Q2 2021 4Front Ventures Corp Earnings Call

[music].

Greetings and welcome to the forefront ventures second quarter 2021 earnings conference call.

At this time all participants are in a listen only mode. A brief 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.

As a reminder, this conference is being recorded.

Now my pleasure to introduce your host for friends Ventures, interim Chief Financial Officer, and Chief Investment Officer, Mr. Andrew huge. Thank you you may begin.

Thank you operator, and welcome everyone to forefront ventures earnings call for the second quarter of 2021.

I'm joined today on the call by our CEO Leo gone maker, President Karl just gano, our CLO, Joe cellphone and Jake Wootten, our EVP of finance.

Before I begin today 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 in our disclosure material.

Any forward looking statements should be considered in light of these factors.

Please also note a 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.

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 excited to share recent developments as our company continues to produce strong results.

While setting the stage for growth to continue well into the future.

As always I'm going to start with reiterating our thesis and strategy.

I'm going to provide some color on our second 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 more detailed review of our operational trends along with highlighting some milestones we achieved in the quarter as we continued to build scale and momentum across the business.

We will conclude with a question and answer session for the entire management team will be available for any follow ups.

So let me start like I usually start.

With our thesis on the industry as a whole.

We firmly believe that we are entering the golden age for the cannabis industry.

Piece of state legalization accelerates and reforms on the federal level appeared to be increasingly inevitable.

From a pure investment standpoint.

We anticipated reforms in banking law should be a game changer, leading the way for cost of capital to continue to come down with financing from commercial banks and eventually access to U S exchanges and broad based institutional ownership in the industry.

The growth fundamentals of U S candidates remains robust.

<unk> robust as we witnessed 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 in this industry is low cost high quality production and distribution of cannabis consumer packaged goods.

For the past seven years forefront facilities have established a dominant position in Washington State with a full line of products, which are distributed over 260 retail locations in any given month across the state.

Our facilities are the number one edibles manufacturer and the number two flour producer with overall number two market share in Washington.

Performing over 600 license holders and one of the most competitive cannabis markets in the world.

All achieved while maintaining very attractive margins and profitability.

Our investment thesis as I always say is really simple we're replicating these tried and true production capabilities in the large and nascent recreational markets, Illinois, Massachusetts, Michigan and California.

And all in we currently serve an addressable market of over 76 million people.

We're pleased to share today important developments as we deliver on this thesis.

One.

Our focus on execution execution continues to take hold in our core business. Both in terms of strong current performance and setting the stage for robust growth into the future.

Momentum from Q1 carried into Q2 further increasing our conviction in both our business model and consumer response to our products.

Our operations and construction teams have done an incredible job of controlling everything that they could could control as we execute on our strategy of being a scaled finished goods producer in every market we enter.

As a result, we have two critical projects math in California that were completed under budget and on time.

And we prepare to break ground tomorrow on a third profit what we've been calling big Daddy in Illinois.

In step with the dramatic increase in Illinois retail licenses in consumer demand in that state.

These meaningful milestones will lay the foundation for continued growth into 2022.2023 and beyond.

Well there is always unpredictable city on the timing of final licensing in the cannabis World. We're pleased to be building or opening our third, Massachusetts Dispensary. This Saturday and anticipated a terrific terrific opening weekend in the heart of the Boston University quarter.

While Leila will get into further detail on our progress in California. We are pleased to share that our fully automated production facility in commerce is clearing the final hurdles for licensed licensure.

And we couldn't be more excited to enter that market with disruptive low cost production and a much deepen relationship with Nab is the number two distributor in the state.

We have signed an additional agreement we're not a full leased 20000 square feet of space in our commerce facility.

Which will not only lower our cost but allows us to further our working relationship with this partner.

We can't wait to bring our proven products and brands to market quickly once we flip the switch in California.

0.2.

Q2, 'twenty one system wide pro forma specific pro forma sales were $34.4 million, an increase of 10% sequentially over the first quarter of 'twenty, one and 85% year over year.

All retail locations across the portfolio continued to perform above our expectations.

Trend that has continued into Q3.

Recreational sales in Massachusetts continue to show strong growth and we have sufficient inventory to supply our next leg of growth with the opening of Brooklyn.

Okay.

Illinois continues to see strong sales trend as trends as well, particularly in Calumet City, and our Calumet City location.

We're incredibly thrilled to be to soon be a scaled producer in the state with our Big Daddy project, which will officially break ground on tomorrow.

The first phase of which will have 65000 square feet of flowering canopy and 70000 square feet of production.

