4Front Ventures Corp. (PNK:FFNTF) Q2 2024 Earnings Call Transcript

4Front Ventures Corp. (PNK:FFNTF) Q2 2024 Earnings Call Transcript August 14, 2024

Operator: Welcome to the 4Front Ventures Second Quarter 2024 Earnings Conference Call. Today’s call is being recorded. At this time, all lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. As a reminder, during the course of this conference call, 4Front’s management may make forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These results are outlined in the Risk Factors section of the company’s filings and disclosure materials. Any forward-looking statements should be considered in light of these factors.

Please note that the Safe Harbor, any outlook presented speaks as of today and 4Front’s management does not undertake any obligation to revise any forward-looking statements in the future. Also, please note that on today’s call, we will refer to certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. 4Front Ventures consider certain non-GAAP measures to be meaningful indicators of the performance of its business in addition to, but not a substitute for our GAAP results. A reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today.

I will now turn the call over to Andrew Thut, Chief Executive Officer of 4Front Ventures. Please go ahead.

Andrew Thut: Thank you, operator and welcome everyone. Joining me on the call today are Karl Chowscano, our Consulting President; Peter Kampian, our CFO; Ray Landgraf, President of Corporate Development; and Brandon Mills, EVP of Operations. In May, we outlined clear priorities for 2024 designed to build on our strengths and address the challenges we faced in 2023. I’m very pleased to share that our team is executing well against these priorities. Throughout our markets, we’re focused on returning to growth and profitability while leveraging our product portfolio to increase market share. In Massachusetts, Illinois, and Washington, the fundamental strengths of our cultivation, production and retail operations are beginning to bear fruit.

Second quarter results were in line with expectations, with revenue holding steady at $18.7 million quarter-over-quarter. This stability was supported by growth in average basket size and a disciplined pricing strategy, which helped offset inconsistent foot traffic and increased retail competition. Our concerted efforts to strengthen wholesale strategy led to a 10% increase in wholesale revenue in Illinois and a substantial 31% increase in Massachusetts quarter-over-quarter. Additionally, our Washington licensees have returned to an all-time high performance levels, generating over $3.3 million in monthly revenue with a strong upward trend. July also marked the best wholesale performance in the past two years for both Washington and Massachusetts.

Now, let’s talk about Matson, our Tier 1 Illinois cultivation and production facility is officially open and we’re hitting the ground running. We’ve seen a robust market demand as evidenced by significant interest in both presales and long-term supply contracts for our flower inventory, reflecting high confidence in the quality and genetic appeal of our products. We are also in advanced discussions with several large strategic partners about bulk sales and private label partnerships, which will further strengthen and diversify our distribution channels. Our commitment to excellence and cultivation is clearly resonating with the market, setting the stage for continued growth and success. As of now, we have over 12,000 square feet of flowering canopy online in Matson, nearly doubling our cultivation footprint versus prior quarters in Illinois.

By the end of August, we’ll triple the size of our canopy in the state and will be at full capacity by the end of November. Our first harvest is scheduled for early September and from there, we’ll be ramping up with three additional harvests each month. Matson will significantly increase the availability of the flower and derivative products, alleviating existing supply constraints, and leading to a substantial increase in wholesale revenue, which, as I just mentioned, is already up 10% quarter-over-quarter in Illinois. This increase in supply also allows us to further enhance our retail offerings by providing customers with a diverse mix of high-quality 4Front brands and popular third-party products. In Massachusetts and Illinois, we’ve recently introduced several exciting new products and SKUs that are already making significant impact.

Crystal Clear Blast, Marmas Bar vaporizers, and Smoke Breaks pre-rolls have been launched to meet the specific demand of our customers and capitalize on opportunities in high-growth categories. These additions reflect our renewed focus on investing in product development and innovation, along with our commitment to data-driven decision-making. They also demonstrate our ability to use the mature market experience to shape our forward-looking strategy. By analyzing consumer preferences and behaviors, we can tailor our offerings to align precisely with market trends and customer desires. Additionally, we have a renewed focus on bud tender education to boost sales. By equipping our team with the latest tools and knowledge, we ensure that they can provide excellent customer service.

