4Front Announces Second Quarter 2020 Results and Business Update

Rhea-AI Summary

4Front Ventures Corp. reported a 1.3% increase in Q2 2020 systemwide pro forma sales to $19M, despite a 10% revenue decline from the Chicago dispensary closure. Positive operating cash flow was achieved in August, with expectations for positive adjusted EBITDA starting in Q3 2020. The company anticipates strong revenue growth driven by recreational approvals in Massachusetts and expansion in Illinois. All expansion projects remain on track for Q4 completion, and divestitures of non-core assets are nearing finalization.

Positive

• Q2 2020 systemwide pro forma sales increased by 1.3% to $19M.
• Achieved positive operating cash flow in August 2020.
• Expecting positive adjusted EBITDA beginning Q3 2020.
• Strong revenue growth anticipated in Q3 and Q4 2020 due to recreational approvals.

Negative

• Approximate 10% revenue impact due to Chicago dispensary closure.
• Adjusted EBITDA showed a loss of $0.4M for Q2 2020.

• Q2 2020 Systemwide Pro Forma Sales, excluding divested non-core assets, increased 1.3% from Q1 2020 to $19m, despite an approximate 10% revenue impact due to the closure of Chicago dispensary in June because of looting.
• Company achieves positive operating cash flow starting in the month of August and expects positive adjusted EBITDA starting Q3 2020.  Company is poised to show significant operating leverage in 2021.
• Company continues to see strong demand across its entire portfolio and anticipates accelerating revenue growth in Q3 and Q4 driven by recreational approvals in Massachusetts, continued expansion in Illinois and strong sales trends in Washington.
• Company expects to finalize the divestiture activities of non-core assets with the closing of Maryland in early September.
• Funded expansion plans underway in both Massachusetts and Illinois production facilities, as well as opening of second Illinois retail location in Calumet City, remain on schedule to be completed in Q4 2020.
• Company remains in progressive discussions to strengthen its balance sheet through a financing/sale leaseback of its affiliated facilities in Washington state.

PHOENIX, Ariz., Aug. 31, 2020 /PRNewswire/ - 4Front Ventures Corp. (CSE: FFNT) (OTCQX: FFNTF) ("4Front" or the "Company") today announced its financial results for the Second Quarter of 2020.

Second Quarter 2020 Financial Results Highlights

• Total Systemwide Pro Forma Sales for the second quarter 2020 increased 1.3% quarter-over-quarter to $19m.
• IFRS Sales for the second quarter of 2020 were flat quarter-over-quarter at $12.7m.
• Adjusted EBITDA for the second quarter was a loss of $0.4m.

Business Update

Robust consumer demand continues across all operating markets.  Recreational sales in Georgetown, MA progressing steadily since August 12^th launch, sales at Mission South Chicago are on pace to climb back to pre-shut down levels since the re-opening on July 31^st.  Washington experienced record sales in July with that momentum carrying into August.

Company reaches cash flow goals ahead of schedule.  Achieves positive operating cash flow in the month of August and expects to generate positive adjusted EBITDA for Q3 2020.  Poised to show significant operating leverage in 2021.

All construction and expansion projects remain on budget and on schedule.  Fully funded expansion plans at Elk Grove, IL and Georgetown, MA cultivation/production facilities are expected to be completed in Q4.  Second Illinois retail location in Calumet City also remains on schedule for a Q4 opening.

Completion of non-core asset divestitures nearing completion.  Divestitures of non-core retail assets in Arizona, Arkansas and Pennsylvania are complete.  Close of Maryland divestitures expected to be completed in early September.

Washington Financing/Sale Leaseback Update.  As of June 30, 2020, 4Front's balance sheet had cash and equivalents of $11.4m with total debt of $78.3m (excluding in-the-money convertible debt of $5.8m). The Company owns and controls highly attractive real estate in Washington state consisting of 176,000 square feet of state-of-the-art industrial space built for cultivation, production and distribution. The Company is in progressive discussions with multiple partners on this transaction.

