Q3 2021 4Front Ventures Corp Earnings Call

[music].

Good afternoon, and welcome to fulfill a benches fourth quarter 2021 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the prepared remarks, there will be a question and answer session if you'd like to ask a question. During this time.

Please press Star then the number one on the telephone keypad.

I would like to withdraw your question. Please press star two and your telephone keypad I would now like to turn the conference over to your host fulfill benches interim Chief Financial Officer, and Chief Investment Officer, Mr. Adam Richard. Thank you you may begin.

Thank you operator, and welcome everyone to forefront ventures earnings call for the third quarter of 2021.

I'm joined today on the call by our CEO Leo got maker President.

There are present, Carl just Connell C L O Joe fell for them.

Jake Wootten, our EVP of finance.

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 in our disclosure materials.

Any forward looking statements should be considered in light of these factors.

Please also note that the safe Harbor any outlook, we presented is as of today and management does not undertake any obligation to revise forward looking statements in the future.

So with that out of the way, let me give a very quick overview of the call today.

As always I'm going to start with a review of our thesis and strategy.

Then I will provide some color on our third quarter results and an update of the progress we've made in the business over the last few months.

Then hand, the call over to Leo who will go into more detailed review of our operational trends.

And I will highlight the milestones we achieved during the quarter before looking ahead to what's in store for 2022.

Well conclude with any question with a question and answer session, whether the entire management team will be available for any follow ups.

So, it's becoming increasingly clear that the industry or forms on the federal level R. O all but inevitable and it's a piece of state legalization accelerates I still believe that we are entering a golden age for our industry.

Recent surveys suggest over two thirds of Americans are now in favor of cannabis legalization, making us a rare nonpartisan issue during the time otherwise polarizing politics.

There are now multiple avenues for reform that could be game changers like say its inclusion in the NDA a as well as recently introduced Republican proposals in the house all of which we believe could ultimately help lead to broader institutional ownership.

Reduced cost of capital through financing from major commercial banks and also access to major U S exchanges could could stem from that.

The business fundamentals of U S candidates remains robust and we're witnessing the emergence of a massive secular growth industry, that's still very much an inclination nascent stages.

At forefront, we maintain that the sweet spot in the value chain of the industry lives in a low cost high quality production and distribution of the candidates consumer packaged goods.

Over the past seven plus years, our facilities and have established a dominant position in Washington State with a full line of products distributed over 268 retail locations in any given month there.

Our Washington facilities, the number one edibles manufacturer and the number two flour producer with overall number two market share in the state outperforming over 600 license holders of one of the most competitive cannabis markets in the world and we achieved this while maintaining very attractive margins and profitability.

So our investment thesis as I always say is simple.

We're replicating these tried and true production capabilities from Washington into large and nascent recreational markets in Illinois, Massachusetts, Michigan and California.

Today, all in we currently serve an addressable market of over 76 million people.

As we deliver on this thesis, let's dive into our third quarter results and recent important developments with you today.

First and most important to our long term growth prospects. We are pleased to now have the infrastructure in place to drive a robust 22 and beyond.

While most of you know we experienced some permitting delays they were out of our control with the launch of our Brookline, Massachusetts, Dispensary and Commerce, California production facility.

Those are now online and we have never felt better about the substantial growth trajectory in 2022 <unk>.

Despite a delayed ramp this year, our internal targets for 2022 and 2023 remain unchanged.

Key operational developments this quarter are proving transfer formative for our company.

They are positioned us with positive upward momentum and reinforced foundation as we move into year end.

And Illinois, construction, a big Daddy or new cultivation and production facility in Madison is now underway.

Construction on the phase one of the project of 250000 square foot building was 65000 square feet of flowering canopy and approximately 70000 square feet of manufacturing space broke ground in August and is anticipated to be completed in Q4 of 2022.

Beginning operations in Q1 of 2023.

The full expansion of the facility once realized will encompass 558000 square feet to help meet demand amidst the dramatic increase of Illinois retail licenses and consumer demand turning online in 2022.

Once complete our Madison facility will produce over 20, plus in house brands, and 1800 products, which will be offered to Illinois customers in an accessible price point at our own mission dispensaries as well as partner dispensaries across the state.

Big Daddy will also produce a variety of wholesale white label products, including flower concentrates edibles tinctures gel caps and other manufactured products for.

