4Front Ventures Corp

Greetings. Welcome to the Forefront Ventures fourth quarter and year-end 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Andrew Toot, Chief Investment Officer. Thank you. You may begin.

Thank you, Operator, and welcome everyone to the Forefront Ventures earnings call for the fourth quarter of 2020. I'm joined today on the call by the entire Forefront management team. We have Leo Gontmaker, our CEO, President Carl Toscano, Jake Wooten, our EVP of Finance, Joe Feltham, our COO, and Pete Renard, our interim CFO. Before I begin, I'm obligated to remind everyone that during the course of this conference call, management may be making some forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These results are outlined in the risk factors section of our filings and our disclosure materials. Any forward-looking statements should be considered in light of these factors. Please note, at safe harbor, Any outlook we present is as of today, and management does not undertake any obligation to revise any forward statements in the future. So, with that out of the way, let me give a very quick overview of the call today. We have a lot to get through, and we're extremely excited to share recent developments as our company enters this significant growth phase. As always, I'm going to start reiterating our thesis and strategy as a company. Then I'm going to provide some color on our fourth quarter results and an update on the significant progress we've made in the business. I'll then hand the call over to Leo, who will go into a more detailed review of our operational trends, along with highlighting some milestones we achieved exiting 2020 as we set the table for what we think will be step function growth and operating leverage in 2021. We'll conclude with a Q&A session where the entire management team will be available for follow-ups. So with that, let me begin. I know we have many investors on the call today that are newer to the forefront story. So I'll start, again, by outlining the forefront thesis and what we as investors are playing for. We are entering the golden age for the cannabis industry. As the pace of state legalization accelerates, and reforms at the federal level are appearing to be increasingly inevitable. From a pure investment standpoint, anticipated reforms in the banking laws should be a game changer, leading the way to cost of capital coming down in the space, allowing us to get financing from money-centered banks, and we think that eventually leads to access to U.S. exchanges and broad-based institutional ownership in the industry. You combine that with the fact that the business fundamentals of U.S. cannabis continue to be robust in the face of a global pandemic that has caused a lot of economic uncertainty. Industry momentum continues to build. And what we're witnessing here is the emergence of a massive secular growth story industry that's still very much in its nascent stages. At Forefront, we believe the sweet spot in that value chain in this industry is low-cost production, and distribution of cannabis consumer packaged goods. So for the past six years, Forefront Facilities has emerged into a dominant position in Washington State, with a full line of products that are distributed to 260 retail locations in any given month in Washington. Our facilities are the number one edibles manufacturer in the state and the number two producer of flour, with overall number two market share. We've outperformed over 600 other license holders in one of the most competitive cannabis markets in the world, all achieved while maintaining very attractive margins and profitability. Our thesis, as I always say, is simple. We're replicating these tried and true production capabilities in large and nascent recreational markets of Illinois, Massachusetts, Michigan, and California. All in, we currently serve an addressable market of over 76 million people. We're pleased to share today important developments as we execute on this thesis. So one, we are seeing a maniacal focus on execution taking hold in our business. We put it this way. We have skimmed these from so many times, from so many years competing in the hyper competitive playground of Washington State. And this is a playground that our competitors, you know, particularly in the East Coast limited license states, have never competed against. And from those scars, we are smarter and stronger than ever, and consequently have performed better in our core business than we projected. Two, our Q4 2020 system-wide pro forma sales was 25 million, an increase of 12% sequentially over the third quarter of 2020. Revenue growth was primarily driven by the first full quarter of REC sales in Massachusetts, continued strength in Illinois, where we opened our second dispensary in mid-December, and a solid quarter out of our Washington facilities. Speaking specifically to the fourth quarter, our Massachusetts revenue grew by more than 75% over Q3, again, as we benefited from REC sales, a full quarter of REC sales in the state, and Illinois grew north of 60% quarter over quarter. benefiting from the reopening of our South Chicago store for a full quarter, and as well as opening our second dispensary in Calumet City. Three, we have remained operationally cash flow positive since August, which for the record occurred earlier