4Front Ventures Corp (Other OTC: FFNTF) Q4 2019 Earnings Call Transcript

4Front Ventures Corp (FFNTF) Q4 2019 earnings call dated Jun. 15, 2020

Corporate Participants:

Andrew Thut — Chief Investment Officer

Leo Gontmakher — Chief Executive Officer

Karl Chowscano — Interim President

Jake Wooten — Executive Vice President of Finance

Analysts:

Neal Gilmer — Haywood Securities — Analyst

Graeme Kreindler — Eight Capital — Analyst

Doug Cooper — Beacon Securities — Analyst

Presentation:

Operator

Greetings. Welcome to 4Front Ventures 2019 Year-End Earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

I will now turn the conference over to your host, Andrew Thut, Chief Investment Officer. Thank you, you may begin.

Andrew Thut — Chief Investment Officer

Thank you, operator, and welcome everyone to 4Front Ventures earnings call for the year ended, December 31, 2019. I’m joined today on the call by the entire 4Front management team. We’ve got Leo Gontmakher, our CEO; CFO, Nicolle Dorsey; Jake Wooten, our EVP of Finance; and Karl Chowscano, our Interim President.

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 sections of our filings and our disclosure materials. Any forward-looking statements should be considered in light of these factors. And please also note, as safe harbor, any outlook we present is as of today, and management does not undertake any obligation to revise any forward-looking statements in the future.

So perfect. With that, out of the way, let me give you a quick overview of the call today. I’m going to start by giving a brief overview of our thesis and strategy, and then I’m going to provide some color on our fourth quarter results, and perhaps of quite a bit more relevance, give an update on our recent results, and the significant progress we’ve made over the past six months from both a operational and liquidity standpoint. I will then hand the call over to Leo, who will go into a more detailed review of our operations and assets by state, along with the discussion about plans to further strengthen our balance sheet and accelerate what is an already strong — what is already strong business momentum. We’ll conclude with a question-and-answer session, where our entire management team is available for any follow-ups.

So let me start first with the fact. The business fundamentals of the US cannabis industry are accelerating, and they’re doing so in the face of a global pandemic that has caused the US economy to fall into one of the deepest recession since the Great Depression. And what I think we are witnessing here is the emergence of a massive secular growth industry that’s still in its nascent stages. Here at 4Front, we believe the sweet spot for outsized value creation of this industry is really around low-cost production and distribution of cannabis consumer packaged goods.

For the past six years, 4Front has created a dominant position in Washington State, with a full line of products, which are distributed over 260 retail locations in that state. Our facilities are the Number 1 edibles manufacturer, and the Number 2 producer of flower, with an overall Number 2 market share in Washington, outperforming over 600 other license holders in one of the most competitive cannabis markets in the world. We’ve achieved this while maintaining very attractive margins and profitability. So our thesis is very simple. We’re replicating these tried and true production capabilities, supported by our retail stores in large and nascent recreational markets, Illinois, Massachusetts, Michigan and California. All in, we currently serve an addressable market of over 76 million people.

So we’re pleased to be able to share today important developments as we execute on this thesis. The strength of our operations, combined with improving business momentum in the markets we serve, are showing up in our recent financial results. As reported in our press release this morning, Q4 ’19 systemwide pro forma sales were $17.5 million, an increase of 525% year-over-year. Our 2019 full-year systemwide revenues increased 786% year-over-year to $63.5 million. And our Q1 2020 systemwide pro forma sales were $23.8 million, an increase of 36% sequentially, over the December quarter.

Furthermore, we’re very pleased to announce we have reached a conditional resolution with the Massachusetts Cannabis Control Commission, with respect to legacy regulatory issues that have really slowed our progress on achieving recreational licensure in that state. Subject to final commission approval, we expect the agreement will clear the path for the long-awaited recreational licensing of our Massachusetts locations. We’ve also launched meaningful expansion projects for both our Massachusetts and Illinois cultivation facilities, as part of our plan to capture growing market share, and meet demand for our expanding retail footprint. These expansions and upgrades will be completed by Q4 2020, and both are fully funded.

Over the last six months, we began a series of material expense and overhead reduction initiatives that have resulted in a reduction of corporate headcount of over 45%. Our commitment to a leading corporate structure, and focused execution, is expected to enable us to achieve self-sufficient operations, eliminating any need for additional capital to reach profitability, which we expect to achieve in the second half of this year. Finally, we are in active discussions to further strengthen our balance sheet, and increase our financial flexibility by executing a sale leaseback of our facilities in Washington State.

