4Front Ventures Corp

Good afternoon and welcome to Forefront Ventures' third quarter 2021 earnings conference call. At this time, 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 would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star two on your telephone keypad. I would now like to turn the conference over to your host, Forefront Ventures Interim Chief Financial Officer and Chief Investment Officer, Mr. Anderton. 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 Gontmaker, Interim President, Carl Trescano, COO, Joe Feltham, and Jake Wooten, 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 and our disclosure materials. Any forward-looking statements should be considered in light of these factors. Please also note as safe harbor, any outlook we present 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. I'll 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. We'll conclude with a question and answer session, where the entire management team will be available for any follow-ups. So it's becoming increasingly clear that the industry reforms on the federal level are all but inevitable, and as the pace 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 this a rare nonpartisan issue during a time of otherwise polarizing politics. There are now multiple avenues for reform that could be game changers, like safe inclusion in the NDAA, 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 stem from this. The business fundamentals of U.S. cannabis remain robust, and we're witnessing the emergence of a massive secular growth industry that's still very much in its nascent stages. At Forefront, we maintain that the sweet spot on the value chain in this industry lies in the low-cost, high-quality production and distribution of the cannabis consumer packaged goods. Over the past seven plus years, our facilities have established a dominant position in Washington State, with a full line of products distributed to over 260 retail locations in any given month there. Our Washington facilities are the number one edibles manufacturer and the number two flower producer, with overall number two market share in the state, outperforming over 600 license holders in one of the most competitive cannabis markets in the world. And we achieve 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 of 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 that 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. Despite a delayed ramp this year, our internal targets for 2022 and 2023 remain unchanged. Key operational developments this quarter are proving transformative for our company, and they have positioned us with positive upward momentum and reinforced foundation as we move into year end. In Illinois, construction of Big Daddy, our new cultivation and production facility in Madison, is now underway. Construction on the phase one of the project, a 250,000 square foot building with 65,000 square feet of flowering canopy, and approximately 70,000 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 558,000 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 1,800 products, which will be offered to Illinois customers at 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-labeled products, including flour, concentrates, edibles, tinctures, gel caps, and other manufactured products for other multi-state operators, cannabis business, and brands in Illinois. In California, our state-of-the-art 170,000 square foot manufacturing facility and commerce is now officially open and operational. The facility was completed on time and on budget, but as discussed on our last quarterly call, we experienced the delay in the issuance of our 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 their extreme caution with a facility the size and scale of ours is understandable. While we experience longer delays than anticipated during this local regulatory approval process, the facility is up and running in earnest and producing nine of our 20 brands for sale and distribution to licensed dispensaries in California via our partnership with NavVis. NavVis is the leading distributor of cannabis products in the state, covering 100% of all licensed retailers. And NABIS has also leased 20,000 square feet in our facility, which enables our retail products to seamlessly integrate into their inventory at the point of production, allowing for highly efficient distribution. In Massachusetts, perhaps most excitingly, last month we announced the acquisition of New England Cannabis, or NECC. a transaction that will significantly bolster our wholesale presence in the Massachusetts market. The acquisition, once closed, would be immediately accretive to our EBITDA and would solidify a 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 conditions, The acquisition of NECC is expected to close late fourth quarter of this year or early 22, pending final CCC sign-off. We are excited to bring this new opportunity over the finish line and to integrate NECC's 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 effectively flat with a decrease of 4% sequentially from second quarter of 21. With only five weeks of Brookline in the quarter and no revenue in California due to the permitting delay, the 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 and NECC ready to close, We expect strong growth to resume as we leave the year and enter into 2022. Q3 2021 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 the meaningful quarterly step-up adjusted EBITDA that we had hoped, as our targets were predicated on us being fully operational in California. We were pleased that we were able to hold EBITDA flat through the increased sales of our internally produced products, which are driving system-wide margin improvements as designed. 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 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 pre-opening cash expenses in commerce, including material investments and working capital, cash flow from operations was once again positive as we continue to focus on operating expense reductions. And despite the industry's rocky performance in the capital market and headlines around the lack of progress on banking reforms this year, we've never felt better about 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 SOPs from Washington into new markets at scale. We are 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 in Massachusetts, has us very bullish as we head into 2022. Which brings me to my final point. I also believe that we are on the cusp of one of the most active M&A environments 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, their near inevitability is apparent. We reiterate that U.S. cannabis is a state-led story that continues to deliver, and M&A activity in the industry looks like it will continue to heat up as companies vie to position themselves properly. 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 for what looks to be a very robust 22. With that, I'll now turn the call over to Leo Gontmaker, our CEO, who will dive a little deeper into our assets by state and provide additional color on our near and midterm plans. Leo?