Investing in top-notch training and new resources allows our bud tenders to offer great advice and enhance the overall customer experience. Feedback from our loyalty programs and surveys has been crucial. These insights directly inform the knowledge and skills we equip our bud tenders with, ensuring they understand what our customers truly value and need. The 420 weekends showcase the potential and growth of our retail operations. Kicking off with promotional deals and store activations, we saw our best business days in the past six months, surpassing even Green Wednesday and Black Friday sales. Over two days, we processed over 3,400 transactions, which was the highest sales to-date this year, with increased average ticket sizes and units per transaction.

Both Massachusetts and Illinois achieved record new customer acquisitions, setting a new benchmark for sales volume and customer transactions. This success underscores the effectiveness of our promotional efforts and the upward trajectory of our retail brand. As part of our continuous efforts to strengthen the Mission retail brand, and better serve our customers we have introduced a revamped website and e-commerce experience across our markets this month. Additionally, we have engaged a leading international brand and digital marketing firm to elevate our brand presence and drive customer engagement. This collaboration will help us refine our marketing strategies, create compelling content, and execute targeted campaigns that resonate with our diverse customer base.

By leveraging their expertise, we aim to increase brand awareness, foster deeper customer loyalty, and ultimately, drive growth across all our retail locations. As we move forward, we will continue to prioritize innovation and consumer insights, ensuring that every product we bring to market is aligned with the wants and needs of our customers. We’ve also been supercharging our team by bringing in top talent and key hires throughout Q2, especially at our Matson facility in Illinois. Our success is all about the quality and dedication of our team. In the past few months, we’ve carefully chosen individuals who bring a wealth of experience and expertise, all while aligning with our core values and future vision. We’re excited that more experts will be joining us in August and September to drive our growth and keep us at the forefront of cultivation and manufacturing.

Their insights and innovative techniques are already making our growing cycles more efficient and productive, boosting our yields, and fostering a high-performing culture. It’s all about having the right people in the right places. This quarter, we successfully opened our new Norridge store in Illinois. The location has been positively received and is showing consistent week-over-week customer traffic growth and growth in average basket size. Since the official ribbon cutting in June, sales have increased by 10% to 18% week-over-week and we expect to hit operational breakeven by Q4, after which that store location will become a net contributor of cash on a monthly basis. Strategically positioned in a high-traffic area with a large addressable market and attractive demographics, the Norridge store benefits from ample parking and strong co-tenancy with other popular retail stores.

As part of our ongoing expansion efforts, we’re also exploring opportunities to add more dispensaries in Illinois. We’re focusing on high potential locations that align with our growth strategy and market demand to further enhance our presence in the state. Now that, that foundation is largely built, and we’re starting to see results, our focus has shifted back to driving cash flow and preparing for disciplined growth ahead. We are committed to finding ways to achieve the same results with less spending always with an unwavering focus on our customers. On the political front, like everyone else, we don’t have a crystal ball, but we remain optimistic about future Federal development. The potential reclassification of cannabis to a Schedule III substance under the Controlled Substances Act represents a significant opportunity for the industry.

We are encouraged by the prospects and the apparent support from both presidential candidates for Federal movement. This change could streamline regulations, improve tax benefits and enhance banking access. In the meantime, we are concentrating on what we can control, running excellent operations and staying focused on generating strong cash flow. From a macro standpoint, the landscape is filled with promising opportunities and potential developments. We are excited about the future and are committed to navigating these opportunities with precision and confidence. As we progress through 2024, I couldn’t be more enthusiastic about the incredible journey we’re on at 4Front. This year is all about transformation and growth. We’re advancing operationally, strategically, and culturally, and the data supports this.

Our focus remains sharply on operational excellence and delivering topnotch products at great prices. What truly excites me is how we’re connecting with consumers and introducing thoughtful, innovative and consumer-centric product that cater to evolving preferences. For new vape lines and pre-rolls to popular strains and edibles, along with new lab capabilities coming online this year, we’re committed to offering a diverse range of options to meet our customers’ unique needs. This quarter, we’ve also made significant strides in executing our near-term focus on driving and growing the wholesale business. We’re seeing strong results from these efforts, reinforcing our commitment to expanding our reach and impact. With that, I will now pass the call over to Brandon to discuss trends in our performance in our key markets.