In the meantime, our expectation of wholesale will contribute to our results in the state as we continue to dial in our recently expanded existing growth.

Three Q2 marked our fourth consecutive positive adjusted EBITDA quarter.

Posting $7.5 million in adjusted EBITDA, or 22% adjusted margins, which grew 27% quarter over quarter.

We experienced a snapback in margins as expected in Q2 with sales from our expanded facility in Illinois flowed through the business.

We expect margins to expand meaningfully as we continue to fine tune, our facility's efficiencies as California comes online and we began leveraging those costs and we continue to leverage our SG&A line.

This business is positioned for a step function margin expansion as we exit this year and into 2022.

For our balance sheet, leading Q2 was in solid shape.

As of June 30, we had $11.6 million of cash and $46 million of related party long term debt, which doesn't come due until may 2024.

Cash flow from operations was positive offsets of $4.6 billion in Capex.

Mostly around finishing construction of the commerce facility and building up packaging inventory in anticipation of our start in California.

And despite the apparent disappointment in the capital markets around the lack of progress with banking reforms. This year I've never felt better about our availability.

To access reasonably priced growth capital.

Did that and we are thrilled that navy capitals continue to support a forefront by providing us with a term sheet to lead the financing of our proposed accretive acquisitions to strengthen our position in a key market as the pace of consolidation in the industry picks up.

As we move towards signing the definitive agreement. This acquisition once closed will solidify our scaled position in this COVID-19 market and would be meaningfully accretive to our EBITDA.

Strong operators looking to fund smart and accretive acquisitions have never had better access to fare minimally dilutive capital.

And while the public equity markets arent paying much attention to U S. Cannabis right now I can assure you that the private market, Florida.

Which brings me to my fifth point and possibly one of the most important takeaways, we'd like you to have from this call.

I think that we're on the cusp of one of the most active M&A environment I've seen in my seven plus years in the industry.

While the timing of movement on the federal side is up for debate.

The inevitability of it doesn't seem to be.

We will reiterate that our U S. Cannabis remains a state led story that continues to deliver.

The industry is a beehive of activity as folks move to position themselves properly ahead of legalization and federal rules changes.

We have consistently stated that we aimed to be a larger company.

As a management team, we are somewhat agnostic about whether we maximize value for our stakeholders by continuing to augment our growth with accretive tuck in acquisitions or by being a part of a larger platform.

In the very near term, we see ample opportunities for accretive acquisitions to bolster our market presence as.

As we look beyond with just the assets. We currently have next year, we will have scaled proven operations in Massachusetts, Washington, California, Illinois, with the potential to add a de Novo license in New Jersey.

All of which would make us a valuable piece and a larger puzzle.

And a more strategic puzzle.

We are seeing these opportunities and we're looking at the mall.

Lastly, our operations and construction teams have been phenomenal we are effectively on time and under budget with all of our expansion projects and this is critical as these projects set the stage for future growth.

We will speak specifically to our imminent and exciting entrance into the California market along with the opening of our third, Massachusetts retail location.

We also announced our plans to break ground on our exponentially expand expanded cultivation and manufacturing presence in Illinois.

We're bringing our scaled cultivation and production capabilities to the one of 'twenty cultivation licenses in that state that allows for upwards of 210000 square feet of flowering canopy.

We will officially break ground on the project Tomorrow and are ready for phase one to come online next winter with 250000 square foot building with 65000 square feet of flowering canopy.

70000 square feet of production.

So our thesis is proving out.

We are we are successfully introducing the brands products and best in class operational <unk> from Washington into new markets.

The feedback we've gotten from our customers in mass in Illinois has been fantastic and now we embark on our much anticipated entrance into California, the largest cannabis market in the world.

We're pleased with how our business is performing.

It ends up or step function operating leverage as we continue through 2021 and into 2022.

Having said that stage I'll turn the call over now to Leo got maker, our CEO, who will delve a bit deeper into our assets by state and provide us additional color on our near and medium term plans Leah.

Thank you Andrew for updating us on the strength, we see in our business and in the industry.

As mentioned in the second quarter, we continued to build on the strong momentum. We saw in Q1 that momentum really began in early 2020 and as a direct result of the focus dedication and hard work of all our employees.

Our maniacal focus on execution is working as intended and is showing great initial results, we're already off to an excellent start to the third quarter.

We continue to make tremendous progress of the company streamlining our business improving cost structure and leveraging the structural cost advantages that our facilities in Washington develops the scale profitability in the other states within our license portfolio.

To reiterate our investment thesis states 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.

