GLASF - 4Front Ventures: Cash Flow Break-Even Probably Only KPI That Matters

2023-05-22 11:30:00 ET

Summary

• 4Front Ventures' Brandon Mills discusses how they're making it work in an incredibly challenging environment.
• Multitude of headwinds hitting cannabis industry.
• Cash flow breakeven probably the only KPI that matters.
• Illinois growth opportunity.

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4Front Ventures ( FFNTF ) Executive Vice President Brandon Mills joins us to discuss how they're making it work in an incredibly challenging environment. In California, not being even partially vertically integrated was a tough business model to sustain (5:00). Multitude of headwinds (11:40); cultivation, gross margins and Glass House ( GLASF ) (15:00), Illinois growth opportunity (22:00); balancing debt, growth and profitability (31:00).

Transcript

Rena Sherbill: Brandon, welcome to The Cannabis Investing Podcast. Super happy to have you on, been talking 4Front ( FFNTF ) for a while without actually talking to anybody from 4Front. So, thanks for making the time and coming on.

Brandon Mills: Well, let's change that. We're always happy to talk. Thanks so much for having us and looking forward to exploring whatever you want to cover today.

RS: Awesome. We are literally changing that as we speak. Happy to be making the change. 4Front, we've been focused on California cannabis for a little bit. And also, some analysts are focused on the non-top MSO players, and 4Front I would say in almost every conversation that we've had on the podcast, the 4Front has come up as a name to watch for investors.

So with that out of the way, share with us how you got into cannabis or not out of the way, but with that as a background, how you got into cannabis, and why you found – how you found yourself at 4Front specifically?

BM: Yeah, sure. Happy to and thanks for the question. So I joined the cannabis industry in 2016, as a sort of Co-Founder, founding team member of a brand called Island. And Island was a brand that was born in Los Angeles, California. We were a small private single state operator in California, launched our first products in late 2015, early 2016. And then, rode the roller coaster ride that was California over the next five-ish years before we came to be part of the 4Front family.

And so, within that state, we were really focused on the lane of kind of CPG. So we were manufacturers, making branded products, including packaged flower, pre-roll, vape on several hardware formats. And then also through that journey realized that being -- only playing in one lane of the supply chain in California and not being vertically integrated, or even partially vertically integrated was a business model that was going to be really tough to sustain over time.

And so ultimately, when looking at whether or not we should own retail, or go downstream into cultivation, we decided that cultivation was something that we were particularly interested in, and we thought would be a valuable part of the DNA of our platform. And so, we ended up getting into the cultivation game in California as well.

So we were doing cultivation, manufacturing, and then distribution, both some self distro and some partnership distro. And we did that for a number of years, a number of very difficult years, especially given everything that happened sort of -- in Q4 of 2019, we had the vape crisis. And in Q2 of 2020, we had COVID. There were just a number of these major macro swings that affected everyone's lives. And being a small private operator with limited access to capital, we were in the weakest position that we could possibly be in, in the State of California.

And so sort of toward the end of ‘22 -- sorry, beginning of ‘22, we started to look at if we're going to survive and thrive and be able to scale this brand and this vision that we have for our products beyond California or even sustain it within California, we needed to be part of something bigger and more stable that ultimately would have access to capital and allow us to live to fight another day.

And so, through that journey, we explored some M&A opportunities, both merging with equal sized companies in California, equal sized and smaller companies in other markets, and then also talking to the MSOs about whether or not Island might be a good fit for their portfolio.

And through that journey and through shared Board membership, we met the guys at 4Front. And 4Front just felt very different. The conversation was very different than some of the other bigger MSOs that we were meeting with. And very specifically, one thing that Island's Founder and CEO, Ray and I were attracted to was that 4Front was built by operators. And it wasn't -- the executive team wasn't stacked with ex-finance execs. It was real cannabis, real CPG.

And these were guys and gals that had built and competed in markets that were incredibly competitive and a lot more mature than California, and were winning. And so, we were really impressed by despite them being at the smaller end of the top 15-ish MSOs that we were talking to, we felt like what the hypothesis that they had, the business model that they had was interesting and that we could add value to it. And so we joined the 4Front family in April of 2022, so about a year ago.