So moving to Slide 6, and an overview of Q4. While Q4 ’19 feels like reaching history at this point, we had some significant developments in the quarter that are worth mentioned. The Company reported 4% sequential growth in systemwide sales in the first full quarter, following our merger with Cannex, which closed in July ’19 — July of 2019. Despite a headwind in that quarter from temporary bans on vape products, the Company saw 18% growth quarter-over-quarter in our retail sales, which was largely attributable to management’s focus on invigorating that division through the empowerment of local general managers.

Strong sales momentum in our retail channels continued through 2020. The fourth quarter also saw the opening of the Company’s first recreational store, when our facility in Ann Arbor, Michigan was licensed and opened for rec sales in December. We also wasted no time post merger, porting our Washington expertise to our brand new cultivation facility in Worcester, Mass. The application of our growing techniques have produced early annualized yields of over 400 grams of square foot, which we believe are nearly twice the MSO average yield. At the retail level, our Massachusetts customers embrace the rollout of our premium flower strains, Funky Monkey and Legends, along with our first introduced edibles Marmas and Pebbles.

Lastly, and more of a matter of record, as a result of the merger with Cannex, the Company took a non-cash write down of goodwill of approximately $146 million in the fourth quarter of 2019. The goodwill acquired from the merger was primarily result of relatively high stock price on the date at the merger was completed, compared to the impairment assessment date of December 31, 2019. So, it’s largely a function of where the stock was when the transaction closed, and when we had to assess the impairment at the end of the year. The impairment is a no way reflective of any change in our expectations for increased revenue and profitability in our business. As a 4Front — as a legacy 4Fronter, I will say we couldn’t be more pleased with the business combination, and the confidence that give us in our operating capabilities.

Moving on to highlights of Q1. We continue to strengthen both our operating platform and financial results, as we entered the first quarter of 2020. While we are still in the process of completing the audit of our Q1 financials that we plan to file in the next month, our preliminary systemwide pro forma sales for the quarter accelerated 36%, bolstered by recreational sales beginning in Illinois on Jan 1, our Washington assets benefited from improving pricing as capacity continues to leave that market in the return of vape sales. We also continued — we also saw continued improvements in our overall retail performance. The rollout of 4Front branded products in the Massachusetts market also continued with the introduction of Terp Stix, which is our line of infused pre-rolls.

So along with accelerating topline growth in the quarter, we made significant amount — announcements in Q1, around the streamlining of our operational focus, as well a shifting of management responsibilities, commensurate with that focus. Leo Gontmakher was promoted from Chief Operating Officer, to the position of CEO in March. At that time, former CEO, Josh Rosen, who is here with us on the call as well, transitioned to Executive Chairman of the Board of Directors. Leo, who along with this family of the single largest shareholder of 4Front, is quite simply a rare breed in the cannabis industry. He have significant experience in all aspects of scaled cannabis cultivation, production and distribution.

In addition to his on the ground leadership presence, Leo’s expertise in facility design, construction management, equipment sourcing, operations, branding, sales and marketing strategy are simply unparallel. He co-founded Cannex, whose affiliated assets are combined one of the largest and most successful producers of cannabis products in Washington State. And he also served as the COO at Cannex, which as, you know, we merged with in July of last year. We believe the market values — do we believe the ways that the market values cannabis companies is evolving? From a focus on assets, to a focus on how well companies are able to execute on their strategy and effectively operate those assets. For this, Leo is absolutely the man for the job. By making Leo our — by making Leo our CEO, at this time, we aim to more fully empower and support our core team, making it’s truly an operator-led company at the top, and driving excellence as we accelerate the scale of our operations and build value for shareholders.

As part of this renewed operational focus and the rightsizing of our cost structure, we’ve reduced our go-forward corporate overhead expense by approximately 40%. Through reductions of headcount, and streamlined operations, we are now on trajectory to flip the cash flow positive in the back half of this year. We have enormous revenue opportunity and EBITDA opportunity without having to venture outside of our core markets. Lastly, the Company announced the sales of non-core retail assets in Arizona, Arkansas, Maryland and Pennsylvania. Not only did these transactions improve the liquidity of our Company, which I’ll speak more about in a moment, but it narrowed our operational focus to go deep into huge addressable markets.

So where are we now? To recap, over the past six months, we’ve established proof-of-concept. We can port our Washington cultivation production and brands to other states, and we demonstrated very encouraging early success in both Illinois and Massachusetts. We’ve accelerated our retail performance across the portfolio. And we’ve aggressively streamlined the organization to drive towards profitability, eliminating any need for incremental capital. The final sale of our non-core assets are almost completed, which strengthened our balance sheet and sharpened our corporate focus on five large markets, Washington, Illinois, Massachusetts, Michigan and California.