Management Commentary

Leo Gontmakher, CEO of 4Front, said, "Entering 2020, we have been laser-focused on leaning out and replicating our low-cost cultivation and production model in targeted states. We enter the second half of 2020 with a focused business model, streamlined cost structure and fortified balance sheet that has set the stage for us to accelerate growth across our core markets of Washington, Illinois, Massachusetts, Michigan and California.

Mr. Gontmakher added: "Our strong business momentum leaving the second quarter will be aided by significant tailwinds as we enter the second half of this year.  We welcomed the first adult-use sales in Massachusetts at our Georgetown facility on August 12^th and anticipate final approvals for adult use sales at our Worcester facility imminently.  Our cultivation/processing facility expansions in Massachusetts and Illinois as well as our second Illinois retail location are on-track for end of year completion.  We continue to execute on our plans to flip to cash flow positive during the third quarter and have set the stage to exit this year in a position to drive meaningful operating leverage in our business. We are proving that our success in Washington can be replicated in every state in which we operate and are extremely confident in how the company is positioned as we enter this new season." 

(Please see Note Regarding Non-IFRS Measures, Reconciliation, and Discussion below.) (*Please see the Financial Statement section below, and the Company's Second Quarter 2020 Unaudited Condensed Consolidated Financial Statements and Management Discussion and Analysis ("MD&A"), available under the Company's SEDAR profile, for more information.)

Additional Details

As of the date of the MD&A, there were the equivalent of 506,379,437 Class A Subordinate Voting Shares outstanding when calculated as if all share classes were converted to Subordinate Voting Shares. For further details regarding 4Front's share structure, please see its profile at www.thecse.com.

Conference Call

The Company will also host a conference call and webcast on Monday, August 31, 2020 at 5:00 p.m. EDT to review its operational and financial results and provide an update on current business trends.

To join the call, dial 1-877-407-0792 toll free from the United States or Canada or 1-201-689-8263 if dialing from outside those countries. The webcast, which will include a slide deck, can be accessed at this link.

The call will be available for replay until Monday, September 7, 2020. To access the telephone replay, dial 844-512-2921 toll free from the United States and Canada, or 1-412-317-6671 if dialing from outside those countries, and use this replay pin number: 13708994.

Financial Statements

The condensed consolidated interim financial statements for the three and six months ended June 30, 2020 and 2019, have been prepared in accordance with IAS 34 – Interim Financial Reporting. These statements have not been reviewed by an auditor.

4FRONT VENTURES CORP.
Formerly 4Front Holdings, LLC
Condensed Consolidated Interim Statements of Financial Position
As of June 30, 2020 and December 31, 2019 (unaudited)
Amounts expressed in thousands United States dollars unless otherwise stated
	June 30,			December 31,
	2020			2019
ASSETS
Current assets:
Cash	$	11,434		$	5,789
Accounts receivable	560			677
Other receivables	261			325
Lease receivables	10,787			9,556
Inventory	12,447			9,138
Biological assets	2,190			2,187
Notes receivable	1,362			1,871
Prepaid expenses	1,845			2,198
Assets held for sale	7,336			-
Total current assets	48,222			31,741
Restricted cash	-			2,352
Property and equipment, net	40,977			41,822
Notes receivable	520			1,049
Lease receivables	22,876			23,944
Intangible assets	39,888			41,442
Goodwill	28,854			33,988
Right-of-use assets	30,991			20,476
Investments	759			759
Deposits	3,493			6,346
TOTAL ASSETS	$	216,580		$	203,919
LIABILITIES AND EQUITY
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses	$	6,591		$	8,138
Taxes payable	4,198			1,609
Lease liability	971			972
Contingent consideraton payable	2,100			750
Notes payable and accrued interest	6,750			7,382
Liabilities held for sale	1,752			-
Total current liabilities	22,362			18,851
Convertible notes	45,645			35,607
Notes payable and accrued interest	43,878			44,289
Long term notes payable	1,978			1,903
Long term accounts payable	1,600			1,600
Contingent consideration payable	2,994			4,714
Deferred tax liability	2,014			-
Lease liability	31,758			20,976
TOTAL LIABILITIES	152,229			127,940
Equity (Deficiency)
Equity attributable to 4Front Ventures Corp.	238,995			252,656
Reserves	34,111			25,618
Deficit	(208,464)			(202,090)
Non-controlling interest	(291)			(205)
TOTAL EQUITY (DEFICIENCY)	64,351			75,979
TOTAL LIABILITIES AND EQUITY (DEFICIENCY)	$	216,580		$	203,919