Or other multistate operators candidates business and brands in Illinois.

In California, our state of the Art 170000 square foot manufacturing facility.

Facility in Commerce is now officially open and operational.

Facility was completed on time and on budget, but as discussed on our last quarterly call. We experienced a delay in the issuance of a certificate of occupancy due to multiple rounds of comments by the Los Angeles Fire Department.

The Department has recently seen multiple legal and illegal extraction explosions over the years, including a blast last year that injured 11 firefighters. So theyre extreme caution with the facility the size and scale of ours is understandable.

While we experienced longer delays in anticipated during this local regulatory approval process. The facility is up and running in earnest and.

And producing nine of our 20 brands for sale and distribution to license dispensaries in California via our partnership with Devon.

Now this is a leading distributor of cannabis products in the state covering 100% of all licensed retailers.

And now this is also leased 20000 square feet in our facility, which enables our retail products to seamlessly integrate into their inventory at the point of production.

<unk> for highly efficient distribution.

Massachusetts, perhaps most excitingly black.

Last month, we announced the acquisition of new England, cannabis or any C. C. A T.

Transaction that will significantly bolster our wholesale presence in the Massachusetts market.

The acquisition once closed will be immediately accretive to our EBITDA.

It would solidify our scaled position in this core market, enabling broader market penetration of our diverse range of low cost high quality products and brands.

Subject to regulatory approvals and customary closing position conditions. The acquisition of any C. C is expected to close late fourth quarter of this year or early 'twenty two pending final CCC sign off.

We are excited to bring this new opportunity over the finish line and they can integrate any seize operation with our growing Massachusetts model.

So with that let me review the Q3 numbers.

Q3, 2021 system wide pro forma sales were $33 1 million, an increase of 48% over the same quarter last year and.

And effectively flat with a decrease of 4% sequentially from second quarter of 'twenty one.

With only five weeks of Brookline in the corner and quarter and no revenue in California to work due to the permitting delay.

Sequential growth in the quarter was muted.

We expect Q4 to be aided by holidays, more wholesale revenue and stronger margins and with California now online in any C. C ready to close we expect strong growth to resume as we leave the year and enter into 2022.

Q3, 'twenty one adjusted EBITDA grew 103% to $7 5 million up from $3 7 million in Q3 of 2020, representing an adjusted EBITDA margin of 23% as compared to an adjusted EBITDA margin of 22% in Q2 2021.

Unfortunately due to the delays in the local review process and Commerce, we didn't see meaningfully quarter, we didn't see the meaningful quarterly step up adjusted EBITDA that we had hoped as our targets were predicated on us being fully operational in math in California.

We are pleased that we were able to hold EBIT a flat through the increased sales of our or of our internally produced products, which are driving system wide margin improvements is designed with.

With the obstacles facing our California opening now behind US, we expect adjusted EBITDA to meaningfully grow as our facilities begin to sharpen efficiencies and kick into high gear and we remain on track for step function adjusted EBITDA growth as we exit this year and into an active 2022.

Our balance sheet, leaving Q3 was in solid shape.

As of September 30, we had $8 5 million of cash on.

On hand, and $47 5 million of related party long term debt, which does not come due until may of 2024.

Excluding $2 $8 million in Preopening cash expenses, and commerce, including material investments in working capital cash flow from operations was once again positive as we continue to focus on operating expense reduction.

And despite the industry's rocky performance in the capital markets and headlines around the lack of progress on banking forms. This year, we've never felt better about our position our market position and ability to execute on our strategy.

So our thesis continues to prove valid we are successfully introducing the brands products and best in class S. O piece from Washington into new markets at scale.

We are executing on our strategy of continued.

Executing on our strategy of continued expansion into core markets of Massachusetts, and Illinois, and now California.

The pre commercial activity, we're seeing in California, combined with our ongoing proposed acquisition of Massachusetts.

Has us very bullish as we head into 2022.

Okay.

Which brings me to my final point.

I also believe that we are on the cusp of one of the most active M&A environment, we've seen in our industry.

As I briefly mentioned during last quarter's call, while details on safe banking and timing of meaningful change at the federal level remain hazy.

They're nearing inevitability is apparent.

Weird or we reiterate that U S cannabis as a state led story that continues to deliver and M&A activity in the industry. It looks like it will continue to heat up as companies vied a position themselves properly.

Our goal is consistently to be our goal has been consistently.

