Today we will do a deep dive into 4Front Ventures Corp.’s Q3/19 financial results as well as an update from its Chicago Mission dispensary
SmallCapPower | February 24, 2020: 4Front Ventures Corp. (CSE:FFNT) (OTCQX:FFNTF) announced on January 30, 2020, that it has received an additional $3M in financing from Gotham Green Partners, as well as an undisclosed amount from the divestiture of 4Front’s economic interests associated with three Arkansas dispensaries. The announcement marked the first disclosure around the broader capital plan intended to enable the Company to achieve its guidance as previously outlined. The Company’s focus on revenue growth and profitability in 2020 includes the divestiture of certain non-core assets. That followed an announcement on Jan. 6, 2020, in which 4Front disclosed that the Company’s Chicago Mission dispensary reported sales of $266K in the first five days of operation (≈$53K/day), implying an annual run-rate of $20M in sales from one dispensary.
4Front announces sale of Arkansas dispensaries and secures additional $3M in financing from Gotham Green Partners. On January 30, 2020, 4Front Ventures announced that it had completed the previously-announced divestiture of its economic interests associated with three dispensaries in Arkansas, in a move to drive the Company towards profitability. Management expects to use the funds from the divestiture to strengthen its core business operations. In addition to the asset sales, 4Front has also issued a $3M convertible to GGP with 15% PIK accrued interest that convert at US$0.647/share, a 29% premium to the Company’s closing price on Jan. 29, 2020.
Pure Ratios transdermal patches featured at Super Bowl Event in Miami for The Dan Marino Foundation. The Company recently highlighted the rapidly-improving performance of its Pure Ratios wellness brand, which gained valuable visibility during the Super Bowl weekend in Miami. Since 4Front’s acquisition of Pure Ratios, the Company has seen its sales grow exponentially, driven by its innovative line of transdermal CBD reservoir patches that provide relief for up to 96 hours.
Illinois marijuana sales hit $20 million in first 12 days. According to data published by the office of Illinois Governor J.B. Pritzker, cannabis sales in Illinois started off well, with ≈$3.0M on Jan. 1, 2020 and are now trending around $1.6M per day, implying a ≈$600M annual run rate in the first year of sales. According to the Brightfield Group, adult-use revenues from the Illinois market are expected to be ≈$1.5B to ≈$2.0B annually. Sales should pick up once new dispensary licenses become available on May 1, 2020. On May 1, 2019, the Illinois General Assembly passed the Illinois Cannabis Regulation and Tax Act, which legalized recreational cannabis starting on Jan. 1, 2020.
Click here to watch an interview that CNBC did with Kris Krane, 4Front’s President, about the rollout of the adult-use cannabis market in Illinois.
4Front Q3/F19 Financials Recap:
Recall, 4Front Ventures reported Q3/19 financial results on Nov. 29, 2019, after markets closed. Results were highlighted by $7.5M in revenue, an adjusted EBITDA loss of $4.6M, and net loss of $6.9M. Note 4Front reported systemwide revenue of $16.9M, a non-IFRS measure that includes managed revenue.
Overall it was a positive quarter for 4Front. Key highlights include:
- 74% sequential increase in reported revenue
- $16.9M in managed revenues (22% increase)
- 610 basis point increase in gross margins to 46.7%
- Management reiterates F2020 and F2021 revenue guidance of $100M-$140M and $250M to $300M
- Adult recreational-use sales began in the key states of Michigan (12/19) and Illinois (01/20)
- CFO and CIO purchased a combined 250K shares in September, a testament to management’s commitment to creating shareholder value with significant skin in the game
Undervalued to peers: 4Front trades at a 1.5x 2021 EV/sales multiple, a discount to U.S.-based, multi-state operators (MSOs), which trade an average multiple of 2.0x.
Revenue increases by 74%, quarter over quarter. Reported revenue increased by 74% to $7.5M (was $4.3M in the previous quarter) and 4Front reported systemwide revenue of $16.9M. Systemwide revenue is a non-IFRS metric used to capture revenue from entities in which 4Front has a management contract. The Company believes this measure to be more indicative of the growth and scope of the business. The managed revenue is from Washington-based Northwest Cannabis, which has been consolidated under Brightleaf Development, 4Front’s production division. In Washington, Brightleaf has an ≈8% market share and puts a strong emphasis on both quality control and efficiency of its cultivation and extraction operations, with industry-leading yields of 400 grams/sq. ft. The Company produces 16 brands, including 7/10 of the top edible’s brands in Washington State. 4Front’s business strategy is to become a top-tier MSO by replicating this low-cost production model in several other states, including California, Illinois, Michigan, and Massachusetts.
Adj. gross margin expands by 610 basis points. During Q3/19, adj. gross margins were 46.7%, an increase of 610 basis points over the prior quarter. The increase was due primarily to $1.7M in gross profits from Cannex’s real estate leasing business acquired from the Cannex merger. Total SG&A expense increased by 28% to $11.0M; the increase was due mainly to $2.9M in additional overhead expenses from Cannex entities. Adjusted EBITDA loss came in at $4.6M, which was 4% greater than the previous quarter’s loss.
Management reiterates F2020E and F2021E revenue guidance. For F2020E, management is guiding for pro-forma, system-wide revenue of $140M to $180M, with reported revenue of $100M to $140M, and then Adjusted EBITDA of $10M to $15M, with the plan to cross over into positive EBITDA, and positive CFO by H2/20. For F2021E, management is guiding pro-forma, system-wide revenue of $250M to $300M, with reported revenue of $200M to $250M, and Adjusted EBITDA of $45M to $50M.
Key takeaways. Overall, it was an impressive quarter for 4Front with 74% revenue growth. While 4Front operates in 8 states, of note is Illinois, Michigan, California, and Massachusetts, which management believes have strong growth prospects. It is well positioned with assets in Illinois and Michigan, which both launched adult-use markets in the past two months. While Pennsylvania is medical only, it has ~200K patients, which makes it the fourth-largest medical program in the United States. Additionally, management is confident that Pure Ratios can provide upside, especially in the California market where its transdermal patches are a big hit. Management has also demonstrated a commitment to creating shareholder value by purchasing shares on the open market. In September 2019, CIO Andrew Thut purchased 145,000 shares on the open market at an average price of ~$0.60, while CFO Brad Kotansky purchased 105,000 open-market shares at ~$0.60/share.
Undervalued to peers. The Company trades at a 1.5x 2021E EV/Sales multiple, compared with U.S. multi-state operators, which trade at a consensus average of 2.0x. We believe that this valuation gap should close upon the successful execution of the Company’s growth prospects in Illinois, Michigan, and Massachusetts.
About 4Front Ventures
4Front Ventures is a MSO that owns, operates or manages six cultivation and production facilities and 11 retail facilities across eight states. FFNT has developed two >50,000 square-foot indoor cultivation facilities in Washington, with yields of more than 400 g/sq. ft. In Washington, 4Front operates one of the largest cannabis product manufacturing facilities in the world, where it produces some of its top-selling brands of flower, edibles, and oil-based products. The Company is focused on premium indoor cultivation, extraction, manufacturing, and branding of flower, edible, and derivative products. 4Front has cultivation and processing licenses in Washington, Illinois, Michigan, California, Massachusetts, and Arizona, and now also has retail licenses in Illinois, Michigan, Massachusetts, Maryland, Pennsylvania, and Arizona.
Ubika Research/SmallCapPower has received compensation from 4Front Ventures Corp. to provide analyst research coverage. For full disclosure please visit here >>
To read our full disclosure, please click on the button below: