Originally published July 17, 2021
Well, today marks the start of a batch of Structures on the Tier 2’s and 3’s (and beyond 😞) MSO’s and SSO’s. I had started with Vext Science – but since I still can’t figure out what they actually do, I’ve a few questions into the outfit, hopefully they know. We’ll come back to them shortly.
We last looked at 4 Front Ventures ($FFNT) in their 3rd quarter of 2020, and saw an uncurbed dog in the off-leash area. Since then, they’ve released a year end and their first fiscal quarter of 2021.
They still list a total of 5 dispensaries open – but that PENN location (Coming Soon!) is now gone, along with all previously held assets in Arkansas and Maryland too.
To the financials!
- Weed sales of $18.2MM, margin a crisp 55%. They’re kind enough to spilt out COGS by in/out house source, and it tells us that (on a cost basis) that 40% of what they sell is 3rd party gear. Wholesale was only $1MM though.
- Little segmentation beyond that, but what we can see is their CBD business line’s sales have halved YoY, and down 20% QoQ. Given the last time I could see into it (they had great segmentation in Q3 F2020, which went poof!), CBD was running at a 75% margin. More below.
- Wholesale was generating about 45% margin, and retail a modest 30% at the time. So – there has been improvement in both of those, looks like their retail is really moving.
- The challenge is that SG&A is equal to total gross margin from cannabis. I make that distinction because they report rental income of some $2.9MM (down from $3.5MM prior). There is no mention of its’ continued durability.
- In aggregate, they lost $11MM on that $23MM in revenue though. There’s $5MM/q in interest and taxes, aside from warrant liability and those swap notes (more below).
- Inventory flat QoQ at $18MM. I’m sure Canadian companies would love to be able to manage numbers like these – especially in ramp (sales increased $8MM QoQ, looks like Calamut City is doing well, no narrative
- Working capital a thin $1.4MM. They’re banking heavily on that Commerce City (CA) cultivation site.
- Curiously, they were denied a cultivation license in Ohio, which they’re appealing. They claim intent to open a dispo in NJ.
- Now up to 591MM shares outstanding. Multiple voting shares held by management control 1 billion votes, but there is a sunset of 3 years on them though (~=2 years remaining).
- 56MM options ~=$.90 CAD.
- This balance sheet is like getting into a Chinese finger trap. For all of those asset disgorgements last year, LI Lending LLC (a related party, natch) made money. More below.
- That grow op they announced in California – initially slated to come online in April is said to be opening soon. A deal with a distributor in CA has been done, presumably sales will initiate in 4-6 months. Notable, because $FFNT is touting a (pro forma) run rate of $170-$180MM this year. Given they did $20MM in cannabis sales this quarter, it’ll need to get up and rocking.
- It’s easy enough to back into anticipated revenue based upon square footage of it and using their yield numbers (My trusty napkin says they’ll need to harvest 41k plants at full yield 2x this year at $2k/lb wholesale to hit $100MM. There you go. And they won’t come close. Because…..
- “Pro forma’ litters their press releases. I’m not down on this in the general per se, but, always do a look-back for actuals versus estimates. Many an outfit blows hot gas in pressers, only to see reality come in low. We’ll do an overview on their year end – but to myself, bandying about a $170MM pro forma number is genuinely meaningless.
- If these guys got something, they should provide 2022 guidance then. Even the 2021 EBITDA ‘targets’ are pro forma. The worst? “The Company’s existing licensed projects at maturity represent a long-term revenue and EBITDA opportunity upwards of $650 million and $250 million, respectively”.
- An ‘opportunity’. Yuck.
- Their latest dispensary in Brookline had begun construction in January, and said to open in June. I know because theres 9 press releases about it. It’s not open as of writing (July 17), and I’ll point out the lead time it can take to get a store open, particularly when building from scratch.
- This latter point has mystified Blue and myself – particularly in retail – and $FFNT isn’t alone in the sector doing virgin builds. Given their working capital/cash position, it can’t open soon enough.
Ok. I could go on for awhile. Disclosure here is sometimes good, sometimes bad. The MD&A has as much depth as a pane of glass, yet conversely, it provides a good table of operational status across assets..