Brandon?

Brandon Mills: Thanks Andrew. I’ll now dive deep into a comprehensive overview of our performance across all states. First up, the growth engine that is becoming the center of gravity here at 4Front, Illinois. According to BDS and Illinois state data, the Illinois market grew by just over 4% from Q1 to Q2. Flower pricing remained nearly flat quarter-over-quarter despite a nearly 11% decline compared to the previous year. Overall, we are pleased with the supply and demand stabilization and are not aware of any significant new supply coming online. This bodes well for our Matson facility, which launched in a supply-constrained environment with healthy market dynamics. In short, Illinois needs biomass and we are bringing it online at the perfect time.

Our retail revenue saw a decline of just over 10% at our Calumet City location and a smaller decrease of 6% at our South Chicago location. This decline was primarily due to increased competition and inconsistent in-store traffic, similar to what many of our MSO peers are reporting this quarter. Despite this challenge, our average basket size remained consistent in Calumet City, and increased by 2.5% in South Chicago, indicating healthy consumer spending behavior despite persistent macro inflationary pressure. On top of this, our use of discounting decreased by over 10% in both locations as our flower quality and overall assortment continue to improve. In terms of our wholesale traction in Illinois, we had another strong quarter despite ongoing supply constraints.

We sold into 148 third-party retail doors out of approximately 210 in the states, achieving nearly 75% market penetration. Revenue increased by over 10% rising from $1.87 million in Q1 to $2.1 million in Q2. This growth was driven by several factors, including the introduction of new in-demand genetics such as blueberry cookies, new product launches like Crystal Clear Blast, and more of our products being available on our wholesale menu as we continue to diversify and strengthen our assortment of third-party brands in our Mission retail doors. As Andrew noted, in Q2, we started introducing our new capabilities at Matson to the market and the reception has been very positive so far. This includes advanced discussions around repurchase agreements, long-term supply contracts, private label capabilities, and other strategic partnerships that we could never support with our limited toolkit at our outgrow facility.

We look forward to sharing more about these partnerships and developments as we are able. Our product launches in both Massachusetts and Illinois are demonstrating our renewed investment in product development and are beginning to bear fruit. Crystal Clear Blast with its innovative design and high-quality formulations, has garnered significant attention and positive feedback. The Marmas Bar, our vape pen featuring bold fruit flavors and effects-based minor cannabinoid formulations was warmly received in both Massachusetts and Illinois. And our flagship flower brand Mission has been a clear best seller across all of our locations. Following this, we successfully introduced Smoke Breaks, a convenient five-pack of pre-rolls to both retail and wholesale markets on August 7th.

The initial feedback has been excellent, and we anticipate strong sales of this product format at 0.35 gram mini pre-rolls now represent nearly 10% of pre-roll pack sales across Illinois and Massachusetts and will allow us to reach a previously unserved consumer segment. The last point I want to mention regarding our product development roadmap in Illinois is our excitement about bringing our extraction lab online in Matson and entering new innovative product categories. We will soon have a full suite of ethanol, butane, and hydrocarbon capabilities, enabling us to produce not only high-quality distillate for our existing baked and infused pre-roll lines, but also expand into THCA isolates, diamond, cured resin, live resin, and HTE. Later this year, we will also introduce solventless formulations and products, including Raven [ph] These capabilities will allow 4Front to launch high-quality in-demand products across vape, infused pre-rolls and packaged concentrates, leveraging our proven leading brands from Massachusetts and Washington.

In terms of cultivation, as Andrew mentioned, we’re now on a path to a significant scale up in the state. We currently have 12,000 square feet online, which will increase by 50% to 18,000 square feet by the end of the month. We will reach 35,000 square feet of canopy by the end of November. Our first harvest at Matson is scheduled for September 7th, followed by three additional harvests each month, seven in September, nine in October, 12 in November, and stabilizing at 15 per month in December. By the end of the year, we expect to be producing around 3,000 pounds of dried and cured biomass and over 2,000 pounds of sellable flower per month with potential for further increases as we continue to improve yields and drive failure rates even lower.

