This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements generally relate to future events or our future financial or
operating performance and may include statements concerning, among other things,
our business strategy (including anticipated trends and developments in, and
management plans for, our business and the markets in which we operate),
financial results, the impact of COVID-19 on our business, operations, and the
markets and communities in which we, our clients, and partners operate, results
of operations, revenues, operating expenses, and capital expenditures, sales and
marketing initiatives and competition. In some cases, you can identify
forward-looking statements because they contain words such as "may," "might,"
"will," "should," "expects," "plans," "anticipates," "could," "intends,"
"target," "projects," "contemplates," "believes," "estimates," "predicts,"
"suggests," "potential" or "continue" or the negative of these words or other
similar terms or expressions that concern our expectations, strategy, plans or
intentions. These statements are not guarantees of future performance; they
reflect our current views with respect to future events and are based on
assumptions and are subject to known and unknown risks, uncertainties and other
factors that may cause our actual results, performance, or achievements to be
materially different from expectations or results projected or implied by
forward-looking statements.
We discuss many of these risks in other filings we make from time to time with
the Securities and Exchange Commission (the "SEC"). Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
Quarterly Report on Form 10-Q, which are inherently subject to change and
involve risks and uncertainties. Unless required by federal securities laws, we
assume no obligation to update any of these forward-looking statements, or to
update the reasons actual results could differ materially from those
anticipated, to reflect circumstances or events that occur after the statements
are made. Given these uncertainties, investors should not place undue reliance
on these forward-looking statements.
Investors should read this Quarterly Report on Form 10-Q and the documents that
we reference in this report and have filed with the SEC and on SEDAR, including
our Annual Report on Form 10-K, filed with the SEC on April 7, 2021, with the
understanding that our actual future results may be materially different from
what we expect. We qualify all of our forward-looking statements by these
cautionary statements for the three and nine months ended September 30, 2021 and
2020.
Unless the context otherwise indicates, when used in this Quarterly Report on
Form 10-Q, "4Front," "the Company," "we," "us" and "our" refer to 4Front
Ventures Corp., a British Columbia corporation, and its wholly owned
subsidiaries on a consolidated basis.
Overview
The Company exists pursuant to the provisions of the Business Corporations Act
(British Columbia). The Company's SVS are listed on the Canadian Securities
Exchange ("CSE") under the ticker "FFNT" and are quoted on the OTC
(OTCQX: FFNTF).
The Company has two primary operating segments: THC Cannabis and CBD
Wellness. With regard to its THC Cannabis segment, as of September 30, 2021, the
Company operated six dispensaries, three in Massachusetts, two in Illinois, and
one in Michigan, primarily under the "MISSION" brand name. Also, as of
September 30, 2021, the Company operated two production facilities in
Massachusetts and one in Illinois. The Company produces the majority of products
that are sold at its Massachusetts and Illinois dispensaries. Also, as part of
its THC Cannabis segment, the Company sells equipment, supplies and intellectual
property to cannabis producers in the state of Washington.
The Company's CBD Wellness segment is focused upon its ownership and operation
of its wholly owned subsidiary, Pure Ratios Holdings, Inc. ("Pure Ratios"), a
CBD-focused wellness company in California, that sells non-THC products
throughout the United States.
While marijuana is legal under the laws of several U.S. states (with varying
restrictions), the United States Federal Controlled Substances Act classifies
all "marijuana" as a Schedule I drug, whether for medical or recreational use.
Under U.S. federal law, a Schedule I drug or substance has a high potential for
abuse, no accepted medical use in the United States, and a lack of safety data
for the use of the drug under medical supervision. In late January 2021, Senate
Majority Leader Chuck Schumer said lawmakers are in the process of merging
various cannabis bills, including his own legalization legislation. He is
working to enact reform in this Congressional session. This would include the
Marijuana Freedom and Opportunity Act, that would federally de-schedule
cannabis, reinvest tax revenue into communities most affected by the drug war,
and fund efforts to expunge prior cannabis records. It is likely that the
Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act would be
incorporated. Other federal legislation under review for possible submission
includes the Secure and Fair Enforcement Act (the "SAFE Banking Act"), a bill
that would allow cannabis companies to access the federally insured banking
system and capital markets without the risk of federal enforcement action, and
the Strengthening
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the Tenth Amendment Through Entrusting States Act (the STATES Act), a bill that
seeks protections for businesses and individuals in states that have legalized
and comply with state laws.
