4Front Ventures Corp

Good afternoon and welcome to Forefront Venture's first quarter financial results conference call. Today's conference is being recorded. 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'd 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 then the number two. I would now like to turn the conference over to your host, Forefront Ventures Interim Chief Financial Officer and Chief Investment Officer, Mr. Andrew Tu. Thank you. You may now begin.

Thank you, Operator, and welcome everyone to Forefront Ventures' earnings call for the first quarter of 2022. I'm joined on the call today by our CEO, Leo Gottmaker, President Carl Toscano, COO Joe Feltham, Ray Landgraf, who is our President of California Operations, 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 notice 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. All right. So with that out of the way, let me give you 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'll provide color on our first quarter results and an update on what has been a very exciting and busy start to the new year for our company. I'll then hand the call over to Leo, who will go into more detailed review of our operational trends and will highlight the milestones we achieved during the quarter before looking ahead to what's on deck for the rest of 22. We'll conclude with a Q&A session where we will all be available for any follow-ups. So to begin, at Forefront, we're guided by a simple thesis. After perfecting our high-quality, high-margin production capabilities in Washington state, we're replicating them in large cornerstone markets of California, Illinois, Massachusetts, and Michigan. We believe the sweet spot in the cannabis value chain is the low cost, high quality production of cannabis consumer packaged goods at scale, and that is starting to prove itself in spades. We have lived in that sweet spot in Washington for seven years and are confident that the ability to produce low cost and at scale will be the most advantageous skill sets to navigate this industry as it continues to mature. As we sit here today, Our retail locations across the board are performing well and believe are taking market share because transactions, and in many cases, net sales are up despite expected pricing headwinds. Our cultivation and production facilities are dialed in and producing high-quality products at low cost. Our construction project in Madison, Illinois, formerly referred to as Big Daddy, is ahead of schedule with a first phase plan to be delivered in as early as six months. Our production facility in Commerce, California is operating in full swing with strong sales momentum and seemingly infinite blue sky opportunities. Our business has inflected and we expect strong sequential growth to build as we move through the year. So let me spend a minute on two of the biggest growth drivers for our business in the intermediate term, California and Illinois. First on Cali, our 170,000 square foot state-of-the-art production facility in Commerce, California is just a very unique asset that came online late last year. I spent two days in the facility last week touring investors and analysts, and the momentum is palpable as production continues to ramp. The activity and interest we're seeing after just six months of operations has us more confident than ever that Forefront is positioned to be truly disruptive in a California market that is ripe for consolidation and subsequent streamlining of cost efficiency. Our timing for entry into California is proving to be impeccable, possibly a bit serendipitous. Given our success in Washington, we have always thought that the Forefront was uniquely qualified to succeed in this market, where others have stumbled. But the opportunity But the opportunity set we are seeing in California may be larger than we anticipated. The market has been absolutely clobbered by an oversupply of flour, high taxes, and lack of retail stores that has been brutal for incumbent operators. Forefront entered Cali this winter with an asset which solves a major problem in the state. the lack of scaled, low-cost production. We're able to enter the market with our proven and award-winning portfolio of products with pricing as much as 50% lower than the leading incumbents. We're doing this while maintaining very healthy margins. Because we started the year with a revenue base of zero, we aren't faced with pricing pressure headwinds to grow because commoditization has largely already happened. Additional tailwinds in what appears to be a slowly healing Cali market, are an expanding retail base. Recent research indicates that there are currently about 900 active licensed retail locations, which are expected to expand to about 1,200 by the end of 22 and 1,600 by the end of 23. Furthermore, if the cultivation tax is lifted in Cali, our flower-based products will get about an extra 10% additional margin points to play with. As a management team, we've been incredibly busy advancing significant discussions with a growing number of potential partners and strategically attractive businesses. To that end, we're extremely pleased to have closed in April our first strategic deal in California of Island Company. Island is a California mainstay with incredibly high quality products, including pre-rolls, flowers, and vapes. Our commerce facility allows us to acquire brands and manufacture them significantly cheaper and more profitably, which is exactly what we're doing here. We're able to integrate the island production in a matter of weeks, giving us even more confidence in our ability to buttress our growth with simple, accretive acquisitions. Equally as crucial to our California strategy, the management team at Island brings deep operational experience in the local market. In particular, The additions of founder and CEO Ray Landgraf and COO Brandon Mills and team have made an immediate impact to our operations and has strengthened our bench, both on the production and sales side. We are excited to have the Island team on