4Front Ventures Corp

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

Thank you, Operator, and welcome, everyone, to Forefront Ventures Earnings Call for the Third Quarter of 2020. I'm joined today on the call by the entire Forefront Management Team. We have Leo Gommaker, our CEO, CFO Nicole Dorsey, Jake Wooten, our EVP of Finance, Carl Toscano with Strategy and Operations, and Joe Feltham is joining as well. Joe is our newly appointed Chief Operating Officer. Before I begin, I'm obligated to remind everyone that during the course of this conference call, management may be making some forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These results are outlined in the risk factor section of our filings and our disclosure materials. Any forward-looking statements should be considered in light of these factors Please also note, at Safe Harbor, any outlook we present is as of today. Management does not undertake any obligation to revise any forward-looking statements in the future. So, with that out of the way, let me give you a very quick overview of the call today. We have a lot to get through, and we're pretty excited about some of the things that we have going on in our business. As always, I'm going to start with reiterating our thesis and strategy. Then I'm going to provide some color on our third quarter results and an update on the significant progress we've made in the business. I'll then hand the call over to Leo, who will go into a more detailed review of the operational trends, along with highlighting some milestones we've achieved exiting 2020 as we set the table for step function growth and operating leverage in 2021. We'll conclude with question and answer session where the entire management team will be available for any follow-ups. So with that, let me begin. I know we have many investors on the call today that are newer to the forefront story. So I'll start again outlining the forefront thesis and what we as investors are playing for. The business fundamentals of U.S. cannabis continue to be robust in the face of a global pandemic that has caused a lot of economic uncertainty. With additional states voting overwhelmingly to approve cannabis laws in this month's election, industry momentum just continues to build. And what we are witnessing here is the emergence of a massive secular growth industry that's still very much in its nascent stages. At Forefront, we believe the sweet spot in the value chain for outsized value creation in this industry is really around low-cost production and distribution of cannabis consumer packaged goods. For the past six years, Forefront facilities have created a dominant position in Washington State, with a full line of products which are distributed over 260 retail locations in the state. Our facilities are the number one edibles manufacturer and the number two flower producer with overall number two market share in Washington, outperforming over 600 license holders in one of the most competitive cannabis markets in the world. We've achieved all this while maintaining very attractive margins and profitability. So our thesis, as I always say, is very simple. We're replicating these tried and true production capabilities supported by our retail stores in large and nascent recreational markets of Illinois, Massachusetts, Michigan, and California. All in, we serve an addressable market of over 76 million people. So we're pleased to be able to share today important developments as we execute on this thesis. We are seeing what we internally refer to as maniacal focus on execution taking hold in our business. Q3 2020 system-wide pro forma sales was 22.3 million, an increase of 18% sequentially over the second quarter of 2020. Our revenue growth was primarily driven by recreational sales launching in Massachusetts during the quarter, the reopening of our Mission South Chicago store in late July, and continued strength out of our Washington facilities. The company generated positive operating cash flow in the month of August, well within our stated objective of achieving this in the second half of the year. But even this was ahead of our expectations. We also had our first positive adjusted EBITDA quarter, posting 3.7 million in adjusted EBITDA after what was basically a break-even second quarter. Our tight cost controls and accelerating revenues have driven strong operating leverage as we move into the back half of this year. It positioned us incredibly well. As a company, we're feeling great about where our balance sheet sits leading 2020. Last week, we closed an oversubscribed bought deal led by Beacon Securities for $13.2 million US. The company also announced that it's entered into a definitive purchase and sale agreement with Innovative Industrial Properties, providing for sale and leaseback of our cultivation and production facilities in Tumwater, Washington and Georgetown, Mass. The $30 million sale is on track to close by mid-December. and will be used by the company to pay down outstanding senior debt to the affiliates of Gotham Green Partners. So as of November 30th, 2020, pro forma for the close of the pending sale leaseback transaction, and including proceeds from the recently closed bought deal, the company will have approximately $16 million of cash and $43 million of long-term debt on the balance sheet. It doesn't come due until May 2024. This sets us up with an incredible amount of flexibility on the balance sheet. In keeping with our strategy of going deeper into large nascent adult use markets, we're sharing this afternoon the company is finalizing plans to exponentially expand its cultivation and manufacturing presence in Illinois. We're obviously incredibly excited about this. The company is looking to bring its scaled cultivation and production Um, that comes with one of its 20 cultivation licenses in the state that allows for 210,000 square feet of flowering canopy. And we're currently acquiring acres to construct the cultivation and state-of-the-art, uh, manufacturing facility, which significantly adds to the blue sky of our, of our already established presence in Illinois. Um, and Leo will, Leo will go into more of that later. Leo and Carl will opine more on that later. Our focus on execution is also manifesting itself not only in sales trends and expense controls, but also in keeping our expansion projects on time and on budget. This is critical as these projects set the stage for future growth. Construction of our fully funded expansion plans for our Illinois, our current Illinois, and Massachusetts cultivation facilities is largely complete, as well as construction for our second Illinois dispensing, Calumet City, which is scheduled to open by mid-December of this year. Furthermore, we were able to announce last week the anticipated timing for the completion of our manufacturing facility in Commerce, California, which we expect to open in Q2 of 2021. Forefront has successfully introduced its products and brands into Massachusetts and Illinois and soon to be entering the $3 billion California market. The automated state-of-the-art commerce facility incorporates unprecedented capacity for finished goods manufacturing. similar to the scale seen in the traditional consumer packaged goods industry. Commerce will have the ability to produce over 10 times the current capacity of Forefront's 40,000 square foot Washington production hub, which is currently the number one producer of derivative cannabis products in Washington state. We look forward to the first product hitting California retail shelves in May 2021. So very quickly, speaking specifically to the second quarter, Our Massachusetts revenues grew by more than 47% over Q2, which included partial quarter of adult sales in the state. Our strategy of introducing our successful brands and products from Washington into new markets is demonstratingly gaining traction. And the feedback we've gotten from our customers in Mass and Illinois has been fantastic. In Mission, our Ann Arbor dispensary showed 15% sequential growth as the market there continues to mature. Our Washington system-wide revenue grew 12% in the quarter and continues to benefit from improving pricing as capacity leaves that market. Our revenue in Illinois declined 11% quarter over quarter, only largely losing a month of the quarter in July and Mission South Shore ramping back up after we reopened it in late July after it was closed during the riots. Illinois will have additional tailwind leaving this year with our second retail location opening in December. and the opening of our expanded capacity in Elk Grove hitting sales early part of next year. So to finish up, along with the solid sales trends, we've also seen the benefit of our operational focus and the right sizing of our cost structure. Since late last year, we've reduced our go-forward corporate overhead expense by over 50%. Through reductions of headcount and streamlining of the operations, the company has generated positive operating cash flow in the month of August. And as I said, it was several months ahead of our internal plan. Our adjusted EBITDA on the third quarter was 3.7 million versus what was basically break even in Q2. And also as compared to a loss of 2.8 million in the first quarter of this year and a loss of 5.8 million in the fourth quarter of last year. All of this sets us up for step function operating leverage as we leave this year and move into 2021. So having set the stage, I'll now turn the call over to Leo Gauntmaker, our CEO, who will delve a bit deeper into our assets by state and provide an additional color on our near-term and medium-term plans.

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