The Company's Interim Financial Statements are prepared in accordance with U.S.
generally accepted accounting principles ("U.S. GAAP"), and the financial
information contained herein, are reported in thousands (000's) of United States
dollars ("$") unless otherwise specified. Canadian dollar amounts are denoted by
"C$".
Recent Developments
Officer Personnel Changes
Effective July 1, 2021, the Company terminated its month-to-month independent
contractor arrangement with Peter Rennard in his position as Interim Chief
Financial Officer of the Company. Mr. Rennard's termination was not in
connection with any known disagreement with the Company on any matter relating
to the Company's operations, policies or practices, including accounting
principles and practices.
Effective July 15, 2021, the Company's board of directors appointed Andrew Thut
as the Company's Interim Chief Financial Officer while the Company continues its
search for a permanent Chief Financial Officer. Mr. Thut joined the Company in
October 2014 as its Chief Investment Officer and will continue to serve as Chief
Investment Officer during his tenure as Interim Chief Financial Officer of the
Company.
Final Close on Illinois Cultivation and Production Facility Project
The Company announced on August 5, 2021 the first closing of a multiphase
expansion project to build an up to 558,000 sq. ft. cultivation and production
facility (the "Facility") in the Village of Matteson, Illinois, located outside
of Chicago. Construction on Phase 1, a 350,000 square foot cultivation and
production facility, began in Q3 2021 and is expected to be completed in Q4
2022. The facility is expected to begin operations in Q1 2023. The Company plans
to use the Facility to produce the Company's more than 20 in-house brands and
200 products, which will be offered to Illinois customers at an accessible price
point at its Mission Dispensaries and partner dispensaries across Illinois.
Massachusetts Brookline Mission Dispensary Grand Opening
On July 15, 2021, the Company received final approval from the Massachusetts
Cannabis Control Commission to open the Company's third adult-use retail
dispensary in Massachusetts. Located at 1024 Commonwealth Avenue, Boston, MA,
the dispensary held its grand opening on August 21, 2021.
Acquisition of New England Cannabis Corporation
Please see Note 18 of the financial statements for a full description of the
Company's entrance into the NECC Merger Agreement on October 6, 2021, and
related transactions.
Commerce Facility
The Company was awarded a temporary cannabis business license for its 170,000
sq. ft. Cannabis Manufacturing Facility (the "Facility") in Commerce, California
on October 27, 2021. The Company intends that the Facility will manufacture both
in-house and partner brands, including infused pre-rolls, gummies, hard candies,
fruit chews, caramels, mints, soft gel capsules, vapes, tinctures and other
manufactured infused products. As of November 17, 2021, the Company has
commenced permitted manufacturing activities allowable under the license.
COVID-19
In March 2020, the United States and much of the world began to experience a
rapid increase in the number of COVID-19 cases. The emergence of COVID-19, an
extremely infectious airborne respiratory virus, caused a significant response
on the part of many governments to contain it. The most relevant containment
measure for the Company's business is the implementation of "essential" type
business designations and implementation of social distancing protocols. Thus
far, the Company's dispensaries and operations have been allowed to continue
operating. Social distancing protocols have been implemented at the Company's
dispensaries which meet or exceed those required by the local jurisdiction.
Through the date of this Quarterly Report on Form 10-Q, sales continue to meet
or exceed
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comparable periods prior to March 2020, however there is no guarantee that the
Company's dispensaries/operations will not see future negative effects from
COVID-19
.
The situation related to the pandemic and recovery from the pandemic continues
to be complex and rapidly evolving. Certain vaccines have been authorized by
major regulatory bodies to help fight the infection of COVID-19, and certain
other vaccines are in the last stages of development to provide such treatment.