 

4FRONT VENTURES CORP.
Formerly 4Front Holdings, LLC
Condensed Consolidated Interim Statements of Operations and Comprehensive Loss
For The Three and Six Months Ended June 30, 2020 and 2019 (unaudited)
Amounts expressed in thousands United States dollars unless otherwise stated
	Three Months Ended						Six Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
REVENUE	$	12,701		$	2,518		$	25,353		$	4,605
Cost of goods sold, sale of grown and manufactured products	(5,034)			(1,494)			(7,849)			(2,349)
Cost of goods sold, sale of purchased products	(3,012)			(529)			(4,846)			(676)
Gross profit before fair value adjustments	4,655			495			12,658			1,580
Realized fair value included in inventory sold	(436)			(321)			(573)			(112)
Unrealized fair value gain on biological assets	1,480			169			1,853			495
Gross profit	5,699			343			13,938			1,963
OPERATING EXPENSES
Selling and marketing expenses	5,633			1,359			11,817			3,206
General and administrative expenses	2,873			5,620			8,096			9,277
Depreciation and amortization	1,109			386			2,160			706
Equity based compensation	1,048			459			2,275			709
Total operating expenses	10,663			7,824			24,348			13,898
Loss from Operations	(4,964)			(7,481)			(10,410)			(11,935)
Other Income (Expense)
Interest income	8			-			64			-
Interest expense	(3,685)			(936)			(6,953)			(1,123)
Accretion	158			-			331			-
Gain on sale of subsidiary	9,559			-			11,211			-
Gain on restructuring of notes receivable	281			-			281			-
Other income	2,456			2,500			2,456			2,500
Foreign exchange loss	(55)			-			(18)			-
Total Other Income (Expense)	8,722			1,564			7,372			1,377
Net Loss from Continuing Operations Before Income Taxes	3,758			(5,917)			(3,038)			(10,558)
Income Tax Expense	(2,179)			(239)			(2,923)			(452)
Net Loss from Continuing Operations, Net of Taxes	1,579			(6,156)			(5,961)			(11,010)
Net (Loss) Income from Discontinued Operations, Net of Taxes	127			(351)			(499)			(950)
Net Loss	1,706			(6,507)			(6,460)			(11,960)
Net Loss Attributable To Non-Controlling Interest	(68)			(24)			(86)			(110)
Net Loss Attributable to Shareholders	$	1,774		$	(6,483)		$	(6,374)		$	(11,850)
Basic and Diluted Loss Per Share	$	-		$	(0.02)		$	(0.01)		$	(0.03)
Weighted Average Number of Shares Outstanding, Basic and Diluted	506,379,437			340,370,271			506,379,437			340,370,271

Note Regarding Non-IFRS Measures, Reconciliation, and Discussion

In this press release, 4Front refers to certain non-IFRS financial measures such as Systemwide Pro Forma Revenue and Adjusted EBITDA. These measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other issuers. 4Front defines Systemwide Pro Forma Revenue as total revenue plus revenue from entities with which the Company has a management contract, or effectively similar relationship (net of any management fee or effectively similar revenue) but does not consolidate the financial results of per IFRS 10 – Consolidated Financial Statements. 4Front considers this measure to be an appropriate indicator of the growth and scope of the business.

Adjusted EBITDA is defined by the Company as earnings before interest, taxes, depreciation and amortization less share-based compensation expense and one-time charges related to acquisition and financing related costs, excluding fair value adjustments for biological assets. 4Front considers these measures to be an important indicator of the financial strength and performance of our business. The following tables provide a reconciliation of each of the non-IFRS measures to its closest IFRS measure.