board as we build momentum in the state. In Illinois, construction of our Madison facility remains ahead of schedule. The completion of phase one of construction is expected in Q4 of this year. coming online in early 23. As we have preached for years, Forefront aims to be the poster child for scaled, efficient production, and the opening of Madison will mark yet another significant milestone as we continue to iterate and perfect that engine in Illinois. With only two dispensaries open out of our allowable 10 in Illinois, we have enormous room for growth as we expand our retail footprint in addition to expanding our wholesale presence. Let me take a minute to underscore the growth engine that Illinois can be to our story. In Q1, we run-rated 42 million out of Illinois between two retail locations and a small 9,000 square foot grow. Quickly eyeballing some of the other MSOs in Illinois with large cultivation capacity and a full complement of 10 retail locations, I estimate they are doing in the neighborhood of 275 to 300 million of revenue. With Madison coming online, the first box for achieving this kind of scale is checked. The second box is buttressing our wholesale capabilities and capturing the upside by adding additional retail. So stay tuned there, as we have a lot of unrealized potential in this state. With that said, let me now review the numbers. Q1 2022 system-wide pro forma sales was 32.4 million, an increase of 7% over the same quarter last year, and a slight sequential decrease from the fourth quarter of 21. While we expect pricing and limited license states to naturally become more competitive, we think wholesale growth in both Mass and Illinois has potential to strengthen as additional retail comes online in those understored states. As I stated last quarter, Pricing competition in the cannabis industry is a fact of life, one that we've been proactively positioning for for years. Low-cost, high-quality operations matter, and we will see that continue to come home to roost as the industry evolves. Q1 2022 adjusted EBITDA was $9 million, up 53% from Q1 2021. representing an adjusted EBITDA margin of 28%, which we expect to grow in lockstep with incremental revenue growth. Our balance sheet leaving the year is in solid shape, or leaving the quarter is in solid shape. As of March 30th, we had $8.6 million of cash and $48.7 million in related party long-term debt, which doesn't come due until May 24. Cash balance was down sequentially with the closing of our NECC acquisition in mass. We continue to feel very good about our access to additional capital, our market position, and ability to execute on our strategy. So our thesis continues to prove valid. We are successfully introducing the brands, product, and best-in-class SOPs from Washington into new markets at scale. We continue to add additional SKUs on a monthly basis, developing and launching a dozen new lines since Q4 alone. We're executing on our strategy of continued expansion into our core markets of Massachusetts, Illinois, and now California. We're shaping up for a very active 2022. Which brings me to my final point. As I've been saying for some time, we're entering into one of the most active M&A environments we've ever seen in our industry. As I briefly mentioned during last quarter's call, while details on safe banking and timing of meaningful change on the federal side remain hazy, Their inevitability is apparent. Our goal has consistently been to become a larger company. We're open to the right opportunity to be part of a larger enterprise, but in the meantime, it's very important for us to continue to create shareholder value by perfecting our low-cost production engine and proving out our investment thesis. Everything we're doing right now is not only building our company, but setting us up to be the ideal merger partner as we become the poster child for scale and efficiency. 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 creative acquisitions or as part of a larger platform. 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 us with 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 first quarter, we reached several substantial operational milestones that pretend lasting momentum expected to drive our growth well through 2022 and beyond. With the California facility now humming, we are more confident than ever that we now have the strategy, facilities, and teams in place to realize considerable growth in the coming year. So let's start with California. Our commerce facility is only just starting to make waves in the industry, and we believe that we now have the means to considerably disrupt the world's largest cannabis market. It's happening. After a brutal winter in California, where operators struggled to move product and pricing hitting all-time lows, a death knell for inexperienced operators without the capability to scale, we're starting to see a rebound as retailers begin to clear inventory, municipalities enact much-needed tax holidays, and pricing in general improves from its November-December drop. We view the turmoil in California as a golden opportunity to begin consolidating market share from unprofitable operators to accelerate our growth. Due to our significant competitive advantages in cost derived from automation and scaled manufacturing, we can drive meaningful accretion that others cannot. Simply put, this is what we do. We have now built a disruptive asset with over 500 million of processing capacity, whose low-cost production only gets lower as that capacity gets filled. We have a four-pronged strategy to feed the beast. Start with pricing. After just about six months in the market, we've made solid strides in starting the direct sales snowball. The early response to our products has been fantastic, and the sales force continues to focus on new accounts and deeper penetration into existing accounts. Starting April 1st, we flexed the pricing muscle that our low-cost production affords us, introducing pricing in California that was truly eye-popping across all our