As we sit here today, our Company has approximately 531 million basic shares outstanding, and 560 million shares on a fully diluted basis using the treasury stock method. A few noteworthy items on the cap table. The fully diluted number of shares increased by about 23 million, which is attributable to our recent private placement of $5.8 million worth of convertible notes, that are well in the money, as of this morning. You’ll also see that there are approximately 41.5 million of potentially dilutive shares attributable to the senior convertible debt associated with Gotham Green Partners. As we’ll talk about in a minute, we plan on paying off this debt before it matures in November of 2021, in which case that potential dilution would be eliminated.

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

Leo Gontmakher — Chief Executive Officer

Thanks, Andrew. Let me start off by saying how excited I am to be here this morning. For those of you who have been following 4Front, you can see that we’ve been very busy over the past nine months, preparing for the next stage of our Company’s growth. For those of you, who are new to the Company and the 4Front story, welcome. We are incredibly excited about the opportunity that lies ahead for us and how we positioned the Company to thrive in our next chapter. I’ll provide a status update on each of the five states we’re currently operating in, and recap some of our recent initiatives, starting with Washington which are — which is our most mature market.

In Washington, we have two indoor cultivation assets, totaling 176,000 square feet each — total, each building houses 30,000 square feet of total cannabis. We also have a 40,000 square feet production facility, which includes a state-of-the-art lab, packaging automation, the re-kitchens, along with an overall setup that’s currently manufacturing 300 plus individuals SKUs. We’re currently producing 24,000 pounds of packaged flower per year, as well as over 3 million individually packaged derivative goods. On any given month, our products are delivered to between 270 and 300 retail locations. Low-cost production and high-margin separate us from our competition.

Beyond being a low-cost cultivator, we’re constantly working on improving our efficiencies and costs in the post process — in the post-harvest process as well. In essence, I’m talking about how cost efficient we are in taking finished cured flower, and turning it into finished packaged goods. We believe this is an extremely important part of the low-cost production equation. This piece stems from looking for efficiency gains and cost of labor, pioneering new practices in automation when and where possible, and bulk purchasing all non-cannabis supply chain items to secure price breaks. These low-cost, high-quality production methodologies allow 4Front branded product to secure outsized market share.

Our ability to closely monitor consumer preference and quickly adapt product development to meet market demands has helped our branded products continue to stay ahead of the pricing with innovation curve since day one. We’ve built strong mutually beneficial relationships with our retail partners and we continue to grow shelf space [Phonetic], at their stores and beyond. Washington is a tough state that experienced severe cannabis price volatility, with flower prices hitting their bottom in the late 2017 into 2018. As a result of efficient cultivation and production methods, along with premier genetics, 4Front facilities were able to weather the storm by drop in prices and remaining profitable, while many of our competitors collapsed. In 2019, a ton of these suppliers has left the market by either going out of business or by closing shop and moving to a different state, and we finally started seeing a return to pricing growth.

Our average price per sales — our average sales price per gram across the brands of flower was 100 — $1.44 per gram in July of 2019, at the time Cannex and 4Front merged, and has reached a $1.84 as of last month. We expect the prices to continue to rise in Washington, and are implementing packaging efficiencies and marketing strategies to continue to drive sales and improved margins throughout 2020. Sales between October ’19 and February ’20 were impacted by the vaping crisis. Of course, all of our products are tested thoroughly — and contain only natural cannabis substances. None of our products, we ever make will have vaping-related illnesses.

We’re now seeing a strong return to normalized vape sales that are similar or even higher levels to before the vaping crisis. The momentum in our Washington facilities is strong, and generating improved revenues and industry-leading margins. We’re extremely proud to have the Number 1 market share in edibles, Number 2 in flower as well as the second-largest overall market share. The success we’re seeing in Washington provides the blueprint for our expanded operations in key target states.

The same Washington blueprint is already working in Massachusetts. Our yield numbers are coming in at a healthy 400 grams per square foot, which is consistent with what we produce in Washington. We consider this proof-of-concept, as we’re seeing nearly identical results, using our SOPs in our system across two states that have completely different build-outs and natural environments. We’ve introduced our flower brands Legends and Funky Monkey, edibles brands Marmas and Pebbles, as well as our top-selling concentrate line Crystal Clear into the Massachusetts market. Since inception, all of these brands is in great success at our retail locations. And we’re looking forward to being able to wholesale these brands, increase our market share throughout the state, as we see more third-party material will become available, and we start to develop strong relationships with other farmers.

