FFNTF - Good enough in a difficult environment
4Front Ventures reported 2Q22 earnings results last night, where they saw margin compression and 6% revenue growth QoQ.
4Front (FFNTF) saw system-wide revenue of $34.5M, a 6% increase in QoQ, and adjusted EBITDA of $9.2M, a 2% increase QoQ and 22.7% increase YoY. The continued growth of Adjusted EBITDA and margins is expected to persist through 2023 as the Company's operations drive increased production and higher sales volumes without material increases in overhead. The wholesale business drove the revenue growth in California, Illinois, and Massachusetts. The Company completed its acquisition of Island Cannabis back in April. As of June 30, 2022, the Company had $6.0M of cash and $49.5M of related-party long-term debt not due until May 2024. As of today, the Company has 636,636,686 subordinate voting shares outstanding.
The Company sees future drivers for the business, including optimism for some federal reform by the end of the year. Still, it isn't baking that into expectations based on nothing happening on the Hill for the last couple of years. They will also see meaningful growth in IL as they currently only have two licenses out of a possible 10 in the state, which they expect to increase shortly as IL rewarded more licenses nearly a month ago.
"Throughout the second quarter and now halfway through the third quarter, we are seeing an acceleration of business trends within our growth markets, particularly in Massachusetts and California," said Leo Gontmakher, Chief Executive Officer of 4Front. "Our retail locations platform-wide maintained or gained market share, despite anticipated pricing headwinds as we continue to expand our customer base with new product innovations and quality improvements. We believe we are poised for a significant leg of growth to take place over the next 12 months as we leverage our investments in state-of-the-art automation and scaled manufacturing processes, supplemented by strategic and accretive M&A."
4Fronts bread and butter are to thrive in low-price states like California, which should lead to success in other markets, and we will see less mature markets go through the price destruction factors we see in CA. "In the distressed and fragmented California market, we see increased interest from companies looking to 4Front as their low-cost producer of choice. Our long-term plans are to deepen and expand these relationships to grow revenue over time and add a retail presence in the state." FFNTF results last night did not blow the quarter out, but we are not expecting that from any company. 4Front is the type of Company best positioned to continue to operate at a solid clip in the most challenging market conditions. As many companies in these tough markets like CA are cutting prices to try and keep the lights on, 4Front can handle these pressures much better as they are the lowest-cost cannabis option. FFNTF remains a Hedgeye Cannabis Best Idea Long.
TLLTF 2Q22 Earnings
Tilt Holdings saw 22% YoY growth in the cannabis operations.
"TILT's business strategy, while still in its infancy, was forged with an eye towards the type of market volatility the cannabis industry has endured over the first half of 2022," said Gary Santo, CEO of TILT. "Macroeconomic conditions have exacerbated the pressures felt by cannabis operators, causing many to reduce their expectations for the remainder of the year. The downstream effect on TILT was to be expected. The early results from our strategic shift continue to demonstrate that we are on the right path. By partnering with brands that have authenticity, depth, and a proven ability to compete, TILT's cannabis operations grew more than 20% YoY and continue to outpace sequential market trends in each of the states in which we operate. Most importantly, while retail and wholesale pricing has been volatile in those markets, pricing for our brand-partner products has remained relatively flat."
Revenue was $47.1 million compared to $48.5 million in the prior year. The decrease in revenue was driven by lower sales volume and pricing for specific products in the Company's inhalation business, partially offset by more than 20% growth in the Company's cannabis operations. The Company also saw that some of their larger hardware companies that typically sell in 2Q22 have access to inventory and pause their renewals. Gross profit was $10.9 million or approximately 23% of revenue, compared to $12.9 million or approximately 27% of revenue in the prior year. The decrease in gross profit was primarily driven by the pricing of certain product lines in the Company's hardware business, product mix at our Massachusetts facility as we transition to new genetics, and lower pricing in the Company's wholesale cannabis operations. Net Loss for the quarter was $7.1 million compared to a Net Income of $1.0 million in the prior year. The decrease was primarily due to the $6.7 million noncash goodwill impairment incurred in the quarter. Adjusted EBITDA was $1.1 million compared to $7.1 million in the prior year. The decrease was driven by the lower sales volume and pricing contractions within the Company's inhalation business, similar contractions in the wholesale cannabis operations, and higher operating expenses.
Due to the evolving macroeconomic environment, inflationary impacts on consumer spending, and lower cannabis wholesale pricing in Massachusetts and Pennsylvania, the Company lowered its 2022 financial outlook and now expects revenue to range between $205 – $210 million, with Adjusted EBITDA ranging between $10 – $15 million. We knew it wouldn't be a good quarter based on the market conditions, but this name should be a long-term winner in the industry and remains a Hedgeye Cannabis Best Idea Long.
FLORIDA MEDICAL ENROLLMENTS SLOW
After years of robust growth, Florida's medical program enrollment has slowed.
In 2021, an average of 3,792 patients enrolled in the program per week, closing the year with more than 650,000 participants. Through the first three months of this year, over 3,500 Floridians signed up for the program weekly. But as of Aug. 12, average weekly enrollments for 2022 had dipped to just over 2,659. The slowdown is increasing competitive pressure with 460 licensed dispensaries in the state, up from 396 at the close of 2021. Trulieve continues to be the dominant player in the state with 119 dispensaries, more than twice as many as Verano Holdings, its nearest competitor. In context, the state's market share leader, Trulieve, put a steak in the ground and $5.0 million to push for recreational legalization.