Sorry, our goal has consistently been to become a larger company precisely to realize the benefits of our significant operating efficiencies performing at scale for which they were designed.

As a management team always looking for ways to maximize value for our stakeholders. We continue to explore new means to augment our growth via accretive acquisitions or as part of a larger platform.

We are pleased with how the operational developments made during Q3 in our largest markets have positioned us with significant forward momentum as we wrap up Q4 and prepare prepare for what looks to be a very robust 22.

With that I'll now turn the call over to Leo got maker, our CEO, who will dive a little deeper into our assets by state and provide additional color on our near and midterm plans Leah.

Yeah.

Thanks, Andrew for the update on our business progress and on the strength, we see in our model and within the industry.

As just discussed in the third quarter, we reached several substantial operational milestones that have generated last name momentum expected to drive our gross wells through 'twenty two and beyond.

While we expect experienced minor delays during the California approval process before opening our Congress facility, we are more confident than ever that you now have the tools facilities and teams in place to realize considerable growth in the coming year.

During Q3, we made meaningful progress in the development in three of our core markets of California, Illinois, and Massachusetts, where we achieved major operational milestones towards bringing our scaled production capabilities into those markets.

Beginning with Massachusetts, We're happy to report continued success and profitability as we reach our one year anniversary of adult use sales in the state.

In August we opened our third, Massachusetts dispensary in Brookline, serving the wider Boston University and Boston Metro area.

Since its opening mission Brookline has seen strong positive reception from the local community and like our other locations in Massachusetts as you know a steady incline in customer traffic post opening.

Louise that used to be growth in the state at the beginning of October we were thrilled to announce our proposed acquisition of Holliston, Massachusetts based you removed Kansas.

The acquisition of <unk> and its fully operational.

<unk> thousand square foot cultivation, and manufacturing facility will more than double our total flowering and canopy in Massachusetts and significantly expands our strategic position in this attractive market by enabling broader market penetration of our diverse range of low cost high quality products and brands.

Our transaction to acquire an ECC is expected to close in the December January timeframe pending final approval from the CCC.

We continue to bring our traditional cultivation and production methodologies in our products to Massachusetts, and UCC will allow us to strengthen our competitive position in the state with the capacity to support a meaningful wholesale business.

Actually a little more than double storefronts total flower and candidly in Massachusetts to over 30000 square feet with further expansion with potential for up to an additional 10000 square feet of candidate it will approximately triple storefronts kitchen processing and distribution space.

The mechanics are now firmly in place for a continued operational efficiency at scale.

Illinois continues on schedule.

Third quarter saw the closing it stays one of the Buildout of the highly anticipated cultivation and production facility he likes to call. It big data and up to 558000 square foot cultivation and production facilities located in medicine in August we broke ground for the construction of the first phase of 250000.

Square foot building with 65000 square feet of flowering T entity, and approximately 70000 square feet of manufacturing space. This.

The sheer size of this next generation facility will allow us to meet the state's growing consumer demands and will help broaden the reach of our innovative low cost cultivation and manufacturing methodologies and suite of brands and products, all while creating jobs and new streams of tax revenue for mats in Polk County in the state of Illinois.

Now that construction has officially begun phase one of our projects to create the largest cannabis cultivation and manufacturing facility in one of the country's fastest growing cannabis markets is anticipated to be completed in the fourth quarter of 2022, beginning operations in Q1 of 'twenty three.

Also leading forefront in house brands and products to grow in retail and wholesale market in the state.

We have tremendous confidence that big Daddy will be yet another significant and continued validation of our thesis.

Forefront to even though I could not be more excited to be bringing our scale as a low cost cultivation and manufacturing into Illinois, and going head to head with some of the largest msos in this competitive market.

Washington remains relatively stable with wholesale prices have rebounded from their lows in 2018.

<unk> seen very consistent performance, despite having more outdoor product in the market, causing us to pause on taking place while we don't anticipate outsize growth in the Washington market. We continue to hold so which is a testament to the market reception for our products and the focus of our team.

Last but not least California.

In October we commenced operations at our Congress facility one of the largest most automated cannabis he had used to activate facilities in the world.

David There are hundreds 70000 square feet facility, which is located just outside Los Angeles, and Southern California is not open and fully operational currently manufacturing nine of storefronts 20 brands and 164 different skus.