Most importantly, we are building a phenomenal healthy culture and team-first attitude, which are the backbone for our success in every operation. We continue to look for and find improvements and efficiencies daily and spread them throughout the whole Company. As a reminder, we operate two cultivation and production facilities in the state, with 13,020 square feet of total canopy, and two co-located medical dispensaries. In our Georgetown building, we’re under growing — we’re undergoing updates to the 8,800 square feet a canopy there. It’s a simple upgrade, where we’ll be replacing all the high-pressure sodium lights with LEDs, which were expected to result in a 50% increase to our current yields. This upgrade is fully funded and targeted completion is Q4 2020.

The Company’s medical dispensaries in Georgetown and Worcester continue to operate as essential services, and we’re waiting for further two permits to allow us to convince adult use sales of these dispensaries. It should open up significant room for sales growth. We reached a conditional resolution with the Massachusetts Cannabis Control Commission, in respect to legacy regulatory issues. In the meantime, we’re selling through the max amount of product possible, while still operating at the medical dispensary, and stockpiling fresh products in anticipation of higher demand will be open for adult use. Future potential projects in Massachusetts, including expansion opportunity for an additional 20,000 square feet of flowering canopy, at our Georgetown cultivation facility, and the opening of a dispensary in Brookline, which is on track for Q1 2021.

Moving on to Illinois, which is also a key focus for us. We have one of the 19 cultivation licenses that allows for unlimited vegetative canopy and up to 220,000 square feet of flower canopy. We also operate one medical and adult use dispensary. Recently, we appointed a new VP of Operations, Joe Epperson, who previously ran the Flower Department at our Washington location to implement efficiencies and SOPs in Illinois. We’re already seeing the impact of these efficiencies with faster packaging, lower labor requirements, and higher volumes expected to contribute to improved margins and bottom line results in 2020. To further leverage our expertise in this facility, we’re in the early stages of upgrading to grow to optimize output. The design phase is complete, and we’re aiming to have plants in the ground in early December. This upgrade will increase flowering canopy from 3,168 to 9,072 square feet, while also increasing our current yields by three times. Target completion is Q4 2020, and this project is fully funded.

With adult use sales legal as of January 1, 2020, we’re seeing strong sales growth at our mission dispensary in South Shore Illinois. The store was burglarized on Sunday, May 31, but any structural damage to the facility was relatively contained, and the majority of the product that we lost were insured. We expect to reopen this store sometime in July of 2020. There’s more product becomes available in the wholesale market. We expect to see retail trends — retail sales trend upward for the foreseeable future. As everyone knows, Illinois is extremely product constraints, and we’re looking forward to more cultivators coming online and opening up the wholesale channel. We’re also working towards opening a second medical and adult use dispensary in late 2020, Q1 2021. Illinois, the population has just entered 30 million, and it’s the state with tremendous upside potential. It’s also one of the biggest [Indecipherable] market states in the country, and is now experiencing a large supply shortage of legal cannabis, which looks like it will continue for the next few years at least. We’re very pleased with our progress in the state, and consider this market, a major opportunity for 4Front in the short- and long-term.

Moving on to California. In California, the Pure Ratios wellness brand is expected to contribute healthy revenue growth in 2020, as the production and sale of the CBD products are expected to increase, with the recent addition of the new marketing partner and our continued focus on this brand over the next several months. There is a few initiatives that happened within Pure Ratios that help streamline the business. We reduced overhead by 50% and narrowed the scope of the business, in general, to mainly concentrate on direct-to-consumer online sales, making the business very asset-light and well-positioned to generate steady cash flow for us this year and future. We expect to start reporting a meaningful sales of Pure Ratios over the next several months, following the launch of its online marketing campaign in late December 2019. We had a hiccup in the supply chain at the end of Q1, as the demand for our patches went far beyond our projections, and our team has been working day and night over the last three months to make sure we never face this issue again.

Sales began accelerating, again, in April and May, with the full campaign relaunch on June 1, and we’re very excited about the near-term potential of this business. On the THC side, in April, we delayed the launch of our cannabis manufacturing facility in commerce, as a result of capital constraints. We expect to restart construction some time in late 2020, and they are now expected to be operational Q1 2021, subject to project financing. We continue to stay extremely bullish on the California market, and we believe our low-cost production model is poised for massive success, where the market sits today.