in the year than we had projected. Our cash flow from operations in the fourth quarter was $3.2 million. Four, Q4 marked our second consecutive positive adjusted EBITDA quarter, posting $5.9 million in adjusted EBITDA, representing a margin of 24%. Adjusted EBITDA is well up from the $3.7 million in Q3 and what was basically flat in Q2 of last year. So very strong progression. Our tight cost controls and accelerating revenues drove strong operating leverage in the back half of the year. and have positioned us incredibly well entering 21. The effective margin is growing weekly as we turn on our Georgetown and Illinois facility upgrades and implement more of our quote-unquote practices, all reflecting our Washington facility standards. Five, we feel great about our balance sheet leaving 2020. In November, we closed an oversubscribed bought deal led by Deacon Securities for $13.2 million. In December, we also closed $33 million deal with IIPR, which provided for sale and leaseback of our cultivation and production facilities in Palmwater, Washington, and Georgetown, Mass. The proceeds from that deal paid down outstanding senior debt to Gotham Green Partners in its entirety. So as of December 31st, we had $18.9 million in cash on the balance sheet, and $47.3 million in related party long-term debt, which doesn't come due until May of 2024. This sets us up with ample flexibility on the balance sheet. Six, we are effectively on time and under budget with our expansion projects. This is critical that these projects set the stage for our future growth. As you may recall, we announced in our last earnings call plans to exponentially expand our cultivation and manufacturing presence in Illinois. We're pleased to announce last month that the finalization of plans and funding to bring our scaled cultivation and production that comes from one of our 20 super licenses in the state that allows for 210,000 square feet of canopy to fruition. Leo will get into more details later in the call. We're incredibly excited for what we internally referred to as phase one of Big Daddy in Illinois to come online late next year with roughly 65,000 square feet of flowering canopy and 70,000 square feet of production. Seven, in Q4, we also completed the expansion of our existing Illinois Elk Grove Village facility from 3,000 to 9,000 square feet of canopy on time and under budget. as well as the upgrades to our Georgetown facility for the installation of LED lights. Our operations and construction team is firing on all cylinders, and we expect those upgrades to be meaningfully additive to 2021 production. Eight, our second Illinois dispensary in Calumet City, Calumet City, I always pronounce that incorrectly, which opened in mid-December, was on time and budget, and the dispensary from a sales perspective is on fire. It opened strong, and that momentum has carried incredibly well into Q1, and has quickly became the second best-selling dispensary in our portfolio. Nine, furthermore, we're pleased to announce that the construction of our manufacturing facility in Commerce, California is expected to be completed as early as April this month, and we expect it to open in the next 30 to 60 days. Given the success of our facilities products in Washington, where again we're the number one and number two in the state for edibles and flour respectively, and the translation of that success that could now be introduced products and brands into Massachusetts and Illinois, the company is excited and soon to be entering the $3 billion California market. The automated state-of-the-art commerce facility of 185,000 square feet of manufacturing only and incorporates unprecedented capacity for finished goods manufacturing. It is similar to the scale seen in the traditional consumer packaged goods industry. Commerce will have the ability to produce over 10 times the current capacity of Forefront's 40,000 square foot Washington production hub, which is currently the number one producer of derivative cannabis products in Washington state. We look forward to the first product hitting California retail shelves in May 2021. So our thesis is proving out. We are successfully introducing our brands and products from Washington into new markets. The feedback we've gotten for our customers in Mass and Illinois has been fantastic. And while our Washington facilities system-wide revenue grew nearly 14% year-over-year in 2020, we had an expected seasonal dip in Q4, a major contributor to our facility success in 2020 is the onset of better wholesale prices in Washington. as capacity continues to leave that market, which benefits us. To finish up, along with the solid sales trends, we continue to see the benefit of our operational focus and the right-sizing of our cost structure. Since late last year, we've reduced our go-forward corporate overhead expense by over 50% through reductions of headcount and streamlining of operations. The company has generated positive operating cash flow since August, and as I said, It was several months ahead of our internal projections. All of this, again, sets us up for step-function operating leverage as we continue into 2021. Having said that, I'll now turn the call over to Leo, our CEO, who will delve a bit deeper into our assets by state and provide us additional color on near-term and medium-term plans.