And we've taken -- we've been -- Ray and I and the team that came over have been playing a bunch of different roles within the company. We've -- number one, we've taken the Island brand and the products that we've built in California and begun to extend those to other markets, including Massachusetts now, Illinois and soon to be Washington. So that's been kind of a dream come true to be able to take the thing that you built and believed in so much, and bring it to a few other markets. And then we've been playing larger operational roles within 4Front running different territory.

So Ray has kind of taken on leadership in California. I've taken on leadership in Illinois and Massachusetts; and our CEO, Leo, still largely has a large day to day involvement in the operations in Washington.

RS: I know that 4Front had a strong presence in Washington. That was originally kind of what they were known for. How do you think about strategizing the states? And the difficulty behind California in particular, and kind of utilizing the brand presence in Washington, is that able -- are you able to leverage that to other states? Can you talk to me about how you're looking at things?

BM: Yeah, definitely. First of all, I'll say, I still think we're very early in the brand game. That being said, I think that some of the brands that were built in Washington that have become the core brands within that market are performing extremely well in California, and Massachusetts, and Illinois.

And I believe that has something to do with the brand's recognition and presence. It also has a lot to do with the fact that we've got sort of a lot of data behind the products and SKUs and flavorings that we've launched in various edible and vape products, specifically, because those are the ones that transcend state borders most easily and most consistently. And so yeah, we're seeing success in the kernels of what worked in Washington and in other markets now and believe that's a core part of the strategy.

California, as you alluded to, is its own -- its own beast. Every market's its own beast, right, where we have a constant set of rotating challenges that we deal with. But I think what was really unique and interesting about 4Front is that the core of the platform that they've built and the vision that they have is applicable to each market in its own unique way.

It's kind of you take the least common denominator that works everywhere and begin there and then you layer on the things that you need to compete in each market. California, because it's hyper fragmented, incredibly competitive actually feels a lot more like Washington to me than does Illinois or Massachusetts.

And California and Washington are the two states where we don't own retail. So we're a wholesaler - manufacturer, wholesaler and cultivator in those markets. And so there's probably actually more of the Washington playbook that is applicable and working in various ways in California right now that I would argue even the other two markets.

RS: And what would you say to kind of investors that are frustrated with the progress being made or that are concerned about what's happening with wholesale prices and how that affects strategizing? How do you address the concerns that are happening in the market? Well, how do you speak to the investing community about that?

BM: It's a difficult conversation. We've all been -- we're all sort of faced with a lot of the same macro headwinds, right? There's just -- there's a lack of institutional capital. There's a lack of volume trading in all of our stocks. There is an incredibly onerous tax rate. There's the fact that we have to replicate our infrastructure state by state. There are just – there are so many headwinds facing all of us right now.

I think what we're focused on and what we believe will enable us to compete to win in the long-term is that cannabis is maturing into what looks like a large-scale CPG industry within each of these markets. And what we know works in CPG, or what we know is table stakes in CPG, is being able to produce an incredibly high-quality product consistently at a price that is competitive or below your competition.

And without the infrastructure to be able to be a low-cost producer and a high-quality producer at scale, I feel like a lot of companies are fundamentally just competing with a – with one hand tied behind their back. And we're benefiting from that fact in that even in these incredibly competitive markets, like California and Massachusetts are two great examples where we've seen a lot of price compression, a lot of headwinds. 4Front is still operating with healthy gross margins in those markets because of the fact that we have incredibly low-cost inputs, high-quality flower and a manufacturing platform that allows us to produce these products for less cost than most of our competition.

So California is one that's particularly polarizing. We've seen a number of MSOs that have either pulled out or partially pulled out or announced that they're planning to pull out of California. And we understand why it is very, very competitive, it's very expensive to compete here and the road out and the path to something more stable is unknown, and maybe possibly, and it may take a long time to get there.

What we have in California, I would argue, is probably a little bit more competitive than what some of those guys that are leaving this market had in terms of their brand portfolio, their manufacturing capabilities and their cultivation footprint. And so, I think 4Front is uniquely positioned to actually take advantage of the fact that some of the bigger players were exiting. We look at that as an opportunity to go grab that market share at a time when it seems like a contrarian bet.

And the reason that we don't feel that it's a contrarian bet for us at this moment in time is because we have a clear path to cash flow breakeven in this market. And so as long as we're not bleeding, we've got great infrastructure. We're putting up organic month-over-month growth, and we're growing in market share.

And so, we believe that we have an opportunity here to fight for the long-term win in California, which as everyone understands is a huge TAM. And that this is likely the place where a lot of great brands and great products and great innovation on the R&D side will be born and then exported to other markets. And so that's part of our story and our platform.