This scale unlocks incredible opportunities for 4Front-branded wholesale in an Illinois market with limited cultivation coming online and more dispensaries coming online monthly. We look forward to scaling our branded market share in Illinois as we expand into our full capacity in Q4. As highlighted by Andrew, 4Front has partnered with a leading marketing agency with extensive experience in cannabis and CPG. This agency will help us boost brand recognition and improve customer communication across our entire portfolio. Their targeted campaigns are already enhancing customer engagement and loyalty. Our primary goal is to raise brand awareness across all of our brands and products as we build on our existing wholesale market presence ensuring that our portfolio stands out and drives growth in both retail and wholesale channels.

Now, transitioning to Massachusetts. The market experienced a growth of just over 3% from Q1 to Q2 according to BDS. Flower pricing remained relatively stable, showing a slight decline of just over 3% from period-to-period and settling at $5.24 per gram in adult-use retail. Our retail performance in Massachusetts faced challenges like those in Illinois, mainly due to price compression and increased competition at our Brookline store. This heightened competition led to a decline in foot traffic as customers spread their visits across more available retail locations. As we enter Q3, we are now seeing stabilization at our other locations and are currently exploring all options for our Brookline store. We continue to monitor this trend weekly and are making investments in improving our product assortment, shopping experience, loyalty programs, and customer communication to more effectively compete for our customers’ share of wallet.

We believe that the upcoming improvements in our brands and products, flower quality, and genetic diversity will give 4Front more tools to compete in the latter half of this year. On a positive note, our average ticket grew by approximately 5% quarter-over-quarter across all three of our retail locations. This increase is due to a double-digit reduction in discounting across all locations and is supported by our improving assortment strategy and product quality. We expect to see these positive trends continue into Q3 and beyond as the changes in investments in our cultivation operations and leadership bear fruit. Our wholesale operations in Massachusetts have shown great growth this quarter. We achieved an impressive 31% quarter-over-quarter increase with revenue climbing from approximately $950,000 to over $1.25 million, driven by a handful of factors.

First and foremost, our strategy to diversify our product assortment and reduce reliance on 4Front brands in Mission retail has increased the number of products available for wholesale. Combined with high quality and a few new product launches, this has resulted in some of the strongest wholesale menus we’ve had in recent quarters. As our Worcester grow operations resume in Q3, which I’ll discuss further later, we anticipate continued strong quarter-over-quarter growth in our wholesale channel. In Massachusetts cultivation, we’ve made significant strides in the performance of our grow operations. While rolling out our new training, SOPs and genetics in Worcester we also addressed known deficiencies in Georgetown, bringing both facilities up to par with our state-of-the-art facility in Holliston.

These efforts have led to substantial turnaround in our flower quality, improved yields, and reduced failure rates. Following the genetic reset in Worcester, we are expecting that location to begin to contribute 350 to 400 pounds per month primarily to our wholesale menu and growth efforts, which technically kicked off on July 1st with our first harvest post reset. Among the 33 strains we’re now focused on, test results are averaging 33.5% in THC in some strains with peaks as high as 37.7% in our Banana Puddintain strain compared to average THC levels through Q1 and Q2 that range from the low to mid-20% range. In addition to the improvements in cultivation, we’re making significant strides in enhancing our processing and manufacturing operations.

This includes optimizing our dry and cure processes, handling SOPs, trimming and storage to maximize aesthetic, nose, and terpene profile of the end product. For example, both Massachusetts and Illinois have now been equipped with new automated trimming and sorting machines. These machines are already reducing labor and operating costs, while improving flower quality by minimizing run time, product agitation, and loss. We have also invested in water activity meters to precisely control conditions that prevent microbial growth and preserve weight and quality. Additionally, we are continuously refining our nutrient blends and application processes, which we expect will reduce nutrient cost by 40% to 50% by the end of next quarter. Shifting our focus to Washington, our tenants and licensees have been performing exceptionally well in an incredibly competitive market, achieving two of the highest revenue months in Q2 over the past two years.