Our excellent Q2 results and our steady growth quarter over quarter show that our strategy of replicating low cost production methods can rapidly scale in the most attractive markets in the country and we're just getting started.

Let's begin with Massachusetts, We're happy to report the continued success and profitability in Massachusetts. Following the initiation of adult sales in the state in late 'twenty or 'twenty.

We are seeing a pattern of positive reception on the ground from our customers and our in house brands are rapidly outpacing the previous brands that were being sold out of the Georgetown here, what's the location.

This is a great time, and we continue to see the sales cloud.

After a minor permitting delays mission Brookline, our third adult use dispensary in Massachusetts will be opening this weekend.

I'd like to thank our team once again for their fantastic job pushing that project forward and being on top of everything under our control.

His mission Brookline ramps up we aim to further expand our Massachusetts footprint and expect performance to increase as our high standards low cost cultivation and efficient production methodologies to begin to scale in this challenging but attractive market.

Illinois, excuse me, Illinois continues its strong pace best.

Best highlighted by our recent announcement of the closing of the first phase of the build out of our highly anticipated cultivation and production facility, we called project Big Daddy and Madison, Illinois.

Thrilled to that construction on phase one we will officially begin tomorrow and can't wait to come online in Q1.2023.

As we break ground on this up to 558000 square foot cultivation and production facility, we have a tremendous amount of confidence that our scaled production techniques travel well and big Daddy would be yet another significant and continued validation of our thesis.

Phase one of the Madison facility will have a flowering canopy that is 30% larger than our existing facilities in Washington, combined and we expect yields out of big data and it'd be closer in line with our more recent and more efficient, Massachusetts cultivation operations.

Producing over 400 grams per square foot.

The forefront team and I could not be more excited to bring our scale low cost cultivation and manufacturing to Illinois and compete head to head with some of the largest msos in this competitive market.

In California.

Our fully funded state of the art 170000 square foot manufacturing only facility in Commerce is now complete and operations are expected to commence later this month following a brief delay in the local regulatory approval process.

Once operational our Congress facility will provide our suite of high quality branded products to license dispensaries throughout the state and we expect it will soon become the premier multi product manufacturer in the country due to its scale and efficiencies are first suite of available products will include gummies hard candy.

Caramels fruit juice Mint tincture.

Tinctures, vape shops and fused pre rolls.

<unk> brand favorites like marbles Pebbles, chewy is high burst rigor and turf sticks.

Our ongoing partnership conversations to fully leverage the scale of this facility have me incredibly excited about what's to come.

In that vein are signed agreement with NAV is a leading distributor of cannabis products in California, covering 99% of licensed retailers in the state at more than 750 dispensaries gives us full confidence to provide statewide last mile coverage of our products to retail locations on day one of production.

This in addition to our five person sales team that has been boots on the ground since the beginning of the year, including dedicated norcal Socal schemes.

We've had very positive response in the over 800 retail stores contacted so far.

Dozens of whom have already toured our facility in Congress.

Everyone involved is chomping at the bit to get going.

The facility was completed on time and on budget, but as mentioned we saw a delay in the issuance of our certificate of occupancy because of multiple rounds of comments by the La County Fire Department.

This department has seen multiple legal and illegal extraction explosions over the years, including a blast in 2020 that enjoyed 11 firefighters. So its understandable that they've taken extreme caution with the facility that has the size and scale of Congress.

We submitted our fifth round of comments back from the Department on August 3rd and are optimistic of their inspection is coming to a close.

All other departments have signed off on construction and we expect our certificate of occupancy from the Congress building Department within days of the fire Department's approvals.

With the combination of the relocated team from Washington complemented by the additional hiring of an extremely experienced team previously hailing from Yoplait in the leadership of Josh Craig <unk>, our VP of operations in California, We're thrilled with the unprecedented progress that's been made thus far on the industry's most car.

Implicated kitchen line to date.

Moving on to Washington, Washington remains relatively stable with wholesale prices have 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 intake price.

Demand has remained robust, though and we continue to hold serve which is a testament to the market reception for our products and the focus of the team in Washington.

In Michigan, we are pleased with how our team navigated a very choppy supply chain and increased competition.

<unk> was not the same in 2020 as years past due to closures downtown because of COVID-19, and no University of Michigan students, where most of the year.

Even though we don't have the same purchasing power of some of the other retailers in the state the relationships. The team has made over eight years in business, we're able to carry us last year and beyond avail.

Availability of product has improved and by really over the last year, However, and.

And we look forward to students being back on campus hopefully this fall for the first time since we had been adult use.