Leo? Thanks, Andrew. Andrew did a terrific job of updating you on the strength we see in the industry and our business. 2020 was a truly transformational year for our company, which was achieved through focus, dedication, and the hard work of all our employees. It's been a little over a year since our board appointed me CEO because of my deep understanding of cannabis business operations, as well as my business building capabilities, along with their desire for this to be an operator-led company. I've now brought that role in a culture that, as we say internally, is maniacally focused on execution, doing exactly what we say we're going to do. Since March of last year, we've made tremendous progress as a company, right-sizing the cost structure, streamlining our business, and pushing deeper into our core states by leveraging our structural cost advantage our facilities develop in Washington into the rest of our licensed portfolio. Recall our investment thesis. We believe the sweet spot for outsized value creation in this industry is really around low-cost production and distribution of cannabis consumer package fits. Our facilities in Washington State are the number one edibles manufacturer and the number two producer of flour, with an overall number two market share in the state. We outperform over 600 licensed competitors in possibly the most competitive cannabis market in the world. We've achieved this while maintaining very attractive margins and profitability. We're replicating these tried and true production capabilities in the large and nascent recreational markets of Illinois, Massachusetts, Michigan, and soon to be California. So the question is, how is this thesis playing out for us so far? Due to low-cost cultivation and manufacturing methodologies, and again, our maniacal focus on execution, we've successfully and profitably scaled products and brands from Washington into Massachusetts and Illinois. We're very pleased with the results we're seeing one year in. Let's start with Massachusetts. It's been 18 months since the opening of our cultivation facility in Worcester. which at conception, we were able to institute growing methodologies and SOPs developed over the years in Washington. Since our first crop in Q3 2019, we've experienced no failed harvest and demonstrated annual yields of well over 400 grams per square foot. In our acquired Georgetown facility, we continue to make improvements to the growing environment, including upgrading to LED lights, which have driven yields in line with what we're accustomed to seeing in Washington. We've introduced all of our Washington brands in the Massachusetts market without exception. The reception of our products has been fantastic, and we expect to continue to build momentum as word of mouth spreads. We've seen the brands that we brought to market pretty quickly take market share from the previous in-house brands that were being sold out of Georgetown, which is a great sign, and we continue to see the sales climb. We've implemented our extraction methodology, which enables consistent, repeatable feedstock for all our products. and introduced our production and packaging methodologies, which greatly enhanced throughput and reduced labor. As we move forward, we look to continuing momentum in Massachusetts as both of our WSTA and Georgetown facilities continue to ramp up. Our third Massachusetts retail location in Brookline is still expected to open for recreational sales in Q2. We've had to contend with some minor permitting delays, but our team has done a fantastic job of pushing the project and controlling everything we can control. Again, this speaks to our maniacal focus on execution, and we currently expect to be making our first sales in Q2. Our upgraded cultivation in Massachusetts ensures that we'll have plenty of inventory to hit the ground and Brookline running hard. We're excited about this store. Washington continues to stay steady with improved top-line growth as wholesale prices have rebounded from their lows in 2018. Our facilities had a record quarter in the summer, showing a big uptick in general in Washington across the board on flour and derivatives. Pricing is holding well, and as volume has climbed, we haven't had to drop pricing across the board on any products, which is extremely encouraging because usually coming into Q4 and outdoor harvest, you start seeing a bit of a drop in flower pricing and a little bit of slowdown in sales. So we're extremely excited about that trend and hope that going into 2021, we'll be able to hike prices a little and hold steady. In Michigan, we're pleased with how our team navigated a very choppy supply chain and increased competition. Downtown Ann Arbor was not the same in 2020 as years past due to closures downtown because of COVID-19 