4Front 3Q22 Earnings Report.
4Front Ventures (FFNTF) is a Hedgeye Cannabis Best Idea Long.
4Front reported a very solid quarter. Systemwide revenue was $37.3 million, up 9% sequentially and 13% increase YoY. GAAP revenue came in at $32.5 million, up 14%seqentialy and up 25% YoY. The beat was primarily driven by an increase in revenue by the Company's wholesale revenue as it ramps those portions of its business in California, Illinois, and Massachusetts. Adjusted EBITDA was $9.3 million, up 24% YoY, representing an Adjusted EBITDA margin of 25%. The Company has $5.3M in cash and $49.5M in long-term debt ending the quarter. They expect to be operating cash flow positive by next quarter.
The Company posted record net sales in Massachusetts while expanding market share with the launch of four new brands. The Company now has a mid-single-digit market share in Massachusetts, which is a 40% increase from January 2021. They saw sales volume in Massachusetts grow 101% sequentially. Further, 4Front realized an approximate 71% increase in wholesale customers from Q2 2022 to Q3 2022.
"Our growth in Massachusetts in the third quarter is a clear example of our strategy coming to fruition, as we capitalized on our low-cost production methodologies to improve the quality of our growth and drive sales volumes across all product categories. This translated into a doubling of the amount of flower we sold quarter-over-quarter, which also provided an added boost to our market share in Massachusetts. Our operations in California and Illinois are also shaping up to be significant growth markets for us heading into the new year. In California, we are seeing continued market share improvements as our customer pipeline grows and existing partnerships expand, and in Illinois, we are focused on increasing our retail footprint as we complete our cultivation expansion at our facility in Matteson." - Leo Gontmakher (CEO)
The acceleration that the Company sees in its core market is remarkable, and they are doing a great job of being the low-cost provider of cannabis in a core east coast state that is seeing dramatic pricing pressure (see the note from earlier in the week for MA sales trends). We talk about how Glass House Brands in California is winning in that market due to how cost-efficiently they can grow a pound of cannabis, and 4Front is another company winning with a similar strategy.
Maryland Cannabis Trend.
Last week, Maryland became the 21st state in the United States to vote on and pass adult-use cannabis legalization. The state already has a medical cannabis market which we have been tracking. We look forward to tracking the adult-use and medical markets when the state finally rolls this out. On the medical side, Maryland monthly sales came in at ~$38M in October, which was down 1.6% sequentially and down 17.3% YoY. Volumes for the month were only down 0.6% sequentially and up 4.2% YoY. In the past year, this market has seen a decline of 20.7% in terms of pricing power.
BAT INVESTS IN CHARLOTTE'S WEB.
BAT, which provides the Company with incremental capital to fund growth initiatives, announced yesterday a US$56.8 million investment into Charlotte's Web. BAT's Investment has been made via a convertible debenture in the amount of US$56.8 million. The debenture is currently convertible into a non-controlling equity stake in Charlotte's Web of approximately 19.9% and is convertible at BAT's discretion. Kingsley Wheaton, Chief Growth Officer at BAT, said: "The appeal of Charlotte's Web is clear to us: a wide portfolio of high-quality products, strong brand equity, an extensive retail presence, and robust B2C e-commerce platform serving a loyal US consumer base, and a track record of in-depth scientific research." Charlottes Web has commented that the investment money will be used to continue to broaden their research and development and continue to push their innovation in the space.