 About 4Front Ventures Corp.
4Front (CSE: FFNT) (OTCQX: FFNTF) is a national multi-state cannabis operator and retailer, with a market advantage in mass-produced, low-cost quality branded cannabis products. 4Front manufactures and distributes a portfolio of over 25 cannabis brands including Marmas, Crystal Clear, Funky Monkey, Pebbles, and the Pure Ratios wellness collection, distributed through retail outlets and their chain of strategically positioned Mission branded dispensaries.

Headquartered in Phoenix, Arizona, 4Front has operations in Illinois, Massachusetts, California, Michigan and Washington state. From plant genetics to the cannabis retail experience, 4Front's team applies expertise across the entire cannabis value chain. For more information, visit 4Front's website 

This news release was prepared by management of 4Front Ventures, which takes full responsibility for its contents. The Canadian Securities Exchange ("CSE") has not reviewed and does not accept responsibility for the adequacy of this news release. Neither the CSE nor its Regulation Services Provider (as that term is defined in the policies of the CSE) accepts responsibility for the adequacy or accuracy of this release.

This news release does not constitute an offer to sell or a solicitation of an offer to sell any of the securities in the United States. The securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the "U.S. Securities Act") or any state securities laws and may not be offered or sold within the United States or to U.S. Persons unless registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration is available.

Forward Looking Statements

Statements in this news release that are forward-looking statements are subject to various risks and uncertainties concerning the specific factors disclosed here and elsewhere in 4Front Ventures' periodic filings with securities regulators. When used in this news release, words such as "will, could, plan, estimate, expect, intend, may, potential, believe, should," and similar expressions, are forward-looking statements.

Forward-looking statements may include, without limitation, statements related to future developments and the business and operations of 4Front Ventures, developments with respect to legislative developments in the United States, expectations regarding the COVID-19 pandemic, future revenue or Adjusted EBITDA expectations, statements regarding when or if any contemplated or in-progress transactions will close or if/when required regulatory approvals are attained, and other statements regarding future developments of the business. The closing of the transactions described in this news release, including the divesture of Pennsylvania and Maryland assets and the sale of convertible debt, is subject to customary conditions and there can be no guarantee that such transactions will close.

Although 4Front Ventures has attempted to identify important factors that could cause actual results, performance or achievements to differ materially from those contained in the forward-looking statements, there can be other factors that cause results, performance or achievements not to be as anticipated, estimated or intended, including, but not limited to: dependence on obtaining regulatory approvals; investing in target companies or projects which have limited or no operating history and are engaged in activities currently considered illegal under U.S. federal laws; change in laws; limited operating history; reliance on management; requirements for additional financing; competition; hindering market growth and state adoption due to inconsistent public opinion and perception of the medical-use and adult-use marijuana industry and; regulatory or political change.

There can be no assurance that such information will prove to be accurate or that management's expectations or estimates of future developments, circumstances or results will materialize. As a result of these risks and uncertainties, the results or events predicted in these forward-looking statements may differ materially from actual results or events.

Accordingly, readers should not place undue reliance on forward-looking statements. The forward-looking statements in this news release are made as of the date of this release. 4Front Ventures disclaims any intention or obligation to update or revise such information, except as required by applicable law, and 4Front Ventures does not assume any liability for disclosure relating to any other company mentioned herein.

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SOURCE 4Front

FAQ

What were 4Front's Q2 2020 sales results for FFNTF?

4Front reported a 1.3% increase in systemwide pro forma sales for Q2 2020, totaling $19M.

When does 4Front expect to achieve positive adjusted EBITDA?

4Front expects to achieve positive adjusted EBITDA starting in Q3 2020.

What is the revenue impact of the Chicago dispensary closure on 4Front?

The closure of the Chicago dispensary resulted in an approximate 10% revenue decline.

What expansions are scheduled for 4Front in 2020?

4Front plans to complete its expansion projects in Illinois and Massachusetts by Q4 2020.

What is the significance of recreational approvals for 4Front in Q3 and Q4 2020?

Recreational approvals in Massachusetts are expected to drive strong revenue growth for 4Front in the latter half of 2020.