College football weekend being back in full swing have us feeling good about sales ramping up as we head back into September.

As a management team we strive to ensure that we are allocating all of our resources focus time and money into our highest return opportunities of which we have many.

While we took swift and decisive action around our noncore pure ratio CBD business to ensure we lost no money and we were not counting on any meaningful profit from this business this year.

It is becoming increasingly clear to us that focusing all of our energy.

On our myeloid excuse me on a myriad of higher returns.

Project is appropriate at this time.

As Andrew mentioned in his earlier remarks, it's a very attractive M&A market right now for all things candidates I think it'd be appropriate to assume that pure ratios as a part of our near term M&A discussion, we continually refine our portfolio to maximize returns for shareholders.

To conclude since early 2020, we have worked to focus our business model on replicating our large scale low cost cultivation and production capabilities into large and nascent recreational markets.

We couldn't be more pleased in our efforts to date executing on that plan.

With the footprint and capabilities, we're putting in place we are increasingly confident in our ability to drive sustainable growth and capture a significant share of every market we enter.

Forefront is very well positioned to be a major part of the cannabis landscape for years to come either as a standalone or as part of a bigger platform.

We think it's going to be an eventful ended the year for our company. We're excited to add to our strong business momentum with our California in Brookline openings, establishing our presence in a new key market and continued improvements in our other core states as for guidance. This year, we provided a range of system wide pro forma.

Revenues of $170 million to $180 million and adjusted EBITDA of 40 million to $50 million, which we knew would be back end loaded.

We're reiterating that range today. Additionally, although we're not guiding for 'twenty 'twenty. Two we are pleased to report that we have confidence in a stronger 22 ramp that our previous estimates.

With our projects continuing to ramp up it seems a good time to remind investors of what we're playing for and we believe we have at least a $650 million revenue opportunity and a 250 million adjusted EBIT the opportunity and the license to markets in which we already operate and we're taking our scalable efficiencies even deeper.

Into the states we currently have.

We can't wait to share our continued progress with you following the close of Q3 and with that I will now turn the call over to the operator to open the lines for Q&A.

Thank you we will now be conducting a question and answer session.

He would like to ask a question. Please press Star then one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing star.

One moment, please while we poll for questions.

Our first question today comes from Graeme Kreindler with eight capital.

Hey, Graham How're you doing.

Yeah.

Hey, guys. Good. Thanks, how are you. Thanks for taking my question and congrats on the quarter here.

I wanted to I wanted to ask a question.

Any comments about reiterating the guidance.

And having a stronger back half ramp so just looking at some Bakken napkin math here it looks like you've got an average about 30% sequential growth over the next two quarters to hit that guidance range am I understanding it is gonna be a higher rent than what we just saw here in the quarter, but with respect to what you're modeling in in that guidance just curious about the split on the.

Levered as you have commerce coming online you have brookline coming online versus what already sits in the portfolio.

How much of that is as new assets really coming online and hitting their strides versus the existing portfolio continuing to get more and more dial that thanks.

I'll turn that over to Jake Wootton.

Hey, Graham How're you doing.

So in answering that question.

We do still expect a strong growth from our existing assets in Illinois, Massachusetts, Washington is relatively stabilized we've alluded to.

However, as I think your Youre looking into there is step function growth anticipated from the introduction and the on lining of the Brookline dispensary as well as the California location. So I'd say it does tend to you know the.

The GAAP between kind of where today's run rate is in the guidance to the end of the year. You know is largely dependent on the online any of those assets, we feel very confident in those numbers and where they're tracking, particularly with the near term openings in Brooklyn next weekend in California eminently.

But it is it does index into those additional assets coming online.

Okay.

Okay understood I appreciate the comments there and then just to pivot here.

Question regarding the remarks made for M&A. So congratulations on the announcement here that you have secured some financing wanted to get a better sense of how how imminent.

And a transaction is for you guys and to the extent that you can disclose but.

And any details on on the scale of that transaction the stage of where it is in its business and we're in the value chain.

And as well as geographies that would all be appreciated to get an idea.

You know if that's something that's going to expand the portfolio, a little broader or perhaps even in some of the core market share. Thank you.

Yeah, Thanks, Graeme I'm going to turn this over to Carl.

Talk specifically about whats happened in the very near term, but you know as a general comment on M&A.

Been talking in this industry for years about consolidation.

Consolidation in and when will it come.

And I would say from what we're seeing you know there are a lot of players that are even non traditional players.

