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4V

4Front Ventures Corp. (FFNTF)·Q2 2023 Earnings Summary

Executive Summary

  • Q2 2023 GAAP revenue was $30.7M (+8% YoY), Systemwide Pro Forma Revenue was $35.2M, Adjusted EBITDA declined to $2.0M from $3.5M in Q1; net loss was $(11.5)M with EPS of $(0.02).
  • Management accelerated cost actions (~$9M annualized reduction) and aggressively scaled back California to remove margin drag; cash was $5.4M with senior debt extended to May 2026.
  • Illinois drove sequential growth (+~8% QoQ) with retail stores outperforming market by ~11%; wholesale revenue in MA/IL expanded 9% sequentially on product and quality improvements.
  • Guidance/tone shifted from specific EBITDA margin targets to qualitative improvement expectations (gross margin high-40s/low-50s; EBITDA materially better by Q4) as Illinois ramps and California is deemphasized.
  • Wall Street consensus via S&P Global was unavailable for FFNTF; beats/misses vs estimates cannot be assessed. (Attempted retrieval; unavailable)

What Went Well and What Went Wrong

What Went Well

  • Illinois momentum: sequential revenue growth of ~8%, Crystal Clear vapes gained traction (≈44% of retail vape category), and retail stores outperformed the market average by ~11%.
  • Structural improvements: ~$9M annualized cost reduction; management emphasized “self-sustainability” with operations generating cash flow in MA, IL, WA, and the LI Lending extension enhancing financing flexibility.
  • Product/quality execution: Massachusetts launched new Island, Crystal Clear, Marmas SKUs; wholesale up 9% sequentially; >80% of packaged flower tested above 25% total active cannabinoids.

Management quotes:

  • “We are positioned to effectively double the size of our Company within the next 12 to 18 months while expanding margins and generating cash flow.” — CEO Leo Gontmakher
  • “We are not willing to sustain prolonged profitless revenue in any market in which we operate.” — CEO Leo Gontmakher

What Went Wrong

  • Profitability compressed: Adjusted EBITDA fell to $2.0M (from $3.5M in Q1) and gross profit declined YoY; management cited California losses and margin drag.
  • California headwinds: ~$11.3M operating losses in 1H, prompting aggressive downsizing and SKU rationalization (exit from flower/pre-roll; focus on vapes/edibles).
  • Mixed state trends: Massachusetts revenue declined 4% QoQ amid pricing pressure despite YoY growth.

Financial Results

Consolidated P&L snapshot

MetricQ2 2022Q1 2023Q2 2023
Revenue ($USD Millions)$28.439 $30.376 $30.696
Revenue from sale of goods ($USD Millions)$25.488 $27.370 $27.696
Real estate income ($USD Millions)$2.951 $3.006 $3.000
Cost of goods sold ($USD Millions)$(16.123) $(19.388) $(21.100)
Gross profit ($USD Millions)$12.316 $10.988 $9.596
Selling & marketing ($USD Millions)$6.384 $7.038 $6.748
G&A ($USD Millions)$6.556 $7.856 $7.533
D&A ($USD Millions)$1.123 $0.870 $0.866
Loss from operations ($USD Millions)$(4.146) $(5.796) $(5.782)
Interest expense ($USD Millions)$(3.418) $(3.196) $(3.075)
Net loss ($USD Millions)$(6.546) $(11.392) $(11.464)
Basic & diluted loss per share ($USD)$(0.01) $(0.02) $(0.02)
Weighted avg shares (basic & diluted)636,653,975 642,140,067 646,690,827

Non-GAAP metrics

MetricQ1 2023Q2 2023
Systemwide Pro Forma Revenue ($USD Millions)$34.826 $35.158
Adjusted EBITDA ($USD Millions)$3.5 $2.0

Systemwide Pro Forma Revenue reconciliation (Q2 2023):

ComponentAmount
Revenue (GAAP)$30.696
Less: Managed Asset Income$2.873
Plus: Systemwide Revenue Adjustment$7.334
Systemwide Pro Forma Revenue$35.158

KPIs

KPIQ1 2023Q2 2023
Illinois retail outperformance vs market average+23% +11%
Illinois retail vape category share (Crystal Clear)—~44%
Wholesale revenue growth (MA/IL)+7% vs Q4 2022 +9% sequential
MA flower quality mix>80% packaged flower >25% THC (Q1 commentary) >80% packaged flower >25% total active cannabinoids

Balance sheet highlights

MetricJun 30, 2023Mar 31, 2023
Cash ($USD Millions)$5.350 $4.628
Related-party long-term debt ($USD Millions)$50.451 $50.129
Total assets ($USD Millions)$330.506 $333.746
Total liabilities ($USD Millions)$322.680 $315.767
Subordinate Voting Shares outstanding649,859,727 643,416,275

