4Front Ventures ($FFNT) has been around since August of 2019, the result of a merger between ‘Cannex’ (a producer in Washington State with 20 brands and 300 SKUs) and the previous incarnation of ‘4Front’ (something something ‘strategic retail asset base’). 4Front references Harborside as being their beginning – not in ownership – but in establishing ops. The began as an ‘advisory and licensing business’, and claim to have executed similar in 20 more dispensaries across 9 states. They also claim to have obtained an additional 60 licenses for customers across 10 states.

With established regulatory acumen, and adding production capability and products to this (Cannex is/was said to be #2 in Washington State market share for flower) – sounds like a good thing, right? It does beg the question of why these guys aren’t tracking like the MSOs – and building an empire.

With the merger, the company created 3 divisions, one each for ‘retail’ (Mission), ‘production’ (BriteLeaf), and ‘wellness’ (PureRatios). According to Mission’s website, they have 10 dispensaries in operation:

With this footprint, these guys should be killing it in terms of cashflow. They also claim footprints in ARIZ, MARY, and ARK.

As GoBlue mentions in his latest look at Aphria, capturing incremental sales in the Canadian market has turned into a ‘knife fight’. This is true about any competitive commercial venture and the reality of our world – ‘if you don’t hustle, you don’t eat’. With respect to cannabis and as we’ve seen in the sector, a product that sells for $1,000/lb (and up) will attract some serious attention.

Washington State and Oregon seem to be a commercial wasteland – at least in terms of potential growth. With unlimited licences available in retail and production, wholesale (and retail) prices are under pressure. Here’s some data from late 2018 (the most recent I can find publicly):

<The data comes from CannaBenchmarks, a data service based in the states. They provide free reports on spot pricing in Canada and the US, but like any useful data service, charge a subscription for access>.

The data reveals the disparities in State level product pricing that TheCannalysts have sufaced. The margin implications are significant: we’ve seen a vast range of prices paid for cultivation/processing/retail assets, which are wholly contingent on the State they reside within.

And what this data says: if one is operating in Washington State or Oregon, their outfit will need to be tight.

Briteleaf is their cultivation arm with cultivation online in MASS, ILL, and soon, CALI. PureRatios offers ‘holistic technology’ – via various balms and patches and the like.

The CEO at the time of the merger is not in the position now. The current CEO was a founder of the grow-op, and had become COO of Cannex before assuming the chair.

This is the first pass I’ve had at 4Front. To the financials!

_________________________________________________________________________________________

• Cash at $8.5MM, down $3MM from previous quarter.
• Sales at $12.4MM in the quarter, 51% margin reported before GoB (or $6.3MM).
• And….SG&A at $8MM in the quarter. Adding back depreciation, they lost $3MM on operations in the quarter, and cumulative losses from operations of $19MM on the year(!).
• Looks like they’ve been forced into asset sales, they’ve booked $15MM so far this year on gains from dispositions.
• $5.8MM alone in interest expense this quarter. They’re barely above that in total gross margin.
• 505MM shares outstanding. Eesh. A $681MM market cap at todays prices. For this?
• Shares outstanding was at 535MM – an interesting deal last May saw 29MM of them folded back into the company. More below.
• Asset sales have generated $15MM in cash so far this year, and they needed it. This thing looks right on the edge at first glance.
• Just recently (mid December), they sold the farm. All of Briteside’s facilities were subjected to a sale and leaseback transaction, resulting in $33MM coming into the company. Given that OPEX and interest charges are killing them, it looks like it was done out of necessity rather than strategic purposes.
• Unless you see avoiding bankruptcy as ‘strategic’. I personally don’t.
• In late November, they cashed up with a $17MM bought deal at $0.70 too – with 2 year 1/2 warrants at $0.90. It’s really telling how much cheaper money is for US outfits. We’ve delved into one of the primary reasons we see for this.
• I get the feeling that the run in MSO’s was a godsend for $FFNT.
• Gotham Green has lit these guys up, with $40MM in a convertible loan coming in via Cannex acquisition (bought in mid-2019 by $FFNT, spending a total of $200MM to create the ‘new’ $FFNT). The loan’s at LIBOR ~=+10%, which is why their interest costs are so bloated. $FFNT shot out 41MM warrants as well with the financing, and they were rolled into $FFNT. Current share price has brought them back to life.
• Naturally, there’s proportionates (convertible at 80:1), and multiples (at 1:1) with 800 votes each. The multiples have a hard box around them in terms of conversion, somebody from Cannex wanted to keep a large measure of control. They still have it.
• That Gotham Green loan is coming due in November of this year (albeit it now stands at $31MM). Still, with cash of only $57MM and 3 quarters to go (you’ll recall cash flow from ops are negative)….they’re going to need a hard turnaround. More below.
• They’ve sold everything that isn’t bolted down. Of $45MM in assets on the balance sheet, I guesstimate about $38MM of that went out in the sale/leaseback. They’ll be down to selling office furniture from here.
• They’ve been selling dispensaries around the country (ARIZ, ARK, MARY, PENN), and have focused on ‘core’ operations. What they now have is 2 dispensaries and 2 grow-ops in MASS, one dispensary and one grow-op in MICH, and a single dispensary in ILL (another one is under construction). The only activity in Washington State is referred to as ‘selling supplies’ to cannabis producers, and leasing real-estate.
• With the sale/leaseback, they’ll probably lose any subleasing revenue.
• No segmentation provided, but they do state that margins from retail are 31%, that wholesale transactions generate 44%, and that the wellness products are at 77%.
• Sadly, the dispensary in Illinois (Chicago) was trashed in late May and ostensibly looted. $FFNT states they were insured, and that the outlet was back in operation by the end of July.
• A 185k ft² grow op in California – announced early last year – was put on hold due to cash position. Due to the recent raises, it’s now ‘fully funded’ – and they state its’ anticipated to begin operation in April 2021.
• Of that $200MM purchase price for Cannex, $167MM was goodwill. Only $36MM survived to the end of 2019, as $131MM of it was impaired, and able to last a whole 4 months. Sheesh.
• They sold a legal claim against a ‘consulting client’ for $2.4MM. Apparently there’s potential for more money from it in certain conditions. That’s a first for me, I haven’t seen it in legal cannabis before. The move supports the a contention that anything that could have been sold, was.