In Michigan, our medical and adult use dispensaries continues to operate business as usual. As a result of the success of our initiatives over the past few months, especially in the Mass, Illinois, California, I believe 4Front is now in the best position it has ever been in, with a strong financial foundation, including operating capabilities in several strategic assets in major key markets. I’m incredibly excited about the opportunity ahead of us. We have several milestones to look forward to during the second half of 2020, including long-awaited recreational approval in Massachusetts, and the completion of our production build-outs in Illinois and Massachusetts, which are expected to be completed in Q4 this year. We’re also adding attractive retail locations in Illinois and Massachusetts, as we continue to penetrate and expand into core markets, as well as build-out our vertical model.

We expect to reach cash flow commensurate with the launch of recreational approval in Massachusetts, Q3 2020, at which time, we’ll be self-funded company, and with exposure to the capital market. The Company anticipates positive EBITDA in 2020, along with significant operating leverage in 2021. We’re also in active discussion for a sale and leaseback of 176,000 square feet state-of-the-art facilities in Washington. The assets are encumbered by senior secured debt with Gotham Green Partners. A sale leaseback of these assets will enable us to remove the debt from our balance sheet, while giving us significant flexibility to use non-dilutive project financing options. We’re in active discussions with multiple partners on the transaction, and feel good about where we’re headed.

As of May 31, 2020 4Front’s balance sheet had cash and equivalents of $11.5 million, with total debt of $80.1 million, excluding in-the-money convertible debt of $5.8 million. With the sale and leaseback transaction and the pending close of a previously announced non-core asset sale in Maryland, the Company expects to significantly reduce net debt on the balance sheet. Resulting debt would include a term loan from LI Lending, carrying 10.25% coupon, which is due on May 2024, and subordinated convertible debt carrying a 5% coupon, due in February of 2022. The strike price for that conversion is $0.25.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Neal Gilmer with Haywood Securities. Please proceed.

Andrew Thut — Chief Investment Officer

Hey, Neal, how’re you doing?

Neal Gilmer — Haywood Securities — Analyst

Hey, good morning, and — I’m good. How’re you doing?

Andrew Thut — Chief Investment Officer

I’m great.

Neal Gilmer — Haywood Securities — Analyst

Great. Thanks for the full update, guys. Very helpful. Just had a couple of questions on my list here, because you knocked a couple of them off through your prepared remarks. And congrats on a strong Q1. That 36% growth is looking great. But just wanted to make sure I wanted to get a little bit of color on that, and with respect to the asset sales announced in May, is there any color you can provide as far as how much that would be representative in the $23.8 million in sales, just so we see how to baseline of what we’re going to see going forward without those assets, as part of your portfolio? And then I guess the second part of my question would be, I know, a while back or whatever, it was last time that you put out some financials, you did provide some preliminary sort of guidance at that point in time for 2020 and 2021, is there any sort of revised guidance that you guys are comfortable putting out now that you’ve done some of those asset sales? Or any further details you can provide on that would be great.

Andrew Thut — Chief Investment Officer

So Neal, I’ll take the first question on the asset sales. So it was a little under $5 million in the quarter, and the tricky part about it is those closes obviously bled into Q2, one of which — the Maryland sale is expected to close imminently, but will be fully accounted for this quarter — in this quarter’s numbers as well. So the short answer is a little under $5 million. On the guidance, I’ll let Leo handle that — but, yeah, I’ll let Leo handle that.

Leo Gontmakher — Chief Executive Officer

Thanks, Andrew. With everything that’s happening in the world in today’s current environment, we’re going to stay away from guidance and timing.

Neal Gilmer — Haywood Securities — Analyst

Yeah, okay. That’s pretty much what most people are doing given everything was still uncertain. I just — I wanted to clarify something that you — comment you made Leo, to make sure I understood your expansion in the Illinois market. Did I hear correctly that it sounds like, I know, I didn’t get all the numbers, but off the top of my head, it sounded like the square footage was going up almost 2.5 fold sort of thing, and then [Indecipherable] to the yields to increase threefold, is that correct?

Leo Gontmakher — Chief Executive Officer

That is correct. And part of that is because in the new build out, we’re going with a tighter spread on the lights and we’re using LEDs, which we’ve had recent success with instead of HPS. And we currently have the lights. They’re spread at 18 square feet on center and in the new build out that LED is are going to be spread at 14 square feet on center, giving us more uniformity in the light spread in the par levels, and we believe that we’ll see at least to three times on the production side.

Neal Gilmer — Haywood Securities — Analyst

Okay, great. That’s good. Maybe my last question for now would be just in the Massachusetts market. So it’s a tough question, but do you have any visibility as to when you might get that final approval from the commission to start adult use? I guess sort of got the impression that you do expect adult use sales in Q3 with that, the right impression that I took away from, and I obviously understand that you’re not control with that final approval. That is what sort of your guide is telling you?