The delays that we experienced during the local regulatory approval process did not translate to idle time, because we were able to further calibrate equipment and focus on building relationships with various large retail groups ahead of a launch.

Congress team who've been working around the clock as it ramps up the production of a wide range of products, including introduce three year olds gummies hard candies routines caramels minutes Softgel capsules.

Tinctures and other manufacturers. These brothers do you believe that to date no. Other operator has been able to achieve this kind of manufacturing scale and the response, we're seeing in the market and has already been tremendous.

With our suite of in house brands on its way to market.

Custom built automated machinery advanced machine automation technologies expert commissioning signature low cost reduction and large scale manufacturing capabilities. We're confident our Congress facility will emerge as one of the premier multi product manufacturers of high quality low cost at the end of this product in the country.

Yeah.

We secured a meaningful distribution partnership with navis, a fully licensed cannabis distributor and wholesaler Pops alone with one of the largest portfolios of cannabis brands in the world supplying 100% of California's dispensaries and delivery services.

We believe our partnership with now this will continue to be a key factor in helping as smoothly and we're the world's largest cannabis market.

So far we've been very pleased with different slogans were seen at this facility.

I'm also incredibly excited about the opportunities you see on the horizon.

E Commerce will be a formidable growth driver or something needs, particularly as more operators look to bring their brands in California.

Currently we're in ongoing conversations with numerous potential partners to fully leverage the scale of our commerce operations and look forward to sharing more good news with you on that in the near future.

Let me just briefly recap a few Congress highlights with you in just the last 90 days.

We started producing in die in a forefront 20 brands and 164 different Skus on November one.

You've manufactured 36, 10 pack edibles and produced 17000 buildings during the first few weeks of production.

To give you a rough idea that's equivalent to about two weeks of Washington's production the market leader into derivative cannabis products in that state.

We've distributed samples and estimate estimate our samples would've hit more than 150 stores by the end of this month.

By the end of December and 700 by the end of January.

Furthermore, we think it's critical for you to understand why we're so confident in our ability to be a dominant player in one of the toughest most competitive markets in the country.

It's no secret that enter in California hasn't always been easy for everyone.

That's why before we entered the marketplace. We did our homework years' of homework you built relationships. We've had a team on the ground for years or a decade working in cannabis has also enabled us to learn valuable lessons, which we believe will not only be applicable in California.

I look to our growth trajectory.

Many of you who've been following US know our managed facilities are the number one edible oil producer in Washington, another incredibly competitive market.

We achieved that market position through research data service and consistency.

Our approach to research and data has really helped us bring our customers and clients great products at attractive prices.

Not only have we been studying the ins and outs of the California marketplace, but we also bring an unprecedented level of expertise and scale low cost manufacturing and highly competitive states in short. This is not our first rodeo we've done this before.

You know how to win in a highly competitive wholesale market and we believe we will prove decent yet in California.

As for annual guidance, we provided a range of system wide pro forma revenues of $170 million to $180 million and adjusted EBIT of 40% to 50 million, which we knew would be backend loaded with the importance of California coming online with the delays in California are pushing in the late October it's become increasingly clear that our timeline.

It has shifted by a quarter more importantly, our expectations for revenue and EBIT targets for 2022 remain unchanged.

We have consistently stated that the advantages to our low cost scalable operations are most apparent when applied over a large platform and we remain maniacally focused on demonstrating the value of that model at scale. Following the completion of these latest initiatives.

Our teams diverse skill set combined with our compelling asset base in key strategic markets has given a significant momentum coming into the end of 2021 and I'm more confident than ever that we're positioned for robust scale growth in 2022.

Before we open up for Q&A I'll close my prepared remarks, with a reminder of what we're playing for we believe we have at least a 650 million revenue opportunity and a $250 million adjusted EBIT to opportunity in the license market, which we already operate and we're taking our scalable efficiencies even further.

With these latest developments.

To reiterate our thesis we believe that the sweet spot for outsized value creation. In this industry is around the low cost high quality production and distribution of cannabis consumer packaged goods with our core footprint and capabilities now in place you'd really built out this company to not only address current opportunity.

He's at hand, but also the market demands of the future.

Now as confident as ever in our ability to drive sustained growth and capture significant share of every market we enter.

We're very well positioned to be a major piece of the cannabis landscape for years to come and we can't wait to share. Our continued progress with you. Following successful entered this year with that I'll now turn the call over to the operator to open the lines for Q&A.