RS: I think also something that investors or observers of the market can point to, that speaks to your point about having a more unique business model in California, is that relationship between cultivation and retail, and that really saves a lot of the headache of the capital costs of getting into stores, getting on shelves. And I imagine that that's a huge boon for 4Front in California specifically. Can you speak to the competition?

Another company in California that seems to kind of be planning for the next iteration of growth in California would be Glass House ( GLASF ), another company that we talk a lot about on the podcast. Would you see Glass House as being your main competition? A lot of California operators have talked about the illicit market being their main competition. How are you looking at the development of things that way?

BM: Yes. So Glass House is an incredible company. We know Graham [Farrar] really well. We're on friendly terms with those guys, and always looking at opportunities to work together with Glass House where you can, because there's such a sort of a force and have such an incredible footprint, it would be silly to not look for an opportunity to be a partner with them rather than compete head-to-head.

I think we have some unique products in our portfolio that they don't have. So there's not as much overlap as it might seem. But we definitely think Glass House is an incredible company and has an incredible leadership team and is thinking about things the right way in terms of how to compete to win long-term both in California and potentially beyond.

I guess one thing that we've learned having been California operators, so 4Front entered California really in 2021, 2022, when our commerce facility launched, and we brought some of the brands and products to market that were – that exist in Washington. But Island and Ray and I and the team that joined had been here for six years before that. And so, we're very familiar with some of the challenges that we've seen in terms of the supply chain tightening, the prices fluctuating wildly year-over-year. And so one area that we made an investment in that's similar to what Glass House has, is in low-cost cultivation.

And for us, that meant both some outdoor, but a lot of Greenhouse and Hoop House cultivation, where we can get our cost of production down to a point where we're fairly insulated from what happens around us. And so are one of the challenges that we met and that we're excited to feel pretty stable on right now is that the infrastructure that we have, the cost structure that we have on the cultivation and manufacturing side are low enough that we really don't have to have any dependencies there. And anywhere you can eliminate dependencies in California is probably a long-term win for you.

And so, we're feeling pretty good that regardless of where prices go, and they're going in the right direction right now in California, which is great, but regardless of where they go, we still have a gross margin profile in California that's defensible.

RS: Can you also talk about the cultivation site in terms of how you're growing the cannabis and in terms of the sustainability side of things and the business model around the actual growing like how you're choosing to grow?

BM: So, the cultivation side of our business was built to support the Island brand, which is positioned as sort of a middle to upper middle tier in terms of quality. It was never intended to compete against the incredible indoor growers that exist in California, like the Connected’s or the Alien Labs. It also wasn't intended to compete with the lowest cost producers in California that are largely driven off of outdoor and auto flower like the old parts of the world.

So we were kind of a middle-market brand. And so, our cultivation was built to support that high-quality, low cost, middle market quality cannabis. And so, we have two farms right now in California. We're always optimizing this footprint based on the company's needs. But they're based in central California and Santa Cruz and Monterey. We use a modified hoop house structure, which is a fancy way of saying that we're growing outdoors. But we're also taking advantage of light deprivation, which allows us to get more than one cultivation turn per year.

And it also provides us with some insulation from the elements like rain, which have been a real problem lately for those that are growing kind of naked outdoor. So the result of that is we get three turns of our cultivation footprint per year where we're growing with those hoops, we get more like four to five, even sometimes over five turns on our green, our full green rigid structure greenhouse cultivation. And I think our footprint is about is a top 20 footprint in terms of the overall square footage that we're cultivating in the state.

So fairly large scale, especially our hoop house production is it's one of the larger contiguous farms in California. So, it's a real, it's got real scale.

RS: It definitely seems that that's, I would say the growing of the future is, was there ever a thought to do it a different way?

BM: Well, historically, the largest price fluctuations happen during that crop over timeframe where most of the large outdoor producers harvest all at once. And so, we wanted to be insulated from the fact that your harvest is coming down and you're instantly competing with most of California in terms of the square footage. And so, greenhouse production or hoop house production definitely solved that for us and allowed us to spread out the harvest over the course of the year.

So that at least for one or two of the flips of the farm, you're selling into a time where the market is drier and prices are typically higher. And so, it was – it just kind of smoothed out the fluctuations in our supply chain availability. And it allowed us to not have to go in and purchase from the open market because we've been -- like many have been bitten, when you have to go buy in June or July and prices are double what they were at the beginning of the year.