Andrew Thut — Chief Investment Officer

So Neal, I’m going to turn that question over to Karl Chowscano, who has been intimately involved with that process.

Karl Chowscano — Interim President

Good morning, Neal. It’s an excellent question. I think I’ve been speaking ad nauseam to some of you regarding this Massachusetts process. I mean, never in my history of negotiating or settling or resolving matters, have I come across a process like this. I think many on the phone, probably no other clients or other issuers that have had some frustrations, not of course with the commission, just with the process. Nevertheless, we’re finally at the door. We have — we’re in the midst of the process to initiate the final inspection for our Worcester facility, which is great news. It’s been bifurcated from the Georgetown process and further good news is that we have reached, not only principle, but also detail a preliminary agreement with CCC and it’s just going to have to go through the normal approval process, which we are hoping within weeks. And yeah, our strong hope and desire is that we are selling rec in Massachusetts, in Q3, and we’re relatively confident that everything goes well as it finally is going, we’re getting a great response now from CCC on other matters. So we are definitely bullish on our ability to finally open our doors in Q3.

Neal Gilmer — Haywood Securities — Analyst

It’s great. Thanks very much for that detail. I’ll leave it there for now. Thanks very much, guys.

Leo Gontmakher — Chief Executive Officer

Thanks, Neal.

Operator

Our next question is from Graeme Kreindler with Eight Capital. Please proceed.

Andrew Thut — Chief Investment Officer

Hey, Graeme, how are you?

Graeme Kreindler — Eight Capital — Analyst

Hi, good morning. Thanks for taking — hey, good. How are you? Thanks for taking my questions this morning. I wanted to dig in for a second here, with respect to some of the growth trends that we’ve seen, so Q1 putting up about 36% growth quarter-over-quarter. So, I was curious, in terms of that Q1, how much of that growth would you attribute that to the scale up of operations versus how much of that you think was probably a bump, due to consumer behavior because of COVID? And then, just curious in terms of what you guys are observing into Q2 here whether things have retreated to pre-COVID levels or whether the demand picture stay strong? Thanks.

Andrew Thut — Chief Investment Officer

Karl and Leo, do you want to tag team that?

Leo Gontmakher — Chief Executive Officer

Sure, I’ll give that the first go here. And so, Q1, I would say, has a little bit of COVID in it, but not so much because we didn’t really get into COVID stage until, say, mid-March. I would attribute the Q1 growth to the Worcester facility in Massachusetts, the SOPs, and efficiencies that we’ve been implementing along the way, across all of the operations to try to streamline, and cut costs, and also just to new products being introduced in the markets that we’re in, mainly because of that and not because of COVID. Going into Q2, we did see a bump from COVID, nothing crazy beyond what we used to see regularly, but people are definitely buying and the trend did not stop. It will be [Indecipherable] may be a strong March would lead to weaker April, will lead to weaker May, but luckily COVID aside, Q2 and Q3 are historically the best quarters for cannabis in general. And that, combined with the operational efficiencies in the new product, is what we believe is going to lead into our increased sales.

Karl Chowscano — Interim President

Yeah, I would just add — this is Karl, I would just add to what Leo had to say. In my estimations, our Q1, at least, was probably attributable to 95% of operational improvement and a slight percentage, due to COVID. These operational improvements really started near the end of or gearing at the beginning of Q3. It takes a while sometimes to make sure that, well, to actually get the revenue impact from improved operations. But there has been a maniacal focus on making sure that we’re doing business and not playing business. And the results have been month-over-month of increased growth in sales out of all of our locations, and some of that is due to the maturation of the markets that we are in. But I would say, the shifting of focus at each of our locations to make sure that our managers are responsible for driving business results, as opposed to a centralized version of running the Company has really paid dividends for us. So 95%, I would say, in Q1 was due to efforts such as that, and the other matters that Leo spoke to.

Graeme Kreindler — Eight Capital — Analyst

Okay, that’s great. I appreciate the color there. I mean, just to get some more detail with respect to the stores that saw disruption, because of any damage or burglary that took place. When we’re looking at the whole topline during that period here, it looks like it’s the store is going to be shut down for about a month and a half, is that correct, when we’re trying to assess what the impact might be in the Q2 [Phonetic] here.

Karl Chowscano — Interim President

That is correct.