Thank you.

Ladies and gentlemen.

Again, just as a reminder, press star followed by.

The one.

Number one to ask a question, we'll now take our first question.

Yeah.

Yeah.

Yeah.

From Graham.

Eight capital your line is open. Please go ahead.

Hi, good afternoon, and thanks for taking my questions.

I wanted to start off just by confirming our 2021 guidance. Yeah, you know understanding the puts and takes in the business.

The back half of the year, but is that being revised to a certain level or is that being with John at this time. Thank you.

Yeah, I mean, we're just trying to be very realistic Graham we.

We when we had when we reaffirmed our guidance in on the last conference call, we were expecting a California turned out pretty shortly thereafter.

And the more that we sort of drifted into the October timeframe.

What's realistic it was too you know.

I mean, even close now as well.

Look at Q4 right now.

We're expecting.

I'll return to you know pretty robust sequential growth Q4 over Q3.

We.

We are.

We're still seeing the ramp in California come on and we have some uncertainty about when we close any C C.

And we're still in the budgeting process, but we're very very confident in our internal goals.

For what the outlook looks like for 2022.

All of our business lines and all of the all of the assets.

We need to be in place for us to have a very robust 22 and meet our internal goals are in place they never had that before.

We feel very confident in our ability to operate.

So.

We are.

<unk> seen a return to strength here in the Q4 with you know, California coming back online, we see opportunities for additional wholesale in the quarter.

And strength in the market as we come into the holidays.

And we're.

Because I believe the year.

Uh huh.

We're excited to leave the year, leaving on a really strong note take that momentum into 'twenty two.

Okay. Thanks for that then just on just on the California side of things and then you mentioned how there is.

Production that's in line with our with the same levels as Washington, then based on that and the I'll put that you're seeing is it fair you know how does the wholesale prices compare one state to another when we think about the revenue potential coming out of California.

You know it is it is it fair to expect that they've had the same level of output when it comes to the revenue side of things or how should we be thinking about that.

I'll turn that over to Leo and maybe with an assist from Joe as well.

Sure Hey, Graham appreciate the question. So I guess on the first part I'd say that our.

Our production over the first two weeks is in line with what we produce in Washington that being said. These are the first two weeks of us ever running this equipment and we're very confident that every week as we keep going that production will ramp up and eventually we can get the 10 X what we do in Washington.

Prices across the board or are similar in some categories and are higher than other categories. I think you know, California has shown itself to be a competitive replaced wholesale Martin, but it hasn't hit the sort of prices that Washington has yet across the board.

Sure when it's going to go there, but what we've built out you know allows us to be prepared for any kind of price compression as we move along I think the potential for revenue in California.

<unk>.

At least five to eight X what the potential is in Washington.

The ability to produce much more than that.

Okay. Thank you and then finally, we're hearing a lot of discussion about wholesale market softness in a market like Pennsylvania is more capacity has come online I'm wondering if that provides any read throughs into Massachusetts, you're about to significantly increase your presence in the wholesale market and there's been very little.

Prices in Massachusetts, but just wondering what youre seeing from incremental capacity coming online wholesale pricing what the outlook looks there. Thank you.

Again, I'll turn this over to Leo or maybe Joe you want to certainly a filter.

Sure I'm happy to.

Start this one.

So right now what we're seeing in Gram in Qs three and Q4.

Is that the number of retail stores coming online still seems to be outstripping the capacity.

All four product, we're still getting kind of the same amount of inbound inquiries and asks for for more product and then we're able to supply that market we are seeing.

Pricing change on the retail side, though and so that's a we're expecting.

Our wholesale pricing to come down we think happy day. This is what we're built for.

Haven't seen it yet, but we're starting to see it on the retail side. So it's only a matter of time.

Probably pretty soon.

And I would I would just reiterate that we're built for this this is how our company operates this is what our thesis is as wholesale competition ramps up that doesn't scare us and we're very confident in our ability to get our product out.

Okay I understand thank you for that.

Thank you, we'll now move onto our next question from Colin of Haywood Securities. Your line is open. Please go ahead.

Hey, Colin how are you doing guys. Good good just filling in for Neal Gilmer Tonight. Thanks for taking my questions.

Just maybe.

[laughter] just made me want to go out a little bit deeper on California, and maybe sort of the impact on margins there.