And you can't - as you know, you can't store flour forever, especially if you're used and packaged flour or pre-roll products. So, it just makes more sense to control your supply chain and to spread it out to the extent that you can. That being said the cost structure of grown indoor was - isn't always defensible and it's most defensible when you have a great brand. And so we just didn't feel like the way that we had positioned the Island brand historically was well suited to the cost structure of growing indoor. Obviously, there are lots of other successful in that area and Connected and Alien Lab are a great example of that.

RS: Are there other areas that you're looking to get into at this point, or are the states that you're in now are those the main states that you're focused on?

BM: I'd say those are our focus with one exception. Illinois is a state that we're still -- although we've been there for a while, it's a state that we have a lot of growth opportunity ahead in. So, Washington State has - is fairly mature and has been pretty stable for us. California, as I mentioned, we're in growth mode. But it's metered growth within a market where there's just a lot going on. And we fully expect it to take a while to consolidate and mature and for those -- for the opportunity to emerge as a winner to actually be here.

So we're patiently awaiting that opportunity and believe that we're armed with the right infrastructure to go compete for it. In Massachusetts, same thing, it's a fairly mature market where we have a three-store retail footprint, which is the cap and mass. And we've got kind of a robust wholesale channel and fairly mature infrastructure there so there's not a lot we can do to grow that market.

Illinois is the outlier in the portfolio in that, we have two out of a potential 10 stores. There's an additional eight retail locations we can bring online. And then today, we have a relatively small 9,000 square foot canopy grow at Elk Grove Village, Illinois, and we've been two years into construction, which I'm incredibly happy and proud to be able to share is construction complete this month, April, on a facility in Madison, Illinois, which is over 200,000 square feet that brings our cultivation canopy to from 9,000 to over 40,000 square feet in Phase one, and our manufacturing capacity up to 70,000 square feet in Phase one.

So it’s – it will be the largest facility in 4Front's portfolio of a bigger, better version of what we built in California, which is today, I believe the largest cannabis manufacturing facility in North America, potentially the world.

And so, the infrastructure that we have between our Madison facility and eight additional retail stores that we're working hard to acquire licenses, acquire retail stores and bring online means that we have significant growth ahead in Illinois. And so, in a world where access to capital is limited, and you've got to kind of look for the highest ROI place to put your time and effort. Illinois is a state that we will be investing in very heavily over the next 18 to 24 months and expect to see significant results from.

RS: Can you expand on the Illinois market a little bit? I'd be interested to hear your thoughts because there's different talk about the Illinois market that some things have worked well. Other things haven't. There's been some encroachment from Missouri going online. How're -- can you kind of unpack how you see the Illinois market developing?

BM: Yeah. So I think Illinois, there's 120 stores that are online today out of 110 that were the original licenses, and then a handful of the next tranche of 185 social equity licenses that have actually been tilted up most in kind of the downtown Chicago area. Most of the larger MSOs have either 10 or eight or six stores already up. So kind of the majority of the retail licenses in Illinois that are up and running today are owned and operated by one of the larger MSOs. And so, they're fairly efficient.

And the brand portfolios and products that are here are well-known and high quality and it is competitive. The one thing I will say about Illinois is it's been -- I think the state was a little more intelligent than some other markets about their licensing path. And so, there's more of a supply and demand balance in Illinois than there is, as an example, in Massachusetts or California right now within our portfolio.

And so, prices have been more stable here than they have been in other markets. Gross margins have been healthier. And that's been fantastic and something that we're excited to continue to reap the benefit of. I will say that the one thing that is going to be a challenge for the state is that a lot of the bigger MSOs, ourselves included, have built infrastructure to support much larger cultivation footprints than we have online today.

And we did that in anticipation of retail growth. And right now, for a state of the size of Illinois to have only 120 retail stores online is under supplied on the retail side. And the challenge is that of the 185 social equity licenses that were granted last year, only a few of them have come online. And I believe that's a direct result of the fact that there's just no capital out there to help fund the small businesses tilting up their single store locations.

And so, it's taking longer to bring retail online. And that's probably one of the bigger challenges that we face, as an industry is just ensuring that we don't over cultivate and tank prices in anticipation of retail coming online. That's just going to take us a little bit longer than we expected it to.