There’s lots more to see.

Related party transactions exist around a $40MM loan (a $FFNT director has ownership in the lender). Briteside as a subsidiary (originally called NWCS, which came into Cannex in whole or in part, was founded by the current CEO, who, presumably sold it to $FFNT), has leases and sub-leases and exclusive packaging agreements and consulting fees attaching. Unattractive, particularly given their operating state. A harsh take is that he’s bleeding out the company after having taken off a couple of limbs. A more attractive take is that he is working diligently to contain costs, and is far more flexible than a third party would be. I can’t tell, I haven’t priced out the deals, but the levels of the indebtedness and operational spit-swapping are significant and material.

And think about that $161MM in goodwill from the Cannex buy – the current CEO was on the other side of that deal at the time (in whatever respect and level of dollar value is left unstated. Go figure).

Cash levels aren’t a great concern to me in most operational outfits (unless they are reporting a negative gross margin, or repeated operational losses like this one). Unlike companies in heavy build, there’s a presumption that growth will come incrementally, and thus, only incremental cash will be required to realize gains. Regarding $FFNT, cash will be their only concern for now given the state of operations. This thing has been tossing cash out the door….quarter after quarter after quarter.

Regarding those 30MM in shares that vanished this year, Note 11 describes a transaction where incremental cash had come in from existing lenders last May. This amount had it’s own terms attached, yet a ‘lookback’ was added to the previous debt they held, and included within the incremental amounts. $FFNT attached a swaption (I use that term very loosely here ) to the ‘new’ total value of indebtedness. Yes, the whole ‘no interest rate’ part of the deal (if $15MM/yr in sales is achieved) may look nice, but the total value given up via the ‘swaption’ is a bucketload. I thumbnail the total value to be about equal to the core indebtedness. In short: hella expensive. Like, ridiculously expensive:

Those 45 days have now occurred. And I expect the conversion will have been forced. If not, that would be a negative sign for me – as I would see management keeping this optionality on the books as reckless. $FFNT would likely prefer to raise at their current stock price, but with these financials… I’d ask ‘how?’ Hey – there’s all kinds of viewpoints and money out there. Perhaps someone is interested. Someone certainly was in late November.

I could point more out: this isn’t an easy read. Ultimately, this thing can only be presented as ‘a promise of a fantastic turnaround story’. It’s the only way forward. In the absence of positive operating income somehow appearing from somewhere, there’s nothing here but another 18 months of bleed out.

Those dispensaries out east are mostly wrapped in licensing agreements, and there’s NICs (non-controlling interests) littering the place. They’ve shed a bunch with dispositions, but several remain. These not only saw off potential profitability, future cost increases related to the NICs will increase with perceived increases in underlying asset values (often disproportionately).

This thing is beyond announcing a ‘major restructuring’, they already did that in May of last year, when they kicked the previous CEO up to the Board, and let the CFO go. The wording around this outfit (‘being the best not biggest’) is disconnected from financial reality.

Since that restructuring was announced, OPEX has been identical in the past 2 quarters, while revenue has come off 20% QoQ. This, with a 40% + reduction in headcount both in corporate and in the retail stores. Seriously. How do you jettison 40% of your workforce and stay flat in SG&A? A million less in salaries was offset by a $1MM increase in G&A QoQ. The sales decline might reflect the Chicago dispensary that was levelled being down, but that doesn’t explain the whole of it.

Blech.

Despite the sexy-ish margin, sales are anemic relative to expenses, and if they are promising a ‘turnaround’ – it sure as heck isn’t apparent yet. At this pace, they’re going to need 4-6 quarters to stop the boat from rocking. As it is looking at this thing, I’m getting seasick.

Hard pass for now. There’s obviously been interest in the equity – probably corresponding to larger interest in the MSO’s. Comparatively though – this thing’s a mutt. The magnitude of related party transactions is a red flag as well. Losing money by simply existing is enough to convince me its’ barking.

If you’re interested in the company (please don’t be), this one is dead simple for you to analyze yourself. Next quarter, watch sales. If they aren’t back above $12MM, the barking will be even louder. If OPEX isn’t below $7MM, it’ll now be growling and baring its’ teeth. Interest costs will be improved with $FFNT paying back Gotham Green in the fall. Hopefully they won’t have spent the money on ops before then, and it’s still going to cost them $10MM in interest until then.

That’s just the start. The capital structure looks like what a dog leaves in the park during a walk, and as shareholder in this, you’ll be the one picking it up with your bare hands. $FFNT needs a restructure of their restructure by the looks of it. For a business with as long a history that these guys do….and vertical to whatever degree…..yuck.

Simply put, looking at these financials makes me feel like I’ve just stepped in something large and squishy.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $FFNT