Graeme Kreindler — Eight Capital — Analyst

Okay. Got it. Then just wanted to go back to the sources and uses of capital here. I appreciate you disclosing the $11.5 million as of the end of May. So taking that, along with the comments about Massachusetts and Illinois being fully funded, I wanted to clarify a couple of things. Just with respect to the capex, budget of the capital going into those states and other projects, is it possible to split out what the monthly operating burn looks like versus the amount of capex you’re expecting to deploy? And whether or not that fully funded assumption includes the closing of the sale leaseback or not?

Andrew Thut — Chief Investment Officer

So, Graeme, I think that some of the details on this, we should just take offline, and we can sort of dig into the specifics. But to your final point, no, we are not anticipating the final — the close of the sale leaseback to execute on this. As we sit here today, we are fully funded. We do not need to raise any other capital. Karl, Leo?

Leo Gontmakher — Chief Executive Officer

I think, I can provide a little bit more color. And I agree with Andrew that it would probably be prudent to take it offline, and dig in, with [Indecipherable] into the model, but our anticipation, Graeme, is to be cash flow positive operationally in August, covering interest in September, the projects of expansion in both Illinois and Massachusetts are coverage. So there would be no required further raise to be able to close those circles. And I would say the burn is now — well, the burn now considerably below $2 million, probably somewhere between $1.3 million and $1.7 million, but I would want to verify that and let’s take it — dig into the numbers with you offline.

Graeme Kreindler — Eight Capital — Analyst

Okay, understood. Thank you. That’s it from me.

Leo Gontmakher — Chief Executive Officer

And when I say, burn — sorry, just to clarify that, that’s the overhead number, that’s not obviously a loss that we incurred.

Graeme Kreindler — Eight Capital — Analyst

Understood.

Operator

Our next question is from Doug Cooper with Beacon Securities. Please proceed.

Doug Cooper — Beacon Securities — Analyst

Hi, good morning, guys. Just to dig in a little bit further in the Q1 increase versus Q4. Can you put that down to any one particular state? I mean, put it another way, Washington, are you seen any increase there because of the rising prices or market share gains or anything there?

Leo Gontmakher — Chief Executive Officer

Yeah, absolutely. Hey, Doug, so we raised prices at the end of 2019 and then in January of 2020. And the increased prices definitely contributed a little bit of the increase in sales in Washington. But we’re also seeing a massive increase in edibles and vapes that didn’t have any price increase. And we believe that Washington is still going through consolidation and people are still faltering and the market is still consolidating, and we’re picking up market share on the derivative side pretty much weekly over the last three months.

Doug Cooper — Beacon Securities — Analyst

Okay. So it was running around for systemwide sales — Washington was running around, I believe $40-odd-million, is that sort of we’re seeing an increase off of that level?

Leo Gontmakher — Chief Executive Officer

Correct. I believe last year Washington was just under $37 million, and this year, we’re looking at the low-$40 million, is where we’re trending.

Doug Cooper — Beacon Securities — Analyst

Is there any other, whether it be Illinois or Massachusetts was or Pure Ratios responsible for the $6 million increase, given — was there any outlier impact from any of those states from the jump from Q4 to Q1?

Leo Gontmakher — Chief Executive Officer

Yeah, I would definitely say, Illinois is part of the outliers in recreational adult use and that definitely, massively increased the sales at Shelf Shore. That combined, with the sourcing us providing the product and the way we run the store, but adult use is definitely a contributor.

Doug Cooper — Beacon Securities — Analyst

Okay. You were talking to yields, Massachusetts, you highlighted them close to Washington or basically at Washington. And then you talked about the plan for Illinois to be three times of yield. Are you sort of forecasting a similar yield per square foot in Illinois as you were obtaining in Washington and Massachusetts?

Leo Gontmakher — Chief Executive Officer

We are once the rebuild is complete. We’re looking at a target of 350 grams to 400 grams per square foot. And we’ll be extremely confident in achieving that number with the new buildout.

Doug Cooper — Beacon Securities — Analyst

Okay. And just my final one on the balance sheet. Subsequent to the actual December 31 numbers that you just reported, you obviously had the $5.8 million convertible debenture that you announced, the sale of Pennsylvania is in there, sale of Arizona is in there. When is the sale of Maryland supposed to be complete? And Oklahoma, was that subsequent to the December number as well?

Karl Chowscano — Interim President

I can speak to that, Doug, it’s Karl. Arkansas, so we have most of the proceeds in from Arkansas, but there is still, I want to say, another $2 million plus to be collected on the Arkansas sale. It is not coming yet. Maryland, we are at the final sign-off from the Maryland regulators and we would anticipate that deal to close in the next couple of weeks. Four weeks at the outset, but I’d be shocked if it took that long.