We also have border competition. The Missouri thing is a great observation. And I think there are those of us that have exposure to it and those of us that don't. 4Front is - has been fortunate so far, in that our Calumet City store, which is a border location is on a border that is performing well for us because we've got people coming across the border to our store.

And so, in our portfolio, our Calumet store is outperforming our Chicago store by over 50% right now. And so we feel good about that location, long, long-term, I think border stores you need to understand and meter your exposure to those, or just understand what the implications are over time because things change fairly quickly.

RS: Well, I was going to ask another question first, but this is another question I wanted to ask. And I think this speaks to what you were just saying and how, and especially as a brand guy from California, what are the points of emphasis? I know the obvious ones and the people that the things that most everybody points to, but in a saturated market with so many brands, with so much cannabis coming online, with more states coming online, how do you stand out as a retail option? What is the focus there?

BM: So our retail team has done an incredible job in Massachusetts and Illinois at curating like a really, really personalized program for our patients and customers. It includes all kinds of local involvement from community events to hosting events at our sites. It's not just come here to buy cannabis. It's not a shop. It's not purely a transactional shopping experience. It's more of a community experience.

And there's a lot of time and effort and staff and investment that goes into, like fostering that community. And I think they've done an incredible job. There are loyalty programs, there are food trucks, there are painting classes, things that are not even cannabis-related that we do at some of our mission retail stores that bring our patients and customers together and we've got -- you stand in line at one of our mission stores for half an hour and you realize that a lot of these folks know each other. They are friends, they are colleagues. They are people that recognize one another from the community, because there are literally thousands of them visiting some of our stores every day.

And so, I think what we've done that's unique, that isn't necessarily sexy or flashy, it's not an Apple store. It didn't require tens of millions of dollars to produce. It's a bottoms-up approach to building a real community and engaging them and rewarding them with things outside of the shopping experience to partake in.

And I think it probably sounds a little cheesy, but it really is like it's a family. The fact that you feel when you walk into our stores. It was unique to me when I joined the company and first went out to the stores to see so many of our employees conversing with customers, providing advice, laughing, smiling. It was a cool experience versus -- and not to throw anyone under the bus. But like walking into a MedMen ( MMNFF ) store in California where it's sterile and quiet. And there's no one there to help you and you're interfacing with an iPad, and it's this very different experience. And so, I think that's what has stood apart for our mission stores.

RS: Debra Borchardt from Green Market Report, I read this morning quoted a Brightfield data point that hashtag cannabis community was the most searched cannabis term in the past month or something. And so yeah, I think that speaks to that a little bit.

BM: Yeah, very cool.

RS: Yeah. The other thing that I wanted to ask was, speaking to the fact that it's so hard to survive in this environment and speaking to the capital crunch, and you were saying that it's hard for a big business to survive in California. Forget about a small business surviving. How are you at 4Front thinking about the capital crunch that isn't over yet, that you still need to be thinking about, at least this year for sure?

And speaking to the stance between the price of cannabis and supply and demand and navigating that balance and navigating, taking on more debt to fuel growth, but also needing to focus on profitability, I know I'm kind of throwing in a lot of points. But the balance between surviving and then advancing, how are you thinking about that? And how are you constructively strategizing around that?

BM: It’s a great question. There's a lot there. Let me try to unpack some of it. So I think, number one, we have to take it market by market. Every market is like a unique business all in and of itself. It has its own unique competitive landscape, its unique challenges. And so we kind of have a unique strategy for California that's different from what we're doing in Massachusetts, is different from what we're about to do in Illinois.

And so, in California, it's very much -- actually in California, Washington and Massachusetts, we've taken an incredible - incredibly deep dive as an executive team and spent literally dozens if not hundreds of hours over the past few months, opened the path to profitability, because we fully understand that cash flow breakeven is probably the only KPI that matters and going concern is the number one question in every investor's eyes right now. And so, we're addressing that and we feel confident that we're on the right track.

In Illinois, we have a growth opportunity ahead of us. And so, we're looking at how do you allocate capital intelligently to a market where there's so much low-hanging fruit for growth and profitability while being mindful of the fact that there doesn't seem to be a macro lifeline for the entire company, and so you've got to be very metered about the cash that you have and be a good steward of capital.

And so, it's that delicate balance that we work on constantly. And we reexamine things every single week. And we've got an entire all-day executive meeting this Thursday to go through it as a team. And we do that very, very regularly and with a fine-tooth comb.