While it is anticipated in the ensuing months that authorized vaccines will
become more widely available to the public, vaccine availability remains limited
in certain regions and the timeline to sufficiently mitigate the effects of the
pandemic through vaccines or other measures remains uncertain. If COVID-19
persists or worsens before vaccines or other treatments are made widely
available, there may be further external developments, such as restrictions
imposed by government authorities, that are beyond our control and may impact
our operating plans. Parts of our business have experienced and may continue to
experience, operational disruption and customer demand impacts. Furthermore, the
impact of the Delta variant cannot be predicted at this time, and could depend
on numerous factors, including vaccination rates among the population, the
effectiveness of COVID-19 vaccines against the Delta variant and the response by
governmental bodies and regulators. As such, we are unable to reasonably
estimate the duration of the pandemic or fully ascertain its long-term impact to
our business.
RESULTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2021 2020 2021 2020
Total revenues $ 25,941 $ 15,293 $ 76,032 $ 40,646
Cost of goods sold (10,269 ) (6,061 ) (30,210 ) (18,756 )
Gross profit 15,672 9,232 45,822 21,890
Total expenses (20,266 ) (17,962 ) (67,718 ) (49,763 )
Net loss from continuing operations (4,594 ) (8,730 ) (21,896 ) (27,873 )
Net income from discontinued operations - 4,761 - 15,473
Net loss (4,594 ) (3,969 ) $ (21,896 ) $ (12,400 )
Net income attributable to
non-controlling interest 5 67 15 41
Net loss attributable to shareholders (4,599 ) (4,036 ) $ (21,911 ) $ (12,441 )
September 30, December 31,
2021 2020
Total assets $ 212,112 $ 204,756
Total liabilities 160,533 162,553
Total equity 51,579 42,203
Components of Revenue
Revenue
As of September 30, 2021, 4Front owns or manages operations in California,
Illinois, Massachusetts, Michigan, and Washington. Since commencing operations
4Front has generated revenue in each state. Adult-use sales began in August 2020
in Georgetown, MA, and in September 2020 in Worcester, MA. The Company opened
its Calumet City, IL dispensary in December 2020 and opened its Brookline, MA
dispensary under adult-use in August 2021. The additional adult-use sales and
the new dispensaries have driven sales higher in 2021. The Company utilizes its
cultivation and production techniques developed by Cannex for its Washington
state customers to increase the yields and quality of products produced in
Illinois and Massachusetts. The ability to supply the Company's adult=use
dispensaries will ensure that the Company can meet increasing demand. As
production increases, the Company will begin to sell excess production in the
wholesale market. The Company also sells equipment and supplies to third party
cannabis operators and sells non-THC wellness products through its Pure Ratios
subsidiary.
Revenue from Sale of Goods
Revenue from sale of goods includes the sale of cannabis products through the
Company's dispensaries. These products are either manufactured by the Company or
are purchased from other licensed cannabis companies. Also included are
equipment and supply sales and non-THC wellness product sales.
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Real Estate Income
Real estate income from leasing cannabis production facilities to third party
cannabis operators in the state of Washington.
Gross Profit
Gross profit is revenue less cost of goods sold. Cost of goods sold includes the
costs to purchase products from third parties and includes finished goods such
as flower, edibles, and concentrates. Cost of goods sold also includes costs to
internally manufacture products such as packaging and other supplies, and
allocated overhead which includes rent, salaries, utilities, and related costs.
Cannabis costs are affected by various state regulations that limit the sourcing
and procurement of cannabis products, which may create fluctuations in gross
profit over comparative periods as the regulatory environment changes.
Total Operating Expenses
Total operating expenses include selling and marketing expenses, general and
administrative expenses, depreciation and amortization, and equity-based
compensation.
Selling and marketing expenses generally correlate to revenue. These expenses
include labor costs and other selling costs to support the Company's retail
locations. The Company expects selling costs as a percentage of revenue to
decrease over time as volumes increase at the Massachusetts and Illinois
dispensaries due to adult-use sales and as the Company begins to sell cannabis
to the wholesale market.