Doug Cooper — Beacon Securities — Analyst

Okay. And you’ve alluded obviously to the sale and leaseback in Washington, and obviously the big potential partner, and that just raised a whole bunch of money. When would you anticipate something like that coming to fruition? Like how far down the line are you?

Andrew Thut — Chief Investment Officer

Doug, we have — this is a major priority for our management team. So we have several folks at the table, very interest — people are really interested in that asset, because it’s a really unique asset. And the reasons for that is that there is quite a bit of operating history. It’s very, very profitable. It’s got high-20s margins. And you’re in a state that’s already where people are already know the market dynamics. It’s already commoditized to the point where capacity is coming out of the industry and it’s coming back. So as opposed to folks sort of guessing on how the market is going to develop and how an operator is going to execute, the gray hair on that asset is just been very attractive to folks. So I don’t want to put a timeline on it. But we are — it is a top — if — it’s a Top 5, if not, no — it’s not — it’s one — it’s top one or two priority for us right now. And so we are pushing hard on all fronts to get that across the goal line asap.

Doug Cooper — Beacon Securities — Analyst

And you obviously indicated in the past that the use of proceeds with the payback the Gotham Green piece, and you indicated, I think in earlier press releases that some of the money come in were to repay, I think, up to $10 million of the Gotham piece. Is any of that been repaid as of today? And is there any prepayment penalties on any of that stuff?

Andrew Thut — Chief Investment Officer

Jake, could you jump in on that?

Jake Wooten — Executive Vice President of Finance

Yeah, of course. As of today, we’ve repaid just over $3 million of principal from the Gotham Green convertible secured note. We’ve additionally repaid the bridge note that we took in Q1 of this year, with proceeds received from the sale of Pennsylvania. And we carried a $102 million [Phonetic] prepay through November of this year, and then no prepay after that.

Doug Cooper — Beacon Securities — Analyst

And Jake, can you provide us the total amount of Gotham that’s been paid down.

Jake Wooten — Executive Vice President of Finance

It’s just over $30 million.

Doug Cooper — Beacon Securities — Analyst

No, the amount that has been paid down, you didn’t provide the amount of the short-term debt.

Jake Wooten — Executive Vice President of Finance

Oh, I’m sorry, I thought I indicated. Just approximately $3 million has been paid down…

Doug Cooper — Beacon Securities — Analyst

To Gotham…

Jake Wooten — Executive Vice President of Finance

Convertible — yes. [Speech Overlap] note. And then the additional $3 million in bridge proceeds.

Doug Cooper — Beacon Securities — Analyst

$3 million bridge. And that was with Gotham as well, right?

Jake Wooten — Executive Vice President of Finance

Yes.

Doug Cooper — Beacon Securities — Analyst

Okay. Great. I think that’s it for me. Thanks, gentlemen.

Andrew Thut — Chief Investment Officer

Thanks, Doug.

Leo Gontmakher — Chief Executive Officer

Thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Andrew Thut — Chief Investment Officer

Leo, do you want to wrap it up?

Leo Gontmakher — Chief Executive Officer

I will wrap it up. Sorry, I was on mute there. Thanks to everyone who dialed in. We’re very pleased with our recent performance. We continued to experience robust consumer demands, across all operating markets, despite COVID-19 and everything else that’s happening in the world. With the divestitures of non-core assets and our private debt placement, the Company is well-capitalized to execute against our targeted strategy, the gross sales volume and achieve positive cash flow in the second half of 2020, and also significant operating leverage in 2021. We continue to take considered and decisive measures to streamline our operational platform, and believe there is still more efficiencies to be achieved along the way.

Cannabis industry is an emerging secular growth industry, showing accelerating fundamentals, despite a recession and a pandemic. The momentum in our business is strong, and our complete attention is focused on maximizing growth in core geographies, and markets and expanding our vertical operations to take meaningful market shares in nascent adult use markets, that represent an addressable market of over 76 million people. Particularly, on uncertain times, maximizing the amount of revenue growth that translates directly to increase EBITDA and cash flow is a high priority for us. We expect existing players that lack our efficiencies to be cleared out over the next 12 months to 18 months, if not sooner. Against this volatile backdrop, we are confident we’ll gain market share and emerge as one of the leading MSOs in the country. With the entire ownership nearing 47%, the interest of management are fully aligned to maximize shareholder value.

With that, I’ll turn the call back to the operator to close the lines.

Operator

[Operator Closing Remarks]