So I guess, yeah, the number one thing that we announced at our last earnings announcement a few weeks ago that we reach operational cash flow breakeven in March. And so we're very proud of that achievement. It took a lot of hard work. It took cuts, it took belt tightening, it took every ounce of every one of our team members across the nation to get to that point. And so, we're focused on not reverting back, not losing any of the progress, not giving up any of the progress or traction that we've made.

RS: Is there any talk of guiding towards when you think you'll be cash flow positive? Or is that premature at this point?

BM: I think it's premature at this point. But I think the way that we've framed it and announced was operational cash flow breakeven in March. And so really, that's outside of any CapEx that we choose to spend. And right now, I think the only real CapEx spending we have is in Illinois. So it's all being put to a good place and it's at our discretion and within our control.

RS: The other thing is that people have been talking about is the use of sale leaseback as a measure of debt. And I know that 4Front has used that in the past. Are there talks about different ways of dealing with debt at this point in the market cycle?

BM: Yeah. We've -- so most of 4Front’s debt is very friendly related party debt. And we're constantly working with those lenders to identify opportunities to update terms or push things out or refinance things or all the friendly ways we can to extend things and give ourselves more runway without incurring overly burdensome cost of capital.

I feel confident in our strategy with our current debt providers and we’re - 4Front debt is not sitting on a lot of like free and clear owned assets, where we can go do more sale leaseback-type activity. So we're sort of we are where we are right now.

RS: Would you say -- something that I've noticed is one of the great strengths of a successful cannabis company is the ability to raise capital. Would you say that's mostly to do with relationships and kind of who the lenders are? Would you say that that's one of the keys to being successful, and in having enough capital in the industry?

BM: It's 100% a relationship-driven competency. And it's a hard thing to come by, as everyone's very aware right now. And I'd say that those that have made announcements recently, where they've been able to raise capital, both equity and debt at reasonable terms, they should be really proud of it, and it reflects really highly on them.

So we see those things as a sign of investor confidence and, and we're actively working on all of those same types of activities here at 4Front and excited to announce when we have something to announce.

RS: The other thing that it has been talked a bit about on the podcast recently and I was interested to hear your thoughts is, there's a lot of talk about when 280E is taken off the books that will be a real boon to the bottom line for cannabis companies. And then we had Jerry Derevyanny talking about how if 280E gets - or when it gets taken away, it will just be replaced with a different tax. Do you have thoughts on the regulatory picture and surviving the different iterations that are to come or how you think that's going to look?

BM: Honestly, I think the place where we're coming from today is that we believe we have a business model that can survive, given in today's ultra onerous tax structure. And so as long as the things don't get worse from here, where we feel like we're well-positioned. And so in my personal opinion, do I think that 280E will just be replaced by a different tax? I don't think so.

I think that 280E would be removed as part of a larger tax reformation initiative. And so, things would be looked at holistically and I like to believe that we'd have an opportunity to look at the long-term sustainable tax structure across all of these different markets and come to something that will work long-term. And so yeah, I'm excited for that opportunity and believe that 280E going away will be ultimately a macro benefit to all of us involved.

RS: Do you spend time or does the executive team spend time, or how much time do you spend thinking about the regulatory or the federal picture? Or are you focused more on the steps you have in front of you?

BM: We do spend time on it. We spend time with lobbyists. We spend time with attorneys. We spend time in our markets with local -- at the local level. But ultimately, we've been at least as of late, we've been pretty laser focused on ensuring that we can survive without any external macro tailwinds. And so we're assuming that 280E is here to stay for the foreseeable future. We're assuming that SAFE , it doesn't happen right around the corner. We're assuming that capital stays incredibly tight, and the cost of capital is going to be high.

And we feel confident that we can survive and perform and compete in that environment. And so, everything else is kind of gravy. And yeah, we've been mostly focused on just ensuring that we feel really comfortable with this status quo.

I honestly think that's all you can do, right? I mean, we’re…

RS: I was going to say…

BM: But I am holding our breath, let's put it that way. We're not waiting for a lifeline. We're not dependent on outside capital. We're focused on operational expertise and making sure that we've got within our four walls, within our own control, we can control our destiny. If we've got that we can sleep at night.

RS: Yeah, I think that's right. I think people that are banking on optionality, any which way are -- they have a lot of waiting in front of them.