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted EBITDA margin (%)FY 2023 exitMid-20% range by year-end (Q1 call) Management avoided numeric guidance; expects significant EBITDA improvement by Q4 (current EBITDA viewed as anomaly) Tempered (numeric target withdrawn)
Gross margin (%)2024 run-rateNot previously quantifiedHigh-40s to low-50s expected, excluding California impact as IL retail/production ramps Initiated qualitative target
Adjusted EBITDA ($) trajectoryH2 2023Low point in Q1; improvement through year (Q1 call) Projecting increase; meaningful improvement by Q4 as CA declines and IL grows Maintained directionality
Matteson facility go-live2H 2023Power connection expected fall 2023; operations in 2H 2023 On track to launch in 2H 2023; ComEd timeline fall 2023 Maintained
Illinois retail footprintMid-2024Eight additional stores planned; third license executed; first store build 6–8 months Targeting five stores operational by mid-2024 Clarified timing

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’22 & Q1’23)Current Period (Q2’23)Trend
California strategyPush toward cash flow; COD sales; private label; cautious credit; April best month cited Aggressive downsizing; exit low-margin SKUs (flower/pre-roll), focus on vapes/edibles; no longer a significant cash drag Improving (risk reduced)
Illinois expansionMatteson construction near-complete; additional retail licenses targeted Matteson on track for 2H; plan for five stores by mid-2024; strong vape traction; retail outperformance Accelerating
Margin outlookAim for mid-40s gross margin; mid-20% EBITDA exit (Q1) Gross margin targeted high-40s/low-50s; EBITDA to rebound by Q4 Positive
Financing/liquidityOperating cash flow positive as of March; LI Lending extension sought; equipment financing LOI LI Lending extension executed (12% rate, maturity to May 2026); more senior secured financing flexibility Strengthened
Product innovationIsland, Crystal Clear, Marmas expansion; 1988 brand launch Continued launches; quality-led share gains; new infused pre-rolls Sustained
Market pricingMA/Washington pricing pressure; CA wholesale price rebound early 2023 MA flower stabilization; CA deemphasized to mitigate volatility Stabilizing (focus shift)

Management Commentary

  • “Our platform is optimized and efficient and achieving operational cash flow emphasizes the significance of only pursuing projects that add cash to our balance sheet.” — CEO Leo Gontmakher
  • “We expect EBITDA to lift as California revenues decline with more profitable revenue coming on to the P&L as Matteson gets launched and retail comes online in Illinois.” — CIO Andrew Thut
  • “Our locations outperformed the market average retail store by an impressive 11% during Q2.” — CIO Andrew Thut

Q&A Highlights

  • California footprint: Management confirmed decisive cost cuts and SKU rationalization; remaining presence aims to be non-loss-making; not committing additional capital until market improves.
  • Margin normalization: Gross margins expected high-40s/low-50s as CA impact fades and IL ramps; normalization more visible in Q4.
  • Financing: Extension with LI Lending affords up to $30M of senior secured capacity and equipment financing, with super-senior options under defined limits.
  • Illinois license M&A: Valuations for licenses have compressed; strategy focused on license acquisition rather than operator buyouts; financing plans linked to debt extension.
  • Matteson timing: Power line extension is the gating item; Q3–fall timeline reiterated with state/local support; operations expected in 2H.

Estimates Context

  • Wall Street consensus via S&P Global was unavailable for FFNTF for Q2 2023, Q1 2023, and Q2 2022; therefore, beats/misses versus consensus cannot be determined. (Attempted S&P Global retrieval; no CIQ mapping available)

Key Takeaways for Investors

  • Illinois is the near-term growth engine: retail/production scaling should expand margins and cash generation as Matteson comes online and stores open (five targeted by mid-2024).
  • California risks curtailed: aggressive downsizing and SKU focus materially reduce margin/EBITDA drag, improving profitability trajectory into Q4 and 2024.
  • Quality and product velocity are differentiators: sustained share gains in MA/IL supported by elevated flower potency and robust launch cadence (Island, Crystal Clear, Marmas, 1988).
  • Liquidity and flexibility improved: LI Lending extension (12% rate, maturity to May 2026) opens equipment and project financing avenues to fund Illinois expansion.
  • Margin outlook constructive: management targets gross margins in the high-40s/low-50s as mix improves; EBITDA expected to rebound meaningfully by Q4.
  • Watch sequential trends in Q3/Q4: Q3 to include residual CA cost impacts; Q4 should reflect normalization and early Illinois contributions.
  • Actionable: Near-term catalysts include Matteson power/launch, additional Illinois license announcements, and evidence of sustained EBITDA improvement; absence of consensus estimates reduces “beat/miss” setup risk but heightens narrative importance.

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