General and administrative expenses include costs incurred at the corporate
offices, primarily related to personnel costs, benefits, and other professional
service costs. These costs are anticipated to be stable.
Provision for Income Taxes
Although the Company is a Canadian corporation, we are classified as a U.S.
domestic corporation for U.S. federal income tax purposes under section 7874(b)
of the U.S. Internal Revenue Code of 1986, as amended (the "U.S. Tax Code") and
will be subject to U.S. federal income tax on our worldwide income. However, for
Canadian tax purposes, regardless of any application of section 7874 of the U.S.
Tax Code, we are treated as a Canadian resident corporation. As a result, we are
subject to taxation in both Canada and the United States, which could have a
material adverse effect on our financial condition and results of operations.
We are subject to income taxes in the jurisdictions in which we operate, and,
consequently, income tax expense is a function of the allocation of taxable
income by jurisdiction and the various activities that impact the timing of
taxable events. Section 280E of the U.S. Tax Code prohibits businesses from
deducting certain expenses associated with trafficking-controlled substances
(within the meaning of Schedule I and II of the CSA). The Internal Revenue
Service of the United States ("IRS") has invoked section 280E of the U.S. Tax
Code in tax audits against various cannabis businesses in the United States that
are permitted under applicable state laws. Although the IRS issued a
clarification allowing the deduction of certain expenses, the scope of such
items is interpreted very narrowly, and the bulk of operating costs and general
administrative costs are not permissible deductions. As a result, we will have
an effective tax rate in the U.S. significantly higher than the rate typically
applicable to U.S. corporations. While there are currently several pending cases
before various U.S. administrative and federal courts challenging these
restrictions, there can be no assurance that these courts will issue an
interpretation of Section 280E of the U.S. Tax Code favorable to cannabis
businesses.
Three-Months Ended September 30, 2021
Revenue from sale of goods
Revenue for the three months ended September 30, 2021 from the Company's retail
and wholesale sales are $23,126, which is an increase of $10,716 or 86% compared
to $12,410 for the three months ended September 30, 2020. This increase is
primarily due to sales from the Calumet City, IL dispensary that opened in
December 2020, sales from the Brookline, MA dispensary that opened in August
2021, and increased sales from the other two Massachusetts dispensaries.
Revenue from the sale of equipment and supplies to third party cannabis
operators was $1,260 for the three months ended September 30, 2021 as compared
to $1,474 for the three months ended September 2020. This $214 or 15% decrease
is due to normal fluctuation in revenue between quarters and future revenue is
expected to remain at 2021 levels.
Revenue from the CBD Wellness segment is $413 for the three months ended
September 30, 2021 as compared to $2,631 for the three months ended September
30, 2020. The revenue decrease of $2,218 is largely attributable to changes in
marketing strategy prioritizing profitable growth with a focus on achieving
positive cash flow.
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Real Estate Income
Real estate income for the three months ended September 30, 2021 is $2,815 which
is relatively flat from $2,883 for the three months ended September 30, 2020.
Cost of Goods Sold
Cost of goods sold ("COGS") for the three months ended September 30, 2021 is
$10,269, an increase of $4,208 or 69%%, from $6,061 for the same period ended
September 30, 2020. The difference in percentage increases is attributable to
the margin benefits of increased sales on internally produced products.
Gross Profit
Gross profit margin for the three months ended September 30, 2021 is 56%
compared to 55% for the same period ended 2020. The $6,440 increase in gross
profit margin is due to lower COGS from internally produced products.
Total Operating Expenses
Total operating expense for the three months ended September 30, 2021 is
$16,596, an increase of $6,319 from $10,277 for the period ended 2020. This
increase is primarily due to: $1.9 million greater sales & marketing expenses
due to the new dispensaries and increased retail staffing to meet adult-use
sales demand; $3.3 million greater general and administrative expenses largely
attributable to start-up costs for the opening of the Commerce Facility; $1.1
million greater equity based compensation expense.