Total revenue exceeded $3.3 million in monthly sales in May, marking the highest month since January of 2022. Additionally, from Q1 to Q2, Washington saw a revenue increase of approximately 9% with revenue rising from $8.35 million in Q1 to $9.12 million in Q2, driven primarily by improvements in overall flower quality and excellent product performance, including the value-oriented EV brand portfolio, which has now expanded to include flower, pre-rolls, vape, and live resin disposables. Our cultivation footprint in Washington remained stable at 30,000 square feet, while the number of cultivars and rotation increased from 34 to 41 and the average THC levels rose from 25% to 26%. With that, I’ll now turn the call over to Peter to provide an overview of our financial results.

Peter Kampian: Thank you, Brandon. In the second quarter of 2024, 4Front reported revenue of $18.7 million compared to $18.8 million in the first quarter. Including Washington revenue, which added another $9.1 million in the second quarter, total revenue from product sales increased to $27.8 million, up from $27.2 million in the first quarter. The company’s adjusted EBITDA increased slightly to $2.6 million in the second quarter of 2024 as compared to the first quarter of 2024. For the second quarter, Illinois reported total revenue of $8.2 million, slightly down from $8.5 million in the first quarter. This decrease was primarily influenced by increased local competition and the resulting variability in store traffic. Meanwhile, Massachusetts showed a positive trend with total revenue increasing to $8.2 million in the second quarter from $8 million in the first quarter.

This growth was driven by strong wholesale demand, supply chain stability, and an improved assortment of third-party brands in addition to our 4Front portfolio. Regarding the balance sheet, as of June 30, 2024, the company had $2.4 million in cash, cash equivalents and restricted cash. The total debt principal amount as of quarter end was $67.4 million, with future debt maturities totaling $40.3 million, excluding certain contingent liabilities. As we look back on the second quarter of 2024 we are pleased with the progress we’ve made and feel confident about the opportunities ahead, especially with our ongoing expansion in Illinois. Our continued improvements in cultivation and production, along with our focus on operational efficiency and strict cost control and position us strongly for success.

Thank you for your ongoing support and confidence in our journey. We’re excited about what’s to come and grateful for your continued support. I will now return the call to the operator to open the lines for Q&A.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of [ Jesse Redmond ] from Water Tower Research. Your line is now open.

Q&A Session

Jesse Redmond: Hi, I was wondering if you could talk a little bit more about the landscape in Illinois. And specifically curious how you see retail competition evolving and how you expect flower prices to trend, let’s say, over the next year or so?

Brandon Mills: Hey Jesse, how are you doing? This is Brandon.

Jesse Redmond: Hey Brandon.

Brandon Mills: We keep very close tabs on the Illinois market. We look at new store openings on a weekly basis together as a team. I think as a business model that will, at least in the near term, be predominantly driven by wholesale. It’s encouraging to us that we do see new store openings pretty much on a weekly basis, weekly or biweekly basis. We have a number of opportunities to expand our own retail reach in the state. I think we’re about two-thirds penetrated today. So, an opportunity for 33% growth, not inclusive of the opportunity to drive same-store sales much higher than they are, day by offering more products as massing comes online. So, we’re seeing retail growth as a tailwind predominantly — we have seen more local competition to some of our stores.

I think almost all of our MSO peers with presence in Illinois are reporting the same thing. We’re simply all trying to address the same consumer opportunity. So, that’s just a challenge that we’re all dealing with. There’s not a lot we can do from a competitive standpoint other than continue to focus on the product assortment that we have available, the quality of our own 4Fronted branded products that we have in store, our pricing. We’ve got our arms pretty well around the toolkit that we have, and we’re continuing to sharpen our skills every week. I think I answered part of the question, which pieces are we missing or anyone from 4Front have anything to add to that?

Jesse Redmond: Yes, I think the second piece —

Ray Landgraf: Hey Jesse.