Who are trying to position themselves for the coming legalization in the U S. So not just msos, but some of the other types of players that you've that you would think out there, including the Lps from Canada, So very life.

Very live conversations from the broader the broader bigger picture consolidation, but I'm going to turn it over to Carl for.

The specific the specific near term opportunity.

Yeah.

Okay.

Hello are you there.

Sorry, guys.

I'm afraid my connection might be bad I was wondering can you hear me now.

We can.

Great.

Apologies for the delay.

Graham I heard most of your question some of the broke off though what I assumed you're asking for some of the.

The the meat on the bone for the details around this this current opportunity and.

All I can say is we are.

Very close to getting ourselves too.

Get ourselves through due diligence and then to execution of definitive, but we have not yet executed definitive and so.

So we are hesitant to go into too much detail here's what I can tell you I think since the.

At the end of Q3 last year, we've been identifying some.

Some excitement about how we built our engine I think the best way to put it and.

The traction that our R. R products are getting in our markets and our desire for 'twenty, one to be able to find a strategic fuel I guess to add to the engine in our limited license markets, so without getting into any great detail, we have been kicking a lot of.

Tires, and we've been doing our homework over the first half of the year.

We're pretty excited about the opportunity that we see in front of us and we are striving and running full speed towards getting ourselves to and execution of definitive which is when we will be able to provide a lot more details if any.

Creatives transaction if the transaction were excited about I think we're all we're equally excited about the support that is being shown to us through our significant and long term investors Navy in particular as you can see in the announcement.

Committing to.

Lead and the financing of the cash portion of the transaction I can tell you that the transactions half cash half stock basically pretty much close to that and the financing arrangements that we've had in addition to the navy lead lead us to a more traditional real estate type financing.

<unk> on.

Anything that's left over after the Navy lead and really not a dilutive.

Or minimally dilutive.

Financing of the cash portion of the deal I anticipate we're going to be executed and definitive probably within three weeks, maybe three and change.

And everytime due diligence is very positive. So I don't know if that's enough detail for you, but it's almost probably all I can give you.

Yeah.

Okay understood I appreciate that call. Thank you very much for that and then just last one before I hop back in the queue here.

Just with respect to the capital position as of today wondering if you could outline.

Their capex plans for the back half of the year here as Youre wrapping up some major capital projects. Thanks.

I'll turn that over to Jake as well.

Sure Graham So I think as we've previously stated on calls our Capex in 2020, one where it was quite a bit frontloaded into the first half of the year getting commerce completed with substantially most of our plans for this year.

That's basically done getting Brookline completed the same you will have some nominal maintenance capex showing up in Q3 and Q4.

In our cultivation facilities in Massachusetts, but nothing that's really yeah, nothing that's meaningful relative to what we showed in the first half of the year, The Illinois project I should caveat.

You know a lot of that Capex is going to be occurring off balance sheet off of cash flow from four com standpoint.

It'll it'll start to manifest itself in the form of a lease payments out.

As we draw down and spend the money, but it won't show up in a typical you know cash flow from investing portion of our cash flow statement.

Yeah.

Okay got it understood. That's it for me thank you very much.

As a reminder, if you'd like to ask a question. Please press Star then one.

At this time there are no further questions.

It looks like we actually have one more question coming from the calling George from Haywood Securities.

How are you good.

How are you congrats on the quarter guys just filling in for Neal and gamma today I just have one quick question here.

You made a comment about how you expect margins to continue to materially expand and actually step up in the future.

Do you expect there to be some sort of volatility.

Ups and down does that goes on as you bring in the new commerce facility online or is it.

Would that would that have any drag in the short term to optimize the long term.

Hi, Jake.

Yeah, I can take that one so yeah. We do expect when Congress comes online there to be a slight ramp period associated with slightly lower margins than it will have that maturity that said any smaller margins from commerce, California facility will be outweighed by further contributions from Massachusetts, you know as we get our third location.

Opening up and running Massachusetts will start to meaningfully contribute more and higher percentage of both revenue and gross profit. So those higher margin should outweigh the roll on of commerce as well as continued growth of our.

Our Illinois facilities.

So yeah, if that answers the question.

No. That's definitely helpful helps me get a better understanding of that.

And I think all my other questions were answered their prior story once again, congrats on the quarter and are looking forward to the growth here in the second half of the year.

Thank you.

Right.

And at this time I'm showing no further questions. So I would like to turn the call back over to Leo got maker for closing comment.

We're extremely excited to move the company forward and whats ahead of us I'd like to thank all of you for joining.

Have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Yeah.

[music].

Yeah.

Yeah.