Because its manufacturing and production of more finished good and there is a little bit more stability in that line.

More peer Rob biomass.

Just looking at your gross margins the last two quarters have been on an adjusted gross margin basis pretty stable at 55%.

I'm just wondering how much of that.

In California could have that on the long term run rate the gross margins there.

Okay.

Leo maybe you jump in on the on the <unk>.

Rising in California's overseen and follow up with Jake on you know kind of a long term impact.

Yeah sure. So I guess to start I would say that overall in general the margins are always better for finished goods.

Goods and so as we predicted there is a large oversupply of biomass in finished oil in California. So our input costs have dramatically come down from what we initially modeled six months ago.

Feeling very good that you've been with further compression from where it is right now who we can sustain fantastic margins in the 50% and above range.

Yeah, I'll, just reiterate what <unk> said our original forecasts.

Had the basically op margins in line with.

With the rest of the business and what we did not expect as our input costs. So dramatically decrease relative to previous expectations that gives us a lot of comfort as we look into what our pricing environment looks like and what our flexibility is with respect to the wholesale pricing of our goods.

It's still meet our original margin expectations, given this decrease in input costs.

Okay. Thanks, that's helpful and maybe just.

One more for me.

Just surrounding our opex.

Based on what supported that comes around that $3 2 million, but taking a look at the adjusted EBITDA.

I'm calculating a little back of the envelope around 11 to 11 five normalized.

Kind of going wait for for Opex, that's not getting backed out.

Any color around that if that is kind of the right level to be building off of going forward.

But that one I think.

Yeah, Yes provided that Youre seeking opex included inclusive of Oh, we referred to as four wall operating expenses. So all the selling and marketing that would be for existing operating assets as well as corporate G&A and business development expenses that fall more in the G&A line.

Then I think youre in the during the neighborhood yes.

But if we're just talking forefront corporate G&A.

Half of that to pay up to 40%.

Yeah.

Okay. Okay. That's helpful.

Yeah, I think that answers all my questions and I'll be looking forward to seeing the results of our commerce show up yet in the coming quarters.

Yeah, we're looking forward to get getting folks out there.

Okay. Thank you guys. That's all for me.

Thank you, we'll now move on to our next question from Shah of Kincaid and Jenny take your line is open. Please go ahead.

Hey, there.

Hi, good afternoon or evening, depending on where you're at.

How are you doing.

Thanks for taking my questions.

So on the first one.

Yeah.

The commentary in your prepared remarks about M&A and in the U S cannabis space.

I was just wondering what your views were in terms of the best ROI for your investment dollars in terms of investing further into your own.

You're into your infrastructure in the states that you are already present, one then.

Or would it be into entering new states through some sort of acquisition and if I could follow on to that.

And those new states.

You're looking at those how would you bifurcate, which markets are the most attractive to you and what qualities or characteristics are you looking for any market Ah if youre going to enter there.

I will turn this over to Karl to Ghana.

Carl you want to grab that one.

Sure. It was it was a pretty loaded question can we have the first question again.

Sure.

So the first part was just where where do you stand where do you see the best ROI.

We're really proud of your investment dollars in terms of investing further into your own <unk>.

Our own state footprints that are active today or into entering new markets.

Yeah. It is an incredibly active time with lots of opportunities in front of us.

The thing that's got US where we are is I hate to use this term again, but I'm going to use it as a maniacal focus on operations or better put performance. So yeah I mean.

The best ROI for US of course is building our team and being able to exploit the opportunities that we have in front of us of course, having more retail footprint in Illinois would be a nice add on and.

We're already as you can see investing further in the state of Massachusetts with respect to California, I think it's very important for us to.

To focus on getting our commerce, a facility up and running to make sure that we have good penetration in terms of all the retail partners that we are already having discussions with and also to explore to the extent strategically optimal for us on a white label type of arrangements.

We do see a dearth of the ability to manufacture efficiently product in California.

Are we looking retail in California, we really want to see what happens in terms of our.

Our facility our production facility in the relationships and how they work, it's a bit of a double edged sword and we have to be careful not regard would we be interested in going vertical in terms of our supply of biomass well. It started cheap right now, but it's always good to have controls so that would be something that we'd always be.

We will always be interested in as a good weed control source of our own fuel.

Otherwise in terms of M&A activity generally.

This is what we do we have focused on where are we.