Jesse Redmond: Sorry.

Ray Landgraf: Go ahead Jesse.

Jesse Redmond: Yes, I would love to hear it. But I think the second piece was, you talked a little bit about where flower prices have been recently. Curious how you expect those to trend and talk a little bit about the supply/demand dynamics in Illinois. I know there’s a lot of demand, but I also know there’s a lot of cultivation coming online. So, curious kind of looking forward basis, how you’re modeling lower price to trend?

Ray Landgraf: Yes, hey Jess, this is Ray. Thanks for the question. I’ll take the back half of it. So we’ve actually seen, as is consistent with our other partners that we’ve been talking to prices start to stabilize out. So, while they have declined a little bit over recent quarters, we’re seeing that flatten out. And we’re not seeing a very vibrant wholesale or bulk supply chain, particularly with regard to biomass. So, we’re pretty excited about the opportunity to bring Matson online and bring more supply to market, and we’ve been working hard with a lot of the larger players in the state and a lot of the other retailers throughout the state to line up supply contracts, the identified brand opportunities to collaborate and bring more product to market.

And ultimately, as you’re probably aware, Illinois doesn’t have a ton of external brands or large brand participation. I think it’s ranked second to last behind Arizona in the number of active brands in market. And a large factor of that is because of the lack of available supply — available consistent supply, I should say. So, as we bring more premium flower into market and increasingly do that each week as we scale Matson, we see supply mapping to demand and an ability to actually meet that demand at current market pricing, which on the premium side is a little over $1,000 a pound right now, bulk wholesale and closer to $20 as a packaged good.

Jesse Redmond: That’s helpful. Thanks. And can you talk a bit about the scale of the Matson facility, how that compares to your background in Washington and how your experience in Washington helps inform your approach in Illinois?

Andrew Thut: Yes, sure. Great question. I guess, first and foremost, we’ll take the opportunity to introduce one of the other 4Front members that’s on the call today, Matt Stevens. Matt is our VP of Operations in Illinois and our Head of Cultivation, company-wide. And Matt was the founder, designer, developer, and operator of our Holliston facility and ECC and is now running operations at Matson. So, Matt, if you’re on the line, do you want to take that one?

Matt Stevens: Yes. Thank you, Brandon. Thank you for the introduction. Over the past two years, our company has worked diligently to refine and standardize our cultivation practices and we now believe we have a robust program capable of consistently producing top-quality flower. We’ve employed a range of canopy management techniques focused intensely on crop steering via substrate monitoring and catering our genetic selection for each individual facility. You brought up the Washington operations. We really geared this facility towards NECC and being a 2.0 version. So, I’m very optimistic about the launch of Matson with the key infrastructure upgrades informed by our operational experiences at NECC, including top-of-the-line LED fixtures across all growth stages, HVAC systems with a focus on process cooling, independent humidification controls, as well as advanced building management and fertigation systems.

As Andrew pointed out, by the end of August, we will have increased our canopy by 3 times in the state, and the plants currently in production looks fantastic. We’re allocating some of our strongest genetics to ensure we can bring them to market immediately, and we’re anticipating that this will be our flagship 2.0. Thank you.

Jesse Redmond: Great. Appreciate the answers. Thank you.

Operator: Your next question comes from the line of Pablo Zuanic from Zuanic. Your line is now open.

Pablo Zuanic: Thank you. Just regarding the stores in Massachusetts, you talked about Brookline, all the options are open. Can you just remind us what are the stores that you have in the state? How are they performing the other ones in the case of Brookline. Can you take that license and move it elsewhere or it may be just better to shut it down if that’s an option? Thanks.

Ray Landgraf: Thanks, Pablo. Andrew, do you want to take the Massachusetts retail question?

