4Front Ventures Corp

Welcome to the Forefront Ventures second quarter 2024 earnings conference call. Today's call 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. As a reminder, during the course of this conference call, Forefront's management may make 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 the company's filings and disclosure materials. Any forward-looking statements should be considered in light of these factors. Please note that as safe harbor, any outlook presented speaks as of today, and Forefront's management does not undertake any obligation to revise any forward-looking statements in the future. Also, please note that on today's call, we will refer to certain non-GAAP financial measures such as EBITDA and Adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. Forefront Ventures considers certain non-GAAP measures to be meaningful indicators of the performance of its business in addition to, but not a substitute for our GAAP results. Reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today. I will now turn the call over to Andrew Tooth, Chief Executive Officer of Forefront Ventures. Please go ahead.

Thank you, Operator, and welcome, everyone. Joining me on the call today are Carl Cescano, our Consulting President, Peter Campion, our CFO, Ray Landgraf, President of Corporate Development, and Brandon Mills, EVP of Operations. In May, we outlined clear priorities for 2024, designed to build on our strengths and address the challenges we faced in 2023. I'm very pleased to share that our team is executing well against these priorities. Throughout our markets, we're focused on returning to growth and profitability while leveraging our product portfolio to increase market share. In Massachusetts, Illinois, and Washington, the fundamental strengths of our cultivation, production, and retail operations are beginning to bear fruit. Second quarter results were in line with expectations, with revenue holding steady at $18.7 million quarter over quarter. This stability was supported by growth in average basket sizes and a disciplined pricing strategy, which helped offset inconsistent foot traffic and increased retail competition. Our concerted efforts to strengthen wholesale strategies led to a 10% increase in wholesale revenue in Illinois and a substantial 31% increase in Massachusetts quarter over quarter. Additionally, our Washington licensees have returned to an all-time high performance level, generating over $3.3 million in monthly revenue with a strong upward trend. July also marked the best wholesale performance in the past two years for both Washington and Massachusetts. Let's talk about Mastin. Our Tier 1 Illinois cultivation and production facility is officially open, and we're hitting the ground running. We've seen a robust market demand as evidenced by significant interest in both pre-sales and long-term supply contracts for our flower inventory, reflecting high confidence in the quality and genetic appeal of our products. We're also in advanced discussions with several large strategic partners about bulk sales and private label partnerships. which will further strengthen and diversify our distribution channels. Our commitment to excellence in cultivation is clearly resonating with the market, setting the stage for continued growth and success. As of now, we have over 12,000 square feet of flowering canopy online in Matson, nearly doubling our cultivation footprint versus prior quarters in Illinois. By the end of August, we'll have tripled the size of our canopy in the state and will be at full capacity by the end of November. Our first harvest is scheduled for early September, and from there, we'll be ramping up with three additional harvests each month. Maxim will significantly increase the availability of the flour and derivative products, alleviating existing supply constraints and leading to a substantial increase in wholesale revenue, which, as I just mentioned, is already up 10% quarter over quarter in Illinois. This increase in supply also allows us to further enhance our retail offerings by providing customers with a diverse mix of high-quality forefront brands and popular third-party products. In Massachusetts and Illinois, we've recently introduced several exciting new products and SKUs that are already making significant impact. Crystal Clear Blast, Marmabar vaporizers and smoke break pre-rolls have been launched to meet the specific demand of our customers and capitalize on opportunities in high-growth categories. These additions reflect our renewed focus on investing in product development and innovation, along with our commitment to data-driven decision-making. They also demonstrate our ability to use the mature market experience to shape our forward-looking strategies. By analyzing consumer preferences and behaviors, we can tailor our offerings to align precisely with market trends and customer desires. Additionally, we have a renewed focus on bud tender education to boost sales. By equipping our team with the latest tools and knowledge, we ensure that they can provide excellent customer service. Investing in top-notch training and new resources allows our bud tenders to offer great advice and enhance the overall customer experience. Feedback from our loyalty programs and surveys has been crucial. These insights directly inform the knowledge and skills we equip our buntingers with, ensuring they understand what our customers truly