4Front Revenue Slips as Legal Woes Mount

4Front Revenue Slips as Legal Woes Mount

4Front Ventures Corp. (CSE: FFNT) (OTCQX: FFNTF) reported pro forma revenue from continuing operations for the third quarter of $28 million versus $31.38 million for the second quarter.

GAAP revenue of $23 million for the quarter ended Sept. 30 was down 18% year-over-year from $28.1 million.

4Front attributed the revenue decrease to lower pricing coupled with transitory pressures from competitors liquidating inventory before leaving the market.

“The third quarter marked the beginning of a transitional period for our business, which we firmly believe will positively impact our future performance and the long-term success of 4Front,” CEO Leo Gontmakher said. “The strategic realignment of our state footprint was crucial to mitigate the continued losses and challenges we experienced from the demanding California market.

“With the drag on our profitability now behind us, we can place greater focus on our core markets of Illinois, Massachusetts, and Washington, where we are generating positive operating cash flow and anticipate the most promising growth opportunities,” he added.

Cash Concerns

As of Sept 30, the company said it had cash of $2.8 million and a working capital deficit of $64.2 million.

The company said it incurred net losses from continuing operations of $26.4 million, a steep jump from last year’s net loss of $4 million for the same time period in 2022.

Despite reporting as a going concern, 4Front noted it has managed to raise money as needed despite the cash crunch.

Legal Woes

In addition to the cash crunch, the company found itself the subject of lawsuits, which are costing the company money, according to the company’s latest regulatory filing.

On May 9, Florival sued 4Front in the California Superior Court for the County of Santa Cruz. The lawsuit alleged the company breached an agreement with Florival under which Island Global Holdings Inc., a subsidiary of 4Front, agreed to purchase the membership interests of licensed cannabis cultivator Gold Coast Gardens LLC.

On Nov. 7, the court entered summary judgment against 4Front and Island, which the entities say they intend to appeal. The company said it has set aside $850,000 related to this matter as of the end of the third quarter.

On Sept. 14, Teichman Enterprises Inc. sued 4Front California Capital Holdings Inc. in the California Superior Court for the County of Los Angeles, alleging that 4Front CA had breached a lease with Teichman for a facility in Commerce, California, by failing to pay rent due under the lease.

4Front CA denied the allegations but vacated the facility. That trial is set for January 2024. Management has accrued $600,000 related to this matter as of Sept. 30.

Teichman also sued 4Front CA alleging that the company breached a lease agreement with for a 10-year lease commitment ending on Jan. 31, 2029. Teichman alleged total rent owed under the lease agreement is $13.4 million in addition to a license fee of $1 million and additional damages. 4Front denies the allegations but again it has accrued $2 million associated with this legal liability.

Illinois Shines

Wholesale revenue in Illinois nearly tripled year-over-year, according to the company. Sequentially, sales were up 40% over the second quarter.

Illinois continues to be an expansion target for 4Front, which plans to open its flagship facility in Matteson by the end of the year. The facility will include “the implementation of best-in-class, automated production equipment relocated from our closed facility in California,” the company said in a statement.

Additionally, 4Front expects to have five operational stores in the state by fall 2024, with the first new store slated to open in the first quarter. The company said it plans “to inaugurate an additional store roughly every two months thereafter. Locations for two of the three additional stores have already been selected for build-out.”

4Front said it secured $10 million in funding to build additional retail locations in Illinois since it reported the cash balance of $2.8 million.

Other States

Sales were also strong in other states where the company has a presence, including Washington, where “enhanced flower quality and brand refreshments have doubled our sales, marking a significant milestone with our first million-dollar flower month since 2021,” Gontmakher said.

Massachusetts offered a “challenging operating environment over the summer,” he said, partially due to competitors’ liquidation sales. However, sales of Island flower and pre-rolls grew nearly 30% sequentially.

“By adhering to strict financial discipline and pursuing our targeted expansion plans, we anticipate the Illinois opportunity to be a pivotal factor in our growth, expecting it to potentially double the size of our company,” Gontmakher noted.

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