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 lasting momentum expected to drive our growth well through 22 and beyond. While we experienced minor delays during the California approval process before opening our commerce facility, we are more confident than ever that we 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, has seen a steady incline in customer traffic post-opening. Following steady Q3 growth in the state, at the beginning of October, we were thrilled to announce our proposed acquisition of Holliston, Massachusetts-based New England Cannabis. The acquisition of NECC and its fully operational 55,000 square foot cultivation and manufacturing facility will more than double our total flowering 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 NECC is expected to close in the December-January timeframe, pending final approval from the CCC. As we continue to bring our efficient cultivation and production methodologies and our products to Massachusetts, NECC will allow us to strengthen our competitive position in the state with the capacity to support a meaningful wholesale business. The transaction will more than double Forefront's total flowering canopy in Massachusetts to over 30,000 square feet, with further expansion potential for up to an additional 10,000 square feet of canopy, and will approximately triple Forefront's kitchen, processing, and distribution space. The mechanics are now firmly in place for a continued operational efficiency at scale. Illinois continues on schedule and in third quarter saw the closing of phase one of the build out of the highly anticipated cultivation and production facility we like to call Big Daddy and up to 558,000 square foot cultivation and production facility located in Mattson. In August, we broke ground for the construction of the first phase, a 250,000 square foot building with 65,000 square feet of flowering canopy and approximately 70,000 square feet of manufacturing space. 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 of products, all while creating jobs and new streams of tax revenue for Matson, Cook County, and the state of Illinois. Now that construction has officially begun, Phase 1 of our project 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 2023, offering forefronts in-house brands and products to the growing retail and wholesale markets in the state. We have tremendous confidence that Big Daddy will be yet another significant and continued validation of our thesis. The forefront team and I could not be more excited to be bringing our scaled, low-cost cultivation and manufacturing to Illinois and going head-to-head with some of the largest MSOs in this competitive market. Washington remains relatively stable, with wholesale prices having rebounded from their lows in 2018. Our facilities have seen very consistent performance despite having more outdoor product in the market, causing us to pause on taking price. While we don't anticipate outsized growth in the Washington market, we continue to hold serve, 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 Commerce facility, one of the largest, most automated cannabis manufacturing facilities in the world. The state-of-the-art 170,000 square foot facility, which is located just outside Los Angeles in Southern California, is now open and fully operational, currently manufacturing nine of Four Front's 20 brands and 164 different SKUs. The delays that we experienced during the local regulatory approval process did not translate to idle time as we were able to further calibrate equipment and focus on building relationships with various large retail groups ahead of our launch. Our commerce team has been working around the clock as it ramps up the production of a wide range of products, including infused pre-rolls, gummies, hard candies, fruit chews, caramels, mints, soft gel capsules, vapes, tinctures, and other manufactured infused products. We 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 has already been tremendous. With our suite of in-house brands on its way to market, custom-built automated machinery, advanced machine and automation technologies, expert commissioning, signature low-cost production, and large-scale manufacturing capabilities, We're confident our commerce facility will emerge as one of the premier multi-product manufacturers of high-quality, low-cost cannabis products in the country. We secured a meaningful distribution partnership with NABIS, a fully licensed cannabis distributor and wholesale platform 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 NavVis will continue to be a key factor in helping us smoothly enter the world's largest cannabis market. So far, we've been very pleased with the performance we're seeing at this facility. We're also incredibly excited about the opportunities we see on the horizon. We believe commerce will be a formidable growth driver for our company, particularly as more operators look to bring their brands to California. In fact, 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 commerce highlights with you from just the last 90 days. We started producing nine of Four Front's 20 brands and 164 different SKUs on November 1st. We've manufactured 36 10-pack edibles and produced 17,000 days during the first two weeks of production. To give you a rough idea, that's equivalent to about two weeks of Washington's production, the market leader in derivative cannabis products in that state. We've distributed samples and estimate our samples will have hit more than 150 stores by the end of this month, 500 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 entering California hasn't always been easy for everyone. That's why before we entered the marketplace, we did our homework. Years of homework. We've built relationships. We've had a team on the ground for years. Our decade working in cannabis has also enabled us to learn valuable lessons. which we believe will not only be applicable in California, but also to our growth trajectory. As many of you who have been following us know, our managed facilities are the number one edible producer in Washington, another incredibly competitive market. We achieve 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 in scaled, low-cost manufacturing in highly competitive states. In short, this is not our first rodeo. We've done this before. We know how to win in a highly competitive wholesale market, and we believe we will prove this again in California. As for annual guidance, we provided a range of system-wide performer revenues of $170 to $180 million, and adjusted EBITDA of $40 to $50 million, which we knew would be back-end loaded with the importance of California coming online. With the delays in California pushing in the late October, it's become increasingly clear that our timeline has shifted by a quarter. More importantly, our expectations for revenue and EBITDA targets for 2022 remain unchanged. We've 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 team's diverse skillset combined with our compelling asset base in key strategic markets has given us 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 EBITDA opportunity in the licensed markets in 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, we've really built out this company to not only address current opportunities at hand, but also the market demands of the future. We are 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 a successful end to this year. With that, I'll now turn the call over to the operator to open the lines for Q&A.