value and need. The 420 weekend showcased the potential and growth of our retail operations. Kicking off with promotional deals and store activations, we saw our best business days in the past six months, surpassing even Green Wednesday and Black Friday sales. Over two days, we processed over 3,400 transactions, which were the highest sales to date this year, with increased average ticket sizes and units per transaction. Both Massachusetts and Illinois achieved record new customer acquisitions, setting a new benchmark for sales volume and customer transactions. This success underscores the effectiveness of our promotional efforts and the upward trajectory of our retail presence. As part of our continuous efforts to strengthen the Mission Retail brand and better serve our customers, we have introduced a revamped website and e-commerce experience across our markets this month. Additionally, we have engaged a leading international brand and digital marketing firm to elevate our brand presence and drive customer engagement. This collaboration will help us refine our marketing strategies, create compelling content, and execute targeted campaigns that resonate with our diverse customer base. By leveraging their expertise, we aim to increase brand awareness, foster deeper customer loyalty, and ultimately drive growth across all our retail locations. As we move forward, we will continue to prioritize innovation and consumer insights, ensuring that every product we bring to market is aligned with the wants and needs of our customers. We've also been supercharging our team by bringing in top talent and key hires throughout Q2. especially at our matching facility in Illinois. Our success is all about the quality and dedication of our team. In the past few months, we've carefully chosen individuals who bring a wealth of experience and expertise, all while aligning with our core values and future vision. We're excited that more experts will be joining us in August and September to drive our growth and keep us at the forefront of cultivation and manufacturing. Their insights and innovative techniques are already making our growing cycles more efficient and productive, boosting our yields, and fostering a high-performing culture. It's all about having the right people in the right places. This quarter, we successfully opened our new Norwich store in Illinois. The location has been positively received and is showing consistent week-over-week customer traffic growth and growth in average basket size. Since the official ribbon cutting in June, Sales have increased by 10% to 18% week over week, and we expect to hit operational break-even by Q4, after which that store location will become a net contributor of cash on a monthly basis. Strategically positioned in a high-traffic area with a large addressable market and attractive demographics, the Norwich store benefits from ample parking and strong co-tenancy with other popular retail stores. As part of our ongoing expansion efforts, we're also exploring opportunities to add more dispensaries in Illinois. We're focusing on high-potential locations that align with our growth strategy and market demand to further enhance our presence in the state. Now that that foundation is largely built and we're starting to see results, our focus has shifted back to driving cash flow and preparing for disciplined growth ahead. We are committed to finding ways to achieve the same results with less spending, always with an unwavering focus on our customers. On the political front, like everyone else, we don't have a crystal ball, but we remain optimistic about future federal development. The potential reclassification of cannabis to a Schedule III substance under the Controlled Substances Act represents a significant opportunity for the industry. We are encouraged by the prospects and the apparent support from both presidential candidates for federal movement. This change could streamline regulations, improve tax benefits, and enhance banking access. In the meantime, we are concentrating on what we can control, running excellent operations and staying focused on generating strong cash flow. From a macro standpoint, the landscape is filled with promising opportunities and potential developments. We are excited about the future and are committed to navigating these opportunities with precision and confidence. As we progress through 2024, I couldn't be more enthusiastic about the incredible journey we're on at Forefront. This year is all about transformation and growth. We're advancing operationally, strategically, and culturally, and the data supports this. Our focus remains sharply on operational excellence and delivering top-notch products at great prices. What truly excites me is how we're connecting with consumers and introducing thoughtful, innovative, and consumer-centric products that cater to evolving preferences. From new vape lines and pre-rolls to popular strains and edibles, along with new lab capabilities coming online this year, committed to offering a diverse range of options to meet our customers' unique needs. This quarter, we've also made significant strides in executing our near-term focus on driving and growing the wholesale business. We're seeing strong results from these efforts, reinforcing our commitment to expanding our reach and impact. With that, I will now pass the call over to Brandon to discuss trends in our performance in our key markets. Brandon?