Andrew Thut: Yes. So, what we’ve seen is over the last the last several months as we’ve seen a stabilization in our retail operations outside of the Brookline operation. As we talked about on previous calls, we’ve done a lot of work on the menu curation — part of what got us a little bit sideways in 2023 was we sort of went down to — we cut out a lot of third-party SKUs. And so we started to expand that again this year and combined with some new product launches and the improvement of our flower. So, on the Worcester and Georgetown, I feel great about the customer experience, about the menu, how it’s looking. We’ve obviously had to deal with whether they’re consumer trends or a little bit more competition we seem to be getting our fair share, and I’m pretty encouraged about some things that we’re going to do with this marketing agency that we just brought in, in the last several weeks.

It’s going to bolster both our retail and wholesale. On the Brookline side, I’ll turn it over to Karl for Brookline.

Karl Chowscano: Hey Pablo, thanks for your question. Yes. With Brookline, I guess as with all our assets, we need to optimize them. And as you know, in Massachusetts, we only have three shots that adult-use. And so we want to make sure we are maximizing that third parking spot. What is the best thing to do with Brookline? We’ve temporarily kind of shut down Brookline and we are looking at options. So, yes, transferring the license could be an option, moving the license for ourselves to another location may not be the most efficient way to open up another location in Massachusetts. But the bottom-line is, as with all our assets, we got to optimize them. We got to make sure the cash flowing — and we are looking at Brookline actively now to see what’s the best next steps to take with it. But we’re unwilling to lose money in any of our assets. Hope that answers your question.

Pablo Zuanic: No, for sure, for sure. And I mean, Brookline just to be a great place, right? Back in the day when [Indiscernible] had their own first store, but it’s a changed world since then, of course.

Karl Chowscano: Interesting world.

Pablo Zuanic: Yes. In terms of the Illinois expansion when you talk about private label, THCA and Partner Brands. But why leave money on the table? I mean your brands are supposed to be strong. You’re almost tripling capacity you think you would do better just allocating that to your own brands. I mean can you explain to you reconcile one on the other? I understand the idea of bringing in new brands from outside licensing agreements, particularly the strong brands, but you’re leaving but the margins are probably lower, right? So, how do you balance the two?

Ray Landgraf: Yes. Hey Pablo, this is Raymond. So, I’d look at it as a multipronged strategy. We’ve got a great opportunity to grow our existing wholesale branded business, and we plan on doing that. In fact, we think we can grow that 3x to 4x. To-date, we’ve been supply constrained, operating out of about 8,000 square feet of Canopy and Elk Grove, and we’re selling everything that we can given the premium nature of the flower. So, we already see that demand. We’re already starting to map to it. And as we harvest, we will continue to fill demand on the branded side. The next piece really transition us into assortment. So, we want to have a balanced assortment where we can have goods that appeal to a broader range of customers.

And we’re acknowledging that maybe not every single one of those brands will be a 4Front brand. As we mentioned on the call, there’s opportunities for third-party brands to come in and perform strongly, and we see a strong monetization opportunity to partner with and service those brands. And then finally, again, as I mentioned earlier, on the bulk wholesale side, Illinois might be one of the least mature markets in terms of wholesale and bulk. And so we just see a great opportunity to find stability, to get contracts in place, to deliver partners’ consistent supply. In turn, that opens up shelf space for us and our brands. And so there’s a symbiotic relationship where it seems to be a win-win right now given the market landscape and opportunity.

Does that answer your question?

Pablo Zuanic: For sure. And just if you can expand on the — I think you said THCA, right? So, — does that mean that you’re planning to get into hemp derivatives? I mean a number of your peers are looking or doing that already, right? So it’s not an opportunity not special. I mean, if you can explain that or maybe I misunderstood.

Ray Landgraf: I’m sorry, I’m not familiar with the specific reference to THCA, but I can confirm that we did migrate our lab that we built in California over to Illinois. And that lab is quite a beast of a production equipment. We’ve done a couple of pilot runs on it now and we’re seeing the same types of results and yields that we were seeing in California, which we believe gives us a competitive advantage in the Illinois market. To paint a little bit better picture, a lot of the production skids that you see on distillation do a single past run — and in this case, our holder pad actually doesn’t dual pass, and it’s able to grab a much more robust and active total cannabinoid pole. So, we’re seeing consistently THC results in the 93%, 94% range and total active cannabinoids much higher than that, even upwards of 98%, 99%.

