We’ve got a raft of background on 4Front Ventures ($FFNT).

Our latest piece – the Structure on their Q3 F2021 – noted $FFNT maintained revenue guidance of $175MM for the fiscal year, attaching the words ‘pro-forma’ before that reference to revenue. Sigh. We also saw them lean heavily on paper in acquiring additional cultivation/processing capability, a blending of business lines that obscures weed margins, and a couple of longer dated capital plays that’ll take some time to get operational.

I’m not going to linger, the amount of time I’ve spent on this thing is disproportionate to any interest I have in putting a dollar near this thing. Yet….. I think $FFNT is a great ‘case study’ in looking at financial statements for subscribers. They won an award for being one of the ‘best led’ companies out there (no less) – so what do I know? <I had to massage my temples when I was reading that>

Perhaps there is fresh investor money waiting in the wings….or perhaps they have a belief that Brookline & Commerce City is going to kill it….. and generate the margin they are definitely going to need. Either or….take a few minutes to refresh yourself with the past couple of quarters if interested.

We see a similar run in share price preceding these financials….followed by a drop, albeit not as steep as Glasshouse’s. They remain an outlier in terms of price, still above where they began the year at:

To the financials!

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• Cash down to $3MM QoQ (to $8.5MM), inventory up $5MM. A/P up $4MM – driven by taxes payable. Overall working capital deficit $7MM.
• Total assets increased by $6MM, liabilities same same.
• Total revenue down $1.2MM. Real estate income increased by $115k – relatively flat. So, either equipment sales or dope sales (or both) dropped.
• And it’s both that fell. THC related product sales came off by $1.4MM; CBD sales dropped an additional $300k (now down to $400k/Q), while equipment sales dropped by some $80k.
• I wouldn’t call the equipment nor real-estate amounts as material (nor interesting), but weed backing up by 8% QoQ – with half of those 12 weeks including revenues from a brand spanking new dispensary – isn’t a good look.
• COGS (excluding equipment) is relatively flat QoQ at 44% of revenue. Gross margin (as they report it) comes in at 56% this quarter, down from last one’s shiny 67%. Excluding the noise, cannabis gross margin was 44%. Since COGS now includes 3rd party sourcing, we can’t see where the moving parts are.
• OPEX is up $1MM QoQ – attributed to sales and marketing and staffing. They flipped from being break-even to reporting a $1MM loss. An additional $7MM in interest and taxes was offset by a reported $3.5MM gain in derivative liabilities. More below.
• Overall, $FFNT reported a $5MM loss this quarter, now at $21MM YTD.
• SBC of $2.6MM, $8MM YTD.
• That inventory growth noted above is almost entirely driven by their new grow in CA (Commerce City).
• That LI Lending agreement is taking a repayment to principal of about $2.5MM/yr (modest), while interest on the amount is accruing at some $6MM/yr. It’s ridiculously expensive money (see our Q1 F2021 Structure), but it’s out a ways in 2024. It will consume cash though, as the principal repayment terms will continue until the due date (when the 20% balloon payment kicks in).
• There are 7MM of $1 CAD warrants that expired day before yesterday, so I’d expect them to be struck. $7MM coming in the door won’t hurt either. Another 8MM in options (also at $1) are live, but they’ve another year until expiry. There’s another 6MM at $0.10, 3 years to go on them. Eesh.
• In total, there’s 55MM options at ~=$0.94CAD, and 40MM warrants at same.

Ok. Share count didn’t move QoQ. I’ll give $FFNT credit, disclosure overall is pretty good – notwithstanding the COGS blending and nuisance of having to bisect QoQ v YoY narratives in the MD&A and statements.

The entirety of the $3.5MM recognized as gain on derivative liability came from an adjustment to the volatility (vol) used in the option calculation. As of June 30th, $FFNT used an 86% vol in the formula, this time they used 37%. I went back a few quarters, and their last year end was the first time they’d begun reporting input values. Perhaps $FFNT was looking for some loose change in the couch – and this is where they found it. It’s kindasorta defensible if they are using a rolling 6 month look-back, but it would need to be consistently applied go forward. If there’s a switch back to using that higher vol at year end – that’d be the tell.

If so, I’d consider that multiple red flags on the field.

$FFNT did get a temporary manufacturing permit at the Commerce City facility in late August. They claim they’ll do in-house and 3rd party production, no word on if/when it’s been initiated. Plants are already growing though according to inventory, and *should* see harvest during the 4th quarter.

The NECC acquisition has yet to close – which will unlock 25MM shares at ~=$1.30 CAD. We’ll see at year end if there’s interest in the seller holding them. You’ll recall from last time that the ‘raise’ they did was ~-80% financed by the seller.

$FFNT’s CBD business line continues a downward spiral. There’s been no change to the narrative about it. $FFNT says: “The revenue decrease……….is largely attributable to changes in marketing strategy prioritizing profitable growth with a focus on achieving positive cash flow”. It’s been heading in the wrong direction for 3 quarters now, with revenue a third of where it was at the start of the year.

Interestingly, disclosure around LI Lending has changed. Note 11 (Related Party Transactions), had only mentioned than an ‘officer and a director’ of $FFNT serve as principals of LI Lending. It also had only mentioned that the CBD line had a related party who maintained an interest in an online marketing company providing services to $FFNT. You’ll recall $FFNT switched marketing companies earlier this year – the strategy of which was attributed to why revenues have declined. This quarter, Note 11 added more detail. The CBD service provider – iWolf Management – has been around for a couple of years though, so the ‘why’ of the CBD business line is sucking air is indeterminable:

That’s it for now.

Along with Glasshouse ($GLAS.A.U) – $FFNT has seen sales back up this quarter. This, despite having a new storefront open. They are undertaking an aggressive capital program, and have their sights set on 2022. As mentioned last time, watch out for Goodwill & Intangibles to take a haircut at year end. Another quarter of similar/flat sales would be a hard negative – and I’d have to believe that would be a pretty hard thing for them to do. $FFNT’s got a harvest coming in, manufacturing capacity initiating, and sure as heck that new storefront should be doing something.

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 any of the companies mentioned.