Thanks, Andrew. I'll now dive deep into a comprehensive overview of our performance across all states. First up, the growth engine that is becoming the center of gravity here at Forefront, Illinois. According to BDS and Illinois state data, the Illinois market grew by just over 4% from Q1 to Q2. Flower pricing remained nearly flat quarter over quarter, despite a nearly 11% decline compared to the previous year. Overall, we are pleased with the supply and demand stabilization and are not aware of any significant new supply coming online. This bodes well for our masking facility, which launched in a supply-constrained environment with healthy market dynamics. In short, Illinois needs biomass, and we are bringing it online at the perfect time. Our retail revenue saw a decline of just over 10% at our Calumet City location and a smaller decrease of 6% at our South Chicago location. This decline was primarily due to increased competition and inconsistent in-store traffic, similar to what many of our MSO peers are reporting this quarter. Despite this challenge, our average basket size remained consistent in Calumet City and increased by 2.5% in South Chicago, indicating healthy consumer spending behavior despite persistent macroinflationary pressure. On top of this, our use of discounting decreased by over 10% in both locations as our flour quality and overall assortment continued to improve. In terms of our wholesale traction in Illinois, we had another strong quarter despite ongoing supply constraints. We sold into 148 third-party retail doors out of approximately 210 in the state, achieving nearly 75% market penetration. Revenue increased by over 10%, rising from $1.87 million in Q1 to $2.1 million in Q2. This growth was driven by several factors, including the introduction of new in-demand genetics, such as blueberry cookies, new product launches like Crystal Clear Blast, and more of our products being available on our wholesale menu as we continue to diversify and strengthen our assortment of third-party brands in our mission retail doors. As Andrew noted, in Q2, we started introducing our new capabilities at Mass into the market, and the reception has been very positive so far. This includes advanced discussions around pre-purchase agreements, long-term supply contracts, private label capabilities, and other strategic partnerships that we could never support with our limited toolkit at our outgrowth facility. We look forward to sharing more about these partnerships and developments as we are able. Our product launches in both Massachusetts and Illinois are demonstrating our renewed investment in product development and are beginning to bear fruit. Crystal clear blast with its innovative design and high-quality formulations has garnered significant attention and positive feedback. The Marmos Bar, our vape pen featuring bold fruit flavors and effects-based minor cannabinoid formulations, was warmly received in both Massachusetts and Illinois, and our flagship flower brand, Mission, has been a clear bestseller across all of our locations. Following this, we successfully introduced Smoke Breaks, a convenient five-pack of pre-rolls, to both retail and wholesale markets on August 7th. The initial feedback has been excellent, and we anticipate strong sales of this product format, as 0.35 gram mini pre-rolls now represent nearly 10% of pre-roll pack sales across Illinois and Massachusetts, and will allow us to reach a previously unserved consumer segment. The last point I want to mention regarding our product development roadmap in Illinois is our excitement about bringing our extraction lab online in Madison and entering new, innovative product categories. We will soon have a full suite of ethanol, butane, and hydrocarbon capabilities, enabling us to produce not only high-quality distillate for our existing vape and infused pre-roll lines, but also expand into THCA isolates, diamonds, cured resin, live resin, and HTE. Later this year, we will also introduce solventless formulations and products, including rosins. These capabilities will allow Forefront to launch high-quality, in-demand products across vape, infused pre-rolls, and packaged concentrates, leveraging our proven leading brands from Massachusetts and Washington. In terms of cultivation, as Andrew mentioned, we're now on a path to a significant scale-up in the state. We currently have 12,000 square feet online, which will increase by 50% to 18,000 square feet by the end of the month. We will reach 35,000 square feet of canopy by the end of November. Our first harvest at Madison is scheduled for September 7th, followed by three additional harvests each month, seven in September, nine in October, 12 in November, and stabilizing at 15 per month in December. By the end of the year, we expect to be producing around 3,000 pounds of dried and cured biomass and over 2,000 pounds of sellable flour per month. with potential for further increases as we continue to improve yields and drive failure rates even lower. This scale unlocks incredible opportunities for forefront branded wholesale in an Illinois market with limited cultivation coming online and more dispensaries coming online monthly. We look forward to scaling our branded market share in Illinois as we expand into our full capacity in Q4. As highlighted by Andrew, Forefront has partnered with a leading marketing agency with extensive experience in cannabis and CPG. This agency will help us boost brand