We haven't changed our thesis right we have to be good operators with builder engines and we built it.

Pretty significantly over the last year.

We believe that we have.

A great engine that requires fuel.

Therefore to the extent that.

Our team and our operating capabilities and our engine 10.

Attract or be part of the greater platform in terms of greater assets that meet our thesis of being.

A significant wholesaler in whatever market that we are in.

Of course, we're interested so anything that enables us to take our thesis and apply it to.

Strategic markets list the appropriate platform.

Is of interest to us I don't think at this point I could really identify what all those those states are I'd be happy to take it offline and our entire team could probably address that better but.

We are we're focusing on what we do we think we built the engine and we think the engines attractive and.

We will let the M&A chips fall, where they fall.

Thank you. Thank you for the color there.

And I'll just switch it up for my second question then.

And just a just touching on California so.

Congratulations on getting that up and running this quarter.

I know that was a pretty large project.

So my question is just on distributions. So appreciating that you have the partnership with neighbors and kind of the detail that you provided in your prepared remarks regarding getting samples out to about 150 stores.

To date.

I was wondering if you could help us level set how much penetration your skus have in terms of you know a number of retail stores out there in California.

As you sit here today.

[noise].

So clearly you want to address that one.

Yeah.

Yeah.

Sure and so we're just starting our sales right now we know the process in California or in most markets in general is to get samples out there in people's hands and get them into the buyers' hands to start taking orders.

Again, we just got samples approved at the end of the previous weeks that are going out.

No penetration to date as far as product on the shelf.

Very excited about the conversations you had the feedback we've gotten and definitely expect inhibitor assisted living in your study.

Thank you that's it for my questions I have a good evening.

Okay.

Thank you.

Yeah.

Thank you we'll now take our next question is from habit of Hey, Josh. Your line is open. Please go ahead.

Hey, Thank you very much for the question.

Yeah I was wondering if you would be possible for you to compare and contrast, your experience in Washington to what you're seeing in California in terms of the pressure on the pricing in the market or just the market in general I am not sure I have asked the question in the sense of how long does it last or peak to trough decline in price just some some.

Around what's happening in California for what you saw in Washington, and I guess, you sort of didn't answer the second part of the question is doesn't that.

Play into your strengths in New York facility.

California. Thanks.

Sure absolutely. So we're seeing a very similar trajectory in California, as we saw in Washington, which is a very exciting ramp up in the beginning where there's a shortage of product.

A lot of people getting licensed more material coming online and you're seeing kind of the ship. Its first shake out of the market will look like.

I think there's still a lot of brands that are about to do that.

I won't be around six months from now or six months from now there will be 500 people that entered.

Kind of the pattern already in California.

Exactly what the pattern was in Washington.

Prices are starting to draw cultivation, starting to shake out.

We feel really good about the similarities between the two markets knowing that we've learned a lot over the last six or seven years in Washington, and we built out California from day, one we're ready to take on what we see is going to happen so our ability to react.

Even more on top of it can be worn Washington has set out for us.

Part of what we do best is to go into market.

The market and then making quick adjustments to make sure we're always current trends happening.

Market right.

And the response to <unk> question previous question, you sort of alluded to that you'd thought about pricing in California with wholesale pricing that continues to come down any.

Okay.

[laughter] chance you want to.

Take a shot at how much you think it could come down.

I think theres going to be way, it's going.

Keep going down until the retailers' working.

Some categories I think edibles are basically after the low youre not going to see much more of a compression for kind of just five six dollar price range that you've seen.

We'll have some room in vapor and Theres, a lot of room to teachers and capsules for them to come down and he still be well above what the pricing is in Washington.

I think eventually.

Big players like us working together with the industry would.

We find the sweet spot for price versus volume and then if that sweet spot has been reached prices go back up as the market shakes out if there's more volume to be done and then you try a lower price and keep pushing it I think it's just it's just a matter of getting the market more fully baked in getting more retail open and then take.

When you look at the data in Wuxi.

I appreciate the question. Thank you.

Thank you.

Thank you no further questions at this time I'd like to turn the conference back to you for any other smaller closing remarks. Thank you.

We're extremely excited about before momentum we've built here and prepare us for the road ahead I'd like to thank you all for joining the call today and look forward to filling you in on our continued progress on our next call. So have a great day.

Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.

Yeah.

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Okay.

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