BM: I think that's more of a trader mentality. And I think that's what is unique about the 4Front executive team was that they're building something for the long-term. And they've been incredibly successful competing and winning in the markets where they've been. And so yeah, we don't -- we look forward to brighter days ahead. We are not dependent upon them.

RS: So with that in mind, how do you speak to the investing community that's looking at the cannabis industry and just seeing these cratering share prices and decimated values, and how do you reassure them? Or do you reassure them? Or are you interested in the people that see it as a long timeline? And that's how you invest in it?

BM: I think you have to invest for the long-term, I think you have to be bullish on like long-term secular growth trends and you have to be confident that in this highly regulated industry that you understand the headwinds that we're all facing, that we don't control the timing on when we get access to capital when we get SAFE Banking.

But if you believe that these are fundamentally strong businesses that are capable of kicking off off cash flow, and if they were outside of the cannabis business industry, if they were manufacturing any other CPG product, or food product, or beverage or alcohol, that they would be worth a lot more than they are today, then I think this is a hell of an entry point.

And that's kind of the way I think about it. We're all collectively down 60%, 70%, 80%. As long as you believe that the company will survive, I think these are an incredible buying opportunity.

RS: Was it a – I mean, I'm sure it was an adjustment. But was it -- how -- I guess how - the better question is, how difficult was it transitioning from a private to a public company?

BM: In my past life in tech, I went from private to public back to private back to public again. So I'm kind of used to the whiplash. The good news is the team here kind of has a well-oiled machine in terms of our capabilities of reporting and internal audit, and all of those things. So it's been, I think, relatively easy.

Would I prefer to be running a private company in given these market conditions? Of course, like trying to run a public company and set expectations and give guidance in a world where you control so little of the things that affect your day-to-day life is really, really challenging, and it takes a lot of our time and effort.

That being said, I think once assuming we can get SAFE Banking at some point in the future, having access to public market equity is - will be a tool that we will benefit from and so that's just sort of the path that we're on right now.

RS: Would you care to wage a prediction about what the next year looks like? Or how you're thinking about it?

BM: I can tell you that every prediction I've made since 2016 has been wrong.

RS: You are in good company.

BM: Like I said, I mean, I'm really proud of where we are as a business and as a team at 4Front. And so for us, I think, with metered expectations in the markets that are competitive, we will continue to eat out, I believe market share gains in those markets as we see some of our competition fall off or some consolidation. And we're doing that and Massachusetts right now is a great example.

I think in California, we’ve got – we have a path ahead that we believe in. And we will continue to fight the knife fight until the macro conditions provide a better opportunity for us all to watch the California market mature into something that hopefully looks like some of the other markets.

And then in Illinois, we've got a real growth chapter ahead of us that we’re - we couldn't be more excited about. And we believe we're well equipped and can go compete for number one or two in Illinois the same way that we've already won it in Washington, in the same way that we're competing for in Massachusetts.

So for us, I think, we're really heads down right now. The rest of this - the path forward is a relatively known quantity for what we can control, and we feel confident in our strategy executing against that. And so that's where most of our effort has been, and will continue to be.

RS: In terms of an M&A focus, anything that you would want to say there, how you're thinking about that side of things, or if you are?

BM: M&A is incredibly challenging right now, primarily, because a lot of the deals you look at are fairly distressed. And if it's a company that's burning cash and/or has debt or overhangs or other hair on it, it’s really, really hard to understand how you can allocate capital to digest something like that, especially given the opportunity that we have in Illinois, that is really, really easy to wrap your head around.

Like, how quickly -- what's the payback period on these investments in retail, how much volume we can produce out of this new Matson facility and guaranteeing that we can sell through that at high margin and put-up high revenue growth. It's hard for us to justify a lot of other M&A activity.

So we've been like laser focused on just internal operations right now. I think there will be deals, I think, we're at rock bottom in a lot of ways as an industry. And I think we will see some good companies and good assets precipitate out of the next chapter. I think we will be opportunistic about looking at those, but again, largely not dependent on those and definitely not willing to do anything to risk our core strategy, which we are confident in and doesn't require M&A.

RS: I'm curious, I know that you were just at Benzinga. I'm curious if there were any takeaways from meeting with different people, or seeing the industry at large gather together. Anything that surprised you or that you think is worth sharing with our audience?

