Our first Structure on 4Front Ventures ($FFNT) saw an outfit with many related party deals, a narrowing of their asset base, OPEX outpacing sales, and not much else. It’s a complex set of financials, and some of the structuring they’ve done trends towards the exotic regarding a pseudo-‘swaption’, referenced to last time.

I’m relatively neutral to the use of exotic instruments. In my commodity days, I saw some seriously crazy shit go into books and through the controllers. The toughest thing I’ve ever seen to value was a physical peaking option on natural gas. Try a google search on it, you’ll find nothing (at least in 5 mins). These things only resides in the rare air of financial engineers and their spreadsheets, and is seen rarely in the wild. Hey – you’ve got a customer who wants an exposure or a hedge, trade will make it ala’ carte and serve it up. There’s a natural reflexivity in people around things that are complex or defy simple description, and it’s understandable. Especially when an asset turns into a liability <I don’t attribute the 2008 meltdown to ‘exotics’ as much as it being simple asset debasement>.

Exotics can be really useful, particularly when you have a target that’s unique and hard to hit. Anyhow, I don’t think they’re anything to fear, except when in the hands of folks who don’t know what they’re doing with them, or, if they’re used to hedge an exposure that wasn’t meant to be hedged. I remark on this, because I’ve seen little of ‘exotic’ optionality used anywhere in the weed sector (it’s as rare as a ‘most-favoured-nations’ clause).

Either or, that ‘swaption’ was ridiculously expensive to $FFNT’s shareholders, and that in itself bears remark.

I dumped on this shop pretty hard in our first cut, and suggested that their sales rates need improvement, and that their OPEX is a millstone. That’s aside from high interest costs and a capital structure its’ mother couldn’t love.

Let’s see what’s been up – and if there’s been improvement in any of those dials.

To the financials!

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• Cash at $18MM, about the same as inventory. Nothing else in current assets to speak of outside of lease payments incoming (at $3MM).
• Considering 20% of their entire revenue for the year ($11MM) comes from ‘real-estate income’ – best to have a look at that. More below.
• Decent enough margin on annual weed revenue (54%), and they’re kind enough to spilt out vertical from purchased product.
• They’ve got $37MM in current liabilities <$11MM in taxes (can’t dodge that ball), another $10MM in A/P and accrued expenses>. They also announced intent to build a large production facility in ILL using Innovative Industrial Properties’ money. Since $FFNT doesn’t have much, makes sense.
• 30% of entire assets are in ‘right-of-use’, another $51MM in Goodwill and Intangibles. Lots of air in the tires. Assets up $5MM, liabilities….up $18MM QoQ.
• The change in liabilities is driven by the total of the sale/leasebacks they did. Balance sheet housekeeping largely, but much of the capital that came in exchange came at the expense of ‘right-of-use’. Lease receivables down by $8MM. Thus, after burning $13MM in operations in the quarter, they ultimately netted $10MM on the restructure.
• Sales of weed in the quarter was $14.5MM, an improvement from $12.4MM last. Likely helped by that trashed store coming back online. And….a switch to GAAP now sees the entire year’s ‘real-estate income’ as ‘gross profit’. More below.
• We do see that there’s $43MM of SG&A against $36MM in GM for the year. A total of $4.1MM in interest expense can be added to that ($500k less than last Q though).
• Thus, they booked a loss on operations of $7.1MM (by my EBITDA calc). Eep. $59MM came in the door via raises and asset sales, $51MM went out in debt repayment and PP&E.

Ok, now I’m just getting irritated.

They collapsed those ‘swap notes’ I referred to last time – somewhere in the past few months. It didn’t make it into the ‘Subsequent Events’ section of the statements, just a line item in Note 11. It could have been triggered prior to year-end (per share price), but was left to drift for a bit. Shareholders should be happy to see the exposure closed. I don’t see $FFNT being forthright and clear on this – and if I was a shareholder….I’d interpret the quietness around this as management being aware it was an ugly deal for shareholders. The thing could have been literally forced on November 14th. That management waited another 2+ months is really low-brow, and suggests someone else’s interests are paramount to shareholders. Yeah, that’s a bold statement. The deal itself, and then management sitting on their hands when it went green….that speaks for itself:

It’s telling too – that when they could have forced those swaps and removed a $13MM liability from their books, they went and raised with whole warrants going out. Cash flow was, and remains, a clear and present danger here. The 590MM (fully diluted) share count they’re packing is a bad joke:

So, ‘real-estate income’ had been previously reported as a separate line item on the income statement. In Q3F2020, it looked like this:

In the year end, that line is moved up, and the entire amount of that income is reported as ‘gross profit’. The reality is that they went from a YTD GM of $13.3MM (pre GoB) to $35.5MM. It stems from a change from IFRS reporting to GAAP. They restated Q1F2020 as part of the switch. No ‘real’ difference aside from GoB being gone, but just as difficult to track performance of the business segments.

It’s just a change in presentation, but as before, the reader has no ability to discern how the ‘real-estate’ segment is performing. From Note 22, we get this unhelpful disaggregation. Disclosure? Nope, that’s it, that’s all:

A strong skew in ‘Professional Services’ at $6MM for the year. Considering a total of $20MM in G&A….and Sales/Marketing Expenses are at $23MM, GM of $36MM ain’t gonna drive that bus:

I remark on this because their 1st Q of calendar 2020 showed $16.9MM in sales, and still run at operational loss. Asset sales have seen revenue back up by $2MM since then, yet Sales and Marketing are $3MM higher for this quarter, and G&A has remained flat. These are two very large and very red and very brightly flashing lights on this dashboard.

This thing feels like nothing more than a loot-box for visionless management pursuing a weak commercial strategy at this point The story I get is of a failed business model (underfunded retail license aggregation) combined with a grow op (Washington) that can’t/couldn’t drive sufficient cash-flow and a guy (the current CEO) hitting a jackpot and taking the big chair because he could.

That’s about all I have on these, this is simply (and remains) a pile at this point. They’ve got a couple of dispensaries coming online, and some activity in Arkansas (WOOO!), but they can’t even run the business they have profitably…. after a restructure no less.

Drifting, and visionless at this point. I’d expect management is probably shopping it around, but there’s nothing remarkable in their asset suite as it is. Cultivation expansion in ILL is all with someone else’s money, and these guy’s haven’t proven anything in verticality to begin with. They’re touting a 240+ increase in headcount. Yeah.

I’m gonna stay on this one for another couple of statements, only if to see if something actually happens that’s a positive. For right now, $FFNT’s business is sclerotic, and presents as low a value proposition as a $TIUM or a $TRTD. Barring some sort of serious catalyst comes forward for them (which I can’t see), this dog still don’t hunt.

I think these guys are a good proxy for some of the crap assets that lie within the MSO landscape – and like many in the Canadian space and run up – were lifted far beyond the value proposition they present.

If anyone holds this thing past current share price, they’ve only themselves to blame. If I’m wrong, I’m genuinely curious to find out where, because I always desire to learn from everything. If these guys have a viable business in here… I can’t see it at this point.

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