DC Progress ON The MORE ACT
The House Rules Committee sent the MORE Act to the House floor on Wednesday by a 9-4 vote. The marijuana decriminalization bill includes a few new provisions, including an amendment prohibiting federal agencies from denying security clearances based on current or past cannabis use. The amendment was introduced by Rep. Jamie Raskin (D-Md.). Early in the Biden administration, White House staffers were suspended, asked to resign, or placed in remote work programs after admitting prior marijuana use.
4Front - Building a house of California Brands
FFNFT is a well-positioned cannabis operator with several CA, IL, and MA growth drivers. The company's low-cost operating strategy, and its new manufacturing facility in California, puts the company in a unique position to roll up high-quality brands in the state.
FFNTF reported 2021 systemwide pro forma revenue of $132.7 million, an increase of 50% over 2020, and GAAP reported revenue was $104.6 million, an increase of 68% over 2020. 2021 adjusted EBITDA was $34 million, up 479% year-over-year, representing an adjusted EBITDA margin of $32.6 million or 32.6%. In 4Q21 systemwide pro forma sales were $33.8 million, an increase of 35% YoY and a slight sequential increase from 3Q21. Also, 4Q21 (A)EBITDA was $13.2 million, an increase of 75% QoQ 3Q21. As of December 30, FFNTF had $22.6 million of cash and $48.3 million of related party long-term debt, which isn't due until 2024.
Over the next few years, one of the most significant growth drivers will be wholesale growth in Mass, Illinois (more of a 2023 story), and now California. As the company reminded investors on the call, "pricing compression in the cannabis industry is a fact of life" therefore, low-cost, high-quality operations are essential considerations for success in cannabis. With California online and the NECC ramping in MA, there is strong visibility to 2022 and 2023. The company also announced it would acquire all issued and outstanding shares of Island Cannabis. The acquisition combines the established California brand with FFNTF's Commerce, California manufacturing facility. "Once integrated into 4Front's Commerce facility, we can reduce production costs and scale volume of the Island Cannabis brand." I suspect many cannabis brands now want to be part of a larger organization. The CA asset looks to be disruptive in the state with over $500 million of processing capacity, with low-cost production only getting better with increased capacity. After three months in the CA market, the company is in over 150 retailers, looking to grow to 500 in 2022 (including stores in MA).
The wholesale growth will be driven by price. On the call, the company used pricing for Marmas as an example. Marmas is the number one selling gummy in Washington will wholesale at $4 or 100 milligram 10 pack box and drives gross margins over 50%. Wholesale pricing to the leading gummies in the California market averages between $8 and $9 for a comparable 100-milligram product. The company is setting a new pricing model for cannabis in California. The company believes it can get this price down to $6.00 in MA from the current $8.00 for 100 milligrams.
Tilt industry-wide challenges, but the future is bright
TLLTF is a long. Overall, 4Q21 results came in a bit short of expectations due to the market softness and pricing in Pennsylvania and Massachusetts. We like the company operating model, which gives the company insight/participation in overall industry growth with its Jupiter subsidiary and the plant-touching business in MA, OH, and PA. In MA, the Cambridge medical store could be open for 2H22; the PA reset will benefit margins and new products are ramping up in OH in 2022.
In 2021 TILT grew revenues by 28% YoY to $203 million and 33% adjusted EBITDA growth to $22.5 million; the revenue growth was driven by a 33% increase in Jupiter and an 11% increase in the plant-touching business. At the end of 2020, 20% of its customers utilized services from both Jupiter and plant-touching, and that grew to 43% of customers utilizing both sides of the business in 2021. Gross margin before the fair value of biological assets for the year came in at 25% compared to 29% in 2020, with the decline primarily driven by lower margins at Jupiter due to increased freight costs in 2021 related to shipping congestion at the ports. In addition, there was margin compression due to customer mix during the fourth quarter. Margins in the plant-touching business were impacted by lower wholesale prices, delayed product approvals in Pennsylvania, and growth challenges in the new canopy in Massachusetts. In 4Q21 revenue grew 28% YoY to $54 million with adjusted EBITDA up 6% YoY to $4.8 million. Sequentially, Tilt saw modest growth in revenue and a slight decline in adjusted EBITDA versus 3Q21. At the operating expense line, OpEx less non-cash adjustments for stock compensation, depreciation and amortization, and impairment charges in 2021 totaled $37.7 million compared to $36.6 million in 2020. As a percentage of revenue, OpEx was 19% in 2021 compared to 23% in 2020 reflecting strong cost controls. 2022 guidance is for Revenues of $255-$265 million and (A)EBITDA between $27-$32 million. At the midpoint, this reflects approximately 28% revenue growth and approximately 31% adjusted EBITDA growth over 2021.