That’s just a lot higher than what we’re typically seeing in the distillate market in Illinois. And so we’re excited about the opportunity to take the biomass that’s coming out of Matson run it through that holder pad and bring really high-quality oil to market, which, again, there’s a lot of demand for.

Pablo Zuanic: Again, understood. But just to be clear, maybe mixing up the terminology, but — this does not mean that you’re going to enter the hemp derivative space or the asset?

Ray Landgraf: You’re talking about additional concentrates.

Pablo Zuanic: Yes.

Ray Landgraf: Yes, we will expand our content trade-off.

Andrew Thut: Let me answer a little bit different. Currently, on the hemp-derived side, Pablo, we have no plans that we’ve mentioned yet to get into that space. Matson is a facility that where we have — it was constructed as a centralized production hub, and we have ample space to do something in there. If we decide to do so. So, — but nothing currently.

Pablo Zuanic: Okay. That’s good. Thank you. And the last one, if I may. And — just if you can comment on your debt maturities. I mean, obviously, that’s all in the 10-Q, we have the details, right? Some companies we’ve seen have been able to refinance. Is there an option for you? And any big maturities you want to highlight — and imagining the context of the recent — I think the $5 million offering that was withdrawn, just if you can provide some context in terms of where you are with all of that? Thank you. That’s it.

Andrew Thut: Karl, do you want to take the piece on the debt and then I’ll take the life?

Karl Chowscano: Well, I can speak to the life too, Andrew, if you wish. But firstly, Pablo, I just want to put a little bit of an emphasis on the answer to your question regarding leaving money on the table in Illinois. We’ve got our knee skinned pretty significantly in California, expecting the market to be there that could pay for a product that eventually didn’t deliver for us. And I’m not saying we’re gun shy in Illinois, but we’re going to be a little bit more prudent with the expectation of return. We are going to cover some risk and make sure we leave enough on the table to be able to optimize profit and we can eventually obviously transfer into a more brand internal brand weighted approach. . But at this point in time, there’s such a good opportunity to reduce risk associated with the facility.

Yes, we may leave a little on the table for a bit. But we’ve learned that things in Canada don’t necessarily always come out the way you hope or expect. And so we’re coming at this in a semi more conservative path. So, that’s kind of why we are looking at this and it seems to be that there’s a fair amount of demand. And there isn’t so much also that there’s not a lot of new canopy coming on, but a lot of the existing canopy that’s on isn’t performing that well. And so that’s one of the things that seems to be even fueling more the desire for the demand for more of a biomass bulk arrangement. So, I just wanted to say — we’re not averse to profit, but we’re just going to take this one a little bit more conservatively. In terms of the life offering, yes, we are approached by a bank and they believe that there might be an appetite for the equity ahead of rescheduling.

We obviously didn’t want to say no to that. But with the uncertainty of the market, I think the Chevron decision came out, and just the market was still unsettled. And so we pulled it instead of striking it out. So, that unfortunately happened. In the meantime, in a parallel path, we are — we’re in good stead with our creditors. We’re in consistent conversation with the creditors, and we are working to find a to find a path that enables us to take advantage of the opportunity in front of us. And that — we’re in full on conversation with all our creditors and fully aware that there are deadlines that are coming and all of our conversations have been very healthy so far. So, we fully expect to have that part of the balance sheet cleaned up as soon as possible because we don’t want to take — we don’t want to not take advantage of this Illinois opportunity that’s in front of us.

I’m not sure if that really answers your question, I hope.

Pablo Zuanic: Of course. No, that’s great color. Thank you.

Operator: There are no further questions at this time. I will now turn the call back to Andrew for closing comments.

Andrew Thut: Excellent. Well, I want to extend heartful thanks to the entire 4Front team for the dedication and hard work. And we’re driving great progress here. As we look forward, we remain committed to our goals and excited about the future. So, thanks for everyone for joining the call. And we eagerly anticipate updating you guys on the next call when we have more results from Matson and some of the other initiatives we have in place. So, thank you for your attention and support and we look forward to speaking with you in a few months. Take care.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.