and no University of Michigan students for most of the year. Even though we didn't have the same purchasing power as some of the other retailers in the state, the relationships our team has made over the past eight years in business were able to carry us last year and beyond. So despite seeing competition double since 2019 and having less product available to us, we were still able to almost triple sales during our first full year of adult e-sales. In Illinois, our South Shore Mission retail reopened at the very end of July. It continues to ramp up steadily month over month, and we're pleased with the results we're seeing. As of March 2021, we're back to revenue numbers we were seeing before the break in last May. Further, our Elk Grove Village facility continues to see progress. Our Washington facilities team took over leadership of the building in January 2020, And since that time, we've seen our yields climb from 290 grams per square foot to right around 375 grams per square foot pre-expansion. Our flower strains and brands have been very well received in the market, along with our recently introduced flagship flower brands, Funky Monkey and Legends. Expansion in Elk Grove was substantially completed on time and under budget. Also, and more exciting, as Andrew mentioned earlier, we're preparing to commence construction of Phase 1 of our build-out of Project Big Daddy. After replicating our facility's best practices from Washington into Massachusetts in our existing Illinois grow, we have a tremendous amount of confidence that our scaled production techniques travel well, and Big Daddy will be yet another significant and continued validation of our thesis. My team and I couldn't be more excited to bring our scaled low-cost cultivation and manufacturing into the state, and also couldn't be more excited to be able to compete with some of the bigger MSOs that also have a super license. and yet haven't played in our playground, let alone skin their knees. Lastly, but certainly not least, in December 2020, our second Illinois location opened for retail in Calumet City, which is approximately one mile from the Indiana border. The grand opening occurred on December 15th, 2020, and the results have been absolutely fantastic. Calumet has quickly become our second biggest revenue dispensary behind Georgetown MA, and the momentum of Q1 has been amazing. In California, It's finally coming up on showtime. We're extremely pleased to be able to reiterate the timing of our entrance into the 3 billion plus California market. The company's fully funded state-of-the-art 185,000 square foot manufacturing facility and commerce will be operational in Q2 2021 with a full line of edibles, tinctures, and vape products to be on California retail shelves by end of May 2021. This facility will have unprecedented automation and low-cost production capabilities white label and private label opportunities, an overall scale that doesn't exist across the rest of our portfolio. California is a state we're extremely excited about for multiple reasons, and the facility here was something that was planned to attack a market at scale with automation that's far and above what we've seen in this industry and across our portfolio in general. Our distribution and attack market strategy is based, pardon the pun, and we're chomping at the bit. It's a big project for us, and we couldn't be more excited about that market. In terms of our CBD business, we're not satisfied with its progress in Q4 and have implemented both further cost-cutting and significant marketing partner improvements, which we are given a short leash to show significant improvements. So consistent with our mantra of maniacal focus on execution, we set up operational bogeys and are knocking them down. Our really hard work in 2020 has beautifully set the table for a strong 2021, and I'm pleased to report that our strong business momentum has continued through the first quarter. While we are still closing the books, we know we had a record Q1 on the top line with strength across our portfolio and expect profit to follow suit. As we enter Q2, we're excited to add to this momentum with the opening of our Brookline location and turning on California. We remain very comfortable with our previous guidance of system-wide performer revenues of $170 to $180 million and adjusted EBITDA of $40 to $50 million. We anticipate these numbers could have an upward bias as we move through the year. With projects falling into place, it seems a good time to frame for investors what we're playing for. We believe if we only what's on our license plate as of today, we have at least a $650 million revenue opportunity and a $250 million adjusted EBITDA opportunity. With that, I'll now turn the call over to the operator to open the lines for Q&A.