recognition and improve customer communication across our entire portfolio. Their targeted campaigns are already enhancing customer engagement and loyalty. Our primary goal is to raise brand awareness across all of our brands and products as we build on our existing wholesale market presence. ensuring that our portfolio stands out and drives growth in both retail and wholesale channels. Now transitioning to Massachusetts. The market experienced a growth of just over 3% from Q1 to Q2, according to BDS. Flower pricing remained relatively stable, showing a slight decline of just over 3% from period to period, and settling at $5.24 per gram in adult-use retail. Our retail performance in Massachusetts faced challenges like those in Illinois, mainly due to price compression and increased competition at our Brookline store. This heightened competition led to a decline in foot traffic as customers spread their visits across more available retail locations. As we enter Q3, we are now seeing stabilization at our other locations and are currently exploring all options for our Brookline store. We continue to monitor this trend weekly and are making investments in improving our product assortment shopping experience, loyalty programs, and customer communication to more effectively compete for our customer share of Wallet. We believe that the upcoming improvements in our brands and products, flower quality, and genetic diversity will give Forefront more tools to compete in the latter half of this year. On a positive note, our average ticket grew by approximately 5% quarter-over-quarter across all three of our retail locations. This increase is due to a double-digit reduction in discounting across all locations and is supported by our improving assortment strategy and product quality. We expect to see these positive trends continue into Q3 and beyond as the changes and investments in our cultivation operations and leadership bear fruit. Our wholesale operations in Massachusetts have shown great growth this quarter. We achieved an impressive 31% quarter-over-quarter increase, with revenue climbing from approximately $950,000 to over $1.25 million, driven by a handful of factors. First and foremost, our strategy to diversify our product assortment and reduce reliance on forefront brands in mission retail has increased the number of products available for wholesale. Combined with high quality and a few new product launches, this has resulted in some of the strongest wholesale menus we've had in recent quarters. As our Worcester grow operations resume in Q3, which I'll discuss further later, we anticipate continued strong quarter over quarter growth in our wholesale channel. In Massachusetts cultivation, we've made significant strides in the performance of our grow operations. While rolling out our new training SOPs and genetics in Worcester, we also address known deficiencies in Georgetown, bringing both facilities up to par with our state of the art facility in Holliston. These efforts have led to substantial turnaround in our flower quality, improved yields, and reduced failure rates. Following the genetic reset in Worcester, we are expecting that location to begin to contribute 350 to 400 pounds per month, primarily to our wholesale menu and growth efforts, which technically kicked off on July 1st with our first harvest post-reset. Among the 33 strains we're now focused on, test results are averaging 33.5% in THC in some strains. with peaks as high as 37.7% in our banana pudding cane strain, compared to average THC levels through Q1 and Q2 that range from the low to mid 20% range. In addition to the improvements in cultivation, we're making significant strides in enhancing our processing and manufacturing operations. This includes optimizing our dry and cure processes, handling SOPs, trimming, and storage to maximize aesthetic, nose, and terpene profile of the end product. For example, both Massachusetts and Illinois have now been equipped with new automated trimming and sorting machines. These machines are already reducing labor and operating costs while improving flower quality by minimizing run time, product agitation, and loss. We have also invested in water activity meters to precisely control conditions that prevent microbial growth and preserve weight and quality. Additionally, we are continuously refining our nutrient blends and application processes, which we expect will reduce nutrient costs by 40 to 50% by the end of next quarter. Shifting our focus to Washington, our tenants and licensees have been performing exceptionally well in an incredibly competitive market, achieving two of the highest revenue months in Q2 over the past two years. Total revenue exceeded 3.3 million in monthly sales in May, marking the highest month since January of 2022. Additionally, from Q1 to Q2, Washington saw a revenue increase of approximately 9%, with revenue rising from $8.35 million in Q1 to $9.12 million in Q2, driven primarily by improvements in overall flower quality and excellent product performance. including the value-oriented EasyBrand portfolio, which has now expanded to include flour, pre-rolls, vape, and live resin disposables. Our cultivation footprint in Washington remains stable at 30,000 square feet, while the number of cultivars in rotation increased from 34 to 41, and the average THC levels rose from 25 to 26%. With that, I'll now turn the call over to Peter to provide an overview of our financial results.