction of that business, but with respect to its contribution to 'twenty. One guidance you know it's it's.
It's pretty nominal and from both the topline and and EBITDA standpoint.
And we're watching of course, we're watching it closely yeah sure of what we're watching it closely we've been disappointed with what we thought the potential of the business had and that being said, we're not losing money on the business and we're keeping a very close eye on where it goes and how this new model.
Getting partner is able to provide them.
A different angle and.
We're going to keep a close eye and make sure that the the business stays positive and as we move forward and you figure out which direction, we want to push it and.
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 until the Yo got maker of for closing remarks.
Thank you guys for joining we're extremely excited about the growth of our business and we look forward through sharing of.
For Q1 results after the quarter closes.
Thanks again.
Thanks, everyone.
Yeah.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.