Total Other Income (Expense)
Net other income for the three months ended September 30, 2021 increased $6,052
to $871 from a $5,181 net expense in the same period ended 2020. The overall net
increase in other income is due to a $3.3 million in change in fair value of
derivative liability and $2.1 million lower interest expense after debt was
repaid with proceeds from sales leasebacks.
Net Income (Loss) Before Income Taxes
Net loss before taxes and non-controlling interest for the three months ended
September 30, 2021 is $53, which is a $6,173 decrease compared to the $6,226 net
loss before income taxes for the three months ended September 30, 2020 due the
reasons explained above.
Nine-Months Ended September 30, 2021
Revenue from sale of goods
Revenue for the nine months ended September 30, 2021 from the Company's retail
and wholesale sales increased $35,526 or 111% to $67,658 compared to $32,132 for
the three months ended September 30, 2020. This increase is primarily due to
sales from the Calumet City, IL dispensary that opened in December 2020, sales
from the Brookline, MA dispensary that opened in August 2021, and higher sales
across other dispensaries with Michigan and Massachusetts dispensaries
benefitting from a full nine months of adult-use sales in 2021.
Revenue from the sale of equipment and supplies to third party cannabis
operators was $3,628 for the nine months ended September 30, 2021 as compared to
$3,238 for the nine months ended September 2020. This $390 or 12% increase is
due to normal fluctuation in revenue between periods and future revenue is
expected to remain at 2021 levels.
Revenue from the CBD Wellness segment is $1,959 for the nine months ended
September 30, 2021 as compared to $6,090 for the similar period ended 2020. This
revenue decrease of $4,130 or 68% largely attributable to changes in marketing
strategy prioritizing profitable growth with a focus on achieving positive cash
flow.
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Real Estate Income
Real estate income for the nine months ended September 30, 2021 is $8,374, which
is relatively flat from $8,514 recognized during the similar period ended
September 30, 2020.
Cost of Goods Sold
COGS for the nine months ended September 30, 2021 is $30,210, an increase of
$11,454 or 61%, from $18,756 for the period ended September 30, 2020. The
favorable percentage increase as compared to 111%% in revenue growth was due to
the margin benefits from increased sales of internally produced products.
Gross Profit
Gross profit margin for the nine months ended September 30, 2021 is 51% compared
to 42% for the period ended 2020. The increase in gross profit margin is due to
lower COGS from internally developed products.
Total Operating Expenses
Total operating expense for the nine months ended September 30, 2021 is $45,725,
an increase of $10,800 from $34,925 for the period ended 2020. This increase is
primarily due to $4.1 million greater equity based compensation, $5.4 million
greater general and administrative expense, and $1.7 million greater selling and
marketing expense.
Total Other Income (Expense)
Net other expense for the nine months ended September 30, 2021 increased $2,037
to $11,448 from $9,411 in the similar period ended 2020. The overall net
increase in other expense for the period is due to $2.9 million in change in
fair value of derivative liability and $2.7 million from the settlement of a
business dispute in 2020, offset by a decrease in interest expense of $3.8
million due refinancing via sales leaseback transactions.
Net Income (Loss) Before Income Taxes
Net loss before taxes and non-controlling interest for the nine months ended
September 30, 2021 is $11,351 compared to $22,446 for the similar period ended
2020, an improvement of $19,073. due the reasons explained above.
Non-GAAP Financial and Performance Measures
In addition to providing financial measurements based on GAAP, the Company
provides additional financial metrics that are not prepared in accordance with
GAAP. Management uses non-GAAP financial measures, in addition to GAAP financial
measures, to understand and compare operating results across accounting periods,
for financial and operational decision making, for planning and forecasting
purposes and to evaluate the Company's financial performance. The Company
utilizes the non-GAAP financial measurement of Adjusted EBITDA, which management
believes reflects the Company's ongoing business in a manner that allows for
meaningful comparisons and analysis of trends in the business, as it facilitates
comparing financial results across accounting periods. Management also believes
that this non-GAAP financial measure enables investors to evaluate the Company's
operating results and future prospects in the same manner as management. This
non-GAAP financial measure may also exclude expenses and gains that may be
unusual in nature, infrequent or not reflective of the Company's ongoing
operating results. As there are no standardized methods of calculating these
non-GAAP measures, the Company's methods may differ from those used by others,
and accordingly, the use of this measurement may not be directly comparable to
similarly titled measures used by others. Accordingly, non-GAAP measures are
intended to provide additional information and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with GAAP.