BM: It was a - I think, in the last Benzinga Capital Conference that I was at in Chicago, everyone was sort of -- the general sentiment in the room was it can't get any worse and SAFE's got to be right around the corner. And I think there were a lot of bullish predictions being tossed around at that conference about timing of certain events and legislation, et cetera.

I think a lot of people were -- had flipped completely and said, like, “Look we’re all right. We were wrong again, at a time where it was such a surety, it didn't – you say it didn't happen.” And so no one was making bold predictions about timing this time around. I think everyone's sort of resolved to the fact that we don't control this. We're all going to do our best to support it. We're all hunkering down and focusing on internal operations and it kind of is what it is.

I was also surprised that we met with some groups and capital providers that that seemed to have interest in deploying capital. But they were 5% to 10% of your meetings versus the last few conferences where 20%, 30%, 40% of the folks you talked to were actively investing or had cash reserves or had dry powder, that it's drier than it's ever been.

So I think it was an interesting time to be at a conference where everyone admits that there is no capital and yet you're out of -- you're in a building with a bunch of people that are either supposed to have it or that want it. And so, the conversations were just difficult because there's just no match, right?

RS: We've been humbled. We've definitely a lot of humility going on.

BM: Sure have. Yeah.

RS: Yeah. So yeah, it's -- how would you leave it with investors? If you feel like there's anything missing that we didn't talk about in this conversation or more points of light or more advice to how to navigate this environment as an investor?

BM: Yeah, I think ensuring that any company that you're looking at, well, I’ll use ourselves as an example, really understands their core competencies, and there's a business model that you can rationalize and you understand your margin profile and your growth levers and all of the traditional business metrics that we have, and is focusing -- pointing the firehose at the markets that are going to work in the near-term.

And I think some of the bigger challenges are, I still see a lot of people clinging on to hope where I don't necessarily believe there is hope, or I see people that are hanging on to assets in markets, where they're just not, they're not in a position to go invest in those markets and really compete. And so I think everybody collectively, if a business isn't - if it looks like it's got fat to trim, that's probably an orange flag.

If it looks like it's going to continue to sit in markets where it can't compete for a win, that's probably a red flag. And if it's -- if there's no clear path to profitability and I don't think any investors right now are funding a bridge to nowhere. So, you've either got to have a near-term path to profitability, or you've got to be looking at as a way to push your company into something bigger and more stable.

And that's where I was a few years ago when we acknowledged that being a small private company in California was just a never ending losing battle. And so we chose to try to get ahead of the curve and be a part of something bigger. And I'm glad that we did. And I think 4Front has been an incredible platform to be a part of and executive team to be a part of.

And so, we are really bullish about our opportunity. And it's a weird thing to kind of put blinders on and just say, let's put our heads down and go execute, because that's what we're great at and that's what we've done successfully in the past. I still see a lot of people chasing shiny objects, talking about partnerships and M&A stuff. And if it's non-core and it's not going to provide a near-term path to profitability, you probably shouldn't be working on it. And that's the way we're approaching it.

RS: That's some sober advice. I think very - people would do very well to heed it. Brandon, I really appreciate you coming on, and really happy that we got this conversation on the books. And thanks for sharing so much about 4Front. As I said, it's a stock that we've had many conversations about. So it's nice to get more of a deep dive from the inside. So really appreciate it.

BM: Happy too. Thank you so much for making the time. And we're - like I said, we're really proud of what we've accomplished historically. We're excited about the future ahead. I know we talk a lot of doom and gloom, or rock bottom or use other terms that just aren't super exciting. That's not the way we see the cannabis industry. That's not the way we see the opportunity in front of us. That's just the reality that we've lived through and that many of us are challenged by on a day-to-day basis. But we couldn't be more bullish and we're excited to be around for the long-term and be one of those few that get to compete for the win.

And that's what we all signed up for when we joined this industry. And I feel like many of us have kind of ridden it all the way to the bottom and we're excited to go write it back up. So, saddle up.

RS: Yeah, to quote Bob Dylan's darkest moment is right before the dawn, right? So here we are. Will you share with the audience how investors can find out more about 4Front website, what have you?

BM: Yeah, 4frontventures.com . We're also on Twitter and Instagram and you can find both our 4Front brand as well as our Mission Dispensary brand on all of the social media platforms. Thank you so much. Take care. Have a great week.

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4Front Ventures: Cash Flow Break-Even Probably Only KPI That Matters