Regarding CBD sales, there’s mention in the MD&A that I’ll let speak for itself, because I have no clue what this means:
We do find a related party in the CBD line though – and a $100k/mo cost of marketing. It’s uncertain if this is is the new or the old ‘marketing partner’. At least it isn’t the $400k per month of a year ago I suppose:
It appears the final asset of their disgorgement went out this quarter, but what I hadn’t seen previously is reference to a 6% fee attaching to LI Lending LLC, for their graciousness in letting $FFNT sell their own property:
That lender is LI Lending, with $FFNT having drawn some $45MM (2 tranches of $35MM & $10MM) in mid 2019 at 10.25%. This was amended in April 2020 to 12.25% on the second tranche, along with $2MM in ‘prepayments’ to permit the sale of PENN/MD assets.
Somewhere in December, $FFNT struck a deal with IIIPR – executing a sale/leaseback of their entire suite of cultivation in MASS and WA for some $33MM. This triggered yet another amendment to LI’s loan (somehow) when interest was yet again increased to 12.75% and 14.75% respectively.
This loan is on an extremely tight leash, with a balloon payment of $10MM added at the end of it all:
Jesus Christ that’s pricey. If I haven’t mentioned it, LI Lending is a related party.
I’m having a hard time tracking the proceeds from that sale/leaseback.
Mentioned last time, the convertible notes – able to be struck for $0.25 by the holder (forceable if the share price is above $.50 for 45 days) – are still on the books…despite share price being above $0.86 the entire time they’ve been live. Indeed, $FFNT accrued $590k of interest on the totality of convertibles – probably (I can’t honestly tell) on $5.8MM of them that was extinguished during the quarter. The ‘swap’ notes aren’t supposed to have interest on them if annual sales are above $15MM, instead having a 3% fee (or $150k/q). If that’s the case, that means they paid $450k in interest on that $5.8MM – which implies an interest rate of 31% – and not even for the entire quarter.
This table says a lot to myself:
An insightful look at cost of capital is within a raise they did last fall for ~=$13MM. With warrant optionality denoted in CDN, it saw a derivative liability arise of $4MM at the time. Their share price increases have seen that liability move up to $8.3MM, and an additional $2.5MM charged through the balance sheet this quarter. The liability and expenses thus far attached to those warrants is equal to the raise itself.
The Gotham Green (GG) notes had been extinguished during 2020 – but not before GG took advantage issuing a hideously expensive $3MM bridge loan during the dark days of last spring, when things weren’t looking so hot. Probably the reason $FFNT got them out of their balance sheet.
$FFNT’s share price has been buoyant nonetheless – despite a 590MM share count, 4 storefronts, and an $80MM/yr actual run rate:
In March, $FFNT announced a very ambitious build of cultivation in Illinois, for some $50MM. They’ve only got $17MM in cash, and there’s been no real change in aggregate assets and liabilities QoQ. I’m guessing they’ll use IIPR’s money here – only funding the land purchase for some $6.5MM. Of note, this facility isn’t slated to come online until Q4 2022. A year and a half……and staring down the barrel of interstate….it could be a long 18 months. They lever the story by claiming high competency gleaned from Washington and the Cannex buy.
Well, as stories go, it looks like this one is pointedly on the cultivation side. Their capital structure though looks built to serve lenders rather than shareholders to myself, and with a related party holding 70% of their debt, it’s unattractive on its’ face.
They have an absolute ton riding on the success of California – and if anything I’d guess another raise is imminent. That they didn’t do it before Schumer’s discussion paper – well – we’ve seen some price softness in the MSO space. If that translates into capital availability – $FFNT might be in for a rough ride.
I think they’ve got room for debt, it simply a question of ‘how much is that dollar in the window’. As it is, these guys have a pretty expensive load to pull, and a relatively shallow pool of revenue generation. The risk is backloaded as well with CA.
In the whole, it feels solidly like a 3rd Tier – with a capital structure only a hedge fund manager could love. They’ve definitely shown marked increases in revenues (adding stores will do that), but with wholesale so thin, it implies they’re selling through most of what they produce. The question then comes back to cultivation again, and with much build going on in CA, I wonder about how much immediate impact they can have in that environ. Illinois remains a beacon, but 4th quarter 2022….is a long haul at this point.
Their relative resilience stems from some obvious interest out there, but I don’t see anything particularly notable. If this level of risk is your thing, I think similar profiles exist out there, and available for far less.
EDIT: some backstory on the Brookline saga can be found here.
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