Adjusted EBITDA
Adjusted EBITDA is defined by the Company as earnings before interest, taxes,
depreciation and amortization, share-based compensation expense, other non-cash
expenses, and one-time charges related to acquisition costs, financing related
costs, extraordinary
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pre-opening expenses and non-recurring expenses. 4Front considers these measures
to be an important indicator of the financial strength and performance of its
business. The following table reconciles Pro Forma Adjusted EBITDA to its
closest GAAP measure.
Nine Months Ended September 30,
2021 2020
Net Loss from Continuing Operations (GAAP) $ (21,896 ) $ (27,873 )
Interest income (13 ) (71 )
Interest expense 7,894 11,691
Amortization of loan discount upon conversion of debt
to equity
2,915 -
Income tax expense 10,545 5,427
Depreciation and amortization 3,667 7,148
Accretion - (274 )
Equity based compensation 7,978 3,792
Change in value of derivative liability (502 ) -
Non-cash lease expense 2,203 -
Loss on lease termination 1,210 1,210
Commerce facility pre-opening expense 2,035 -
Legal settlements and other fair value adjustements - (2,209 )
Acquisition, transaction, and other one-time costs 4,854 1,974
Adjusted EBITDA (Non-GAAP) $ 20,891 $ 815
Liquidity and Capital Resources
As of September 30, 2021 and December 31, 2020, the Company had total current
liabilities of $45,923 and $37,784, respectively and current assets of $43,267
and $44,736, respectively to meet its current obligations. As of September 30,
2021, the Company's working capital is $(6,697), a $13,649 decrease as compared
to December 31, 2020, driven primarily by construction costs to complete the
Commerce facility.
Specific factors affecting the Company's liquidity are:
• A loan due to LI Lending, LLC (see Note 11 of the Financial Statements
entitled Related Party Transactions) with a balance of $47,588 at September
30, 2021 is due in May 2024.
The Company is generating cash from retail sales and the opening of the Commerce
facility is expected to generate additional cash to meet the needs of the
Company. The Company may raise capital through equity offerings or the issuance
of convertible debt to meet future capital requirements.
Cash Flows
Cash Flow from Operating Activities
Net cash provided in continued operating activities is $3,968 for the nine
months ended September 30, 2021, an increase of $3,146 as compared to the nine
months ended September 30, 2020. The increase is due to higher sales at the
Company's dispensaries, corporate cost reductions, and improved sell-through in
vertically-integrated locations.
Cash Flow from Investing Activities
Net cash used in continued investing activities is $(12,745) for the nine months
ended September 30, 2021, an increase of $1,742 as compared to the nine months
ended September 30, 2020. The increase is primarily due to additional purchases
of property and equipment during the nine months ended September 30, 2021, as
compared to the same period in the prior year.
Cash Flow from Financing Activities
Net cash used by financing activities is $1,678 for the nine months ended
September 30, 2021, a decrease of $657 as compared to the nine months ended
September 30, 2020. The decrease is primarily attributed to decreases in equity
issuance in the period as compared to the same period in the prior year.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity or
capital expenditures or capital resources that is material to an investor in our
securities.
Critical Accounting Policies
We review new accounting standards as issued. Although some of these accounting
standards issued or effective after the end of our previous fiscal year may be
applicable to the Company, we have not identified any standards that we believe
merit further discussion. We do not expect the adoption of any recently issued
accounting pronouncements to have a significant impact on our financial
position, results of operations, or cash flows.
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