brands and SKUs, coming in on average 50% lower than the competition. For instance, pricing for Marva's, the number one selling gummy in Washington, wholesales at $4 for a 100-milligram 10-pack box, a price that still drives gross margins in excess of over 50%. For comparison, wholesale pricing for the leading dummies in the California market is between $8 and $9 for a comparable 100 milligram product. We said we were going to come into this market with the goal of being an outsized price leader, and we're doing it. As the market starts to go again, we truly believe this new pricing model will set the standard for cannabis in California. Moving on to brand acquisitions and incubations. The current distress in the California market, time with our scaled low-cost production coming online in the state, has created the perfect storm for us to begin to selectively and accretively consolidate strong brands with good shelf space who are struggling to turn a profit. We have this unique asset that can manufacture and acquire brands cheaper and more profitably than they could on their own. As Island and others are folded onto our platform, margins expand as capacity is absorbed and fixed costs are leveraged. Additionally, each acquisition comes with an installed base of retailers, which presents a chance to cross-sell a diversified portfolio of high-quality, low-cost products. It's early days in the integration with Island, but we're very pleased that cross-sales are already showing significant overlap. On the 90-day rolling average, our customer count is up to 240 in May, up from 224 in April, and 188 in March. We believe the commerce facility lends itself to open-ended profitable growth for the foreseeable future, and as we continue to execute in California, we expect to announce similarly accretive strategic acquisitions over the coming months. Lastly, California brands tend to travel well, and we look forward to introducing those in our existing markets of Washington, Massachusetts, and Illinois, and one day across the country via interstate commerce. Air Party Productions As retailers look to single-source private label products and brands look to improve profitability by going asset-light, we've seen very strong interest from the market to use our facility for third-party processing and manufacturing. We have a high-throughput extraction lab, kitchen line, vape fill, pre-roll fill, flour co-packing, tincture, gel cap, and mint capabilities. We're currently exploring multiple opportunities for symbiotic partnerships with brands and retailers alike. We expect to onboard the first of our private label clients before the end of the quarter. Lastly, retail distribution. We expect to have a retail presence in California this year. While we believe that the sweet spot for value creation in the cannabis industry is finished goods production, vertical integration is necessary at this point in the industry's maturation curve. Our retail presence not only drives higher margins, but would allow us more direct control over the distribution of our products and brands in the marketplace. Moving on to Washington, which remains stable, with wholesale prices having rebounded from their lows in 2018. Our facilities have seen a 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 state of Washington, we continue to hold serve, which is a testament to the market reception for our products and the focus of the team. On to Massachusetts. Our operations and opportunities in Massachusetts have been significantly bolstered by the acquisition of NECC in January. In addition to doubling our canopy and tripling our processing and production space in Massachusetts, the ACID is simply one of the best-designed cultivation facilities we've ever come across and has contributed to improvements not only in Massachusetts, but across our platform. This brand-new facility is already producing premium flour efficiently, which bodes well for what has been a more competitive market in the state. While we think the market headwinds in Massachusetts might be transitory, as the number of retail locations are expected to increase, the long-term trend will be towards reduced pricing, which is precisely what we at 4400 are positioned for. Our broad portfolio of 22 brands allows us to mix and match products and menus very efficiently, and we've increased house brand sales during Q1 and Q2 in both Massachusetts and Illinois. In Massachusetts, our in-house brands represented around 66% of revenue in 21. We think that number could be as high as 80% for 2022 and potentially push the limit as high as 85%. which we believe to be one of the highest percentages of in-house brand sell-throughs in the state. In Illinois, we continue to see solid performance in our two retail locations and plan to add to our Illinois retail footprint as we move through 2022. After further optimizing our cultivation processes over the summer, we're able to sell out of everything we grow. Plus, with the construction of our Madison facility ramping up and ahead of schedule, we look forward to its capacity not only being able to meet our growing retail needs in the 23 and beyond, but also generating meaningful wholesale revenue as our suite of products hit the market that year. As for guidance, we've always said the revenue and EBITDA opportunity from our current assets is $650 million in revenue and $250 million in adjusted EBITDA. To reiterate our thesis, we believe that the sweet spot for outsized value creation in this industry is 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 have really built out this company to not only address current opportunities at hand, but also the market demands of the future. We're now as confident as ever in our ability to drive sustained growth and capture significant share of every market we enter. We are 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. We're always thinking three steps ahead, and I'm convinced that our model will continue to build value for forefront stakeholders well into 2022 and beyond.