4Front CEO talks CEO appointment, challenges, opportunities and more
In this edition of "Rising High," The Fly conducted an exclusive interview with Leo Gontmakher, chief executive officer of 4Front Ventures (FFNTF), a cannabis company that owns and manages cannabis facilities in the U.S. Here are some of the highlights:
CEO APPOINTMENT: 4Front Ventures is a cannabis company with capabilities, cultivation and production, retail and wellness. In March, the company appointed Gontmakher as CEO to succeed Josh Rosen, who transitioned to executive chairman. “What made me take on the role is I believe my skill set is well suited for the current environment that the industry is in,” said Gontmakher, who was previously COO. “At a time when the industry is finally moving towards validating and looking at companies based on their operations versus blue sky opportunity, we felt at the corporation it would be a good time to input an operational CEO.” He added that his strategy moving forward is focus on the company’s core strengths in production, cultivation and manufacturing. “Under this new management team, we’re really laser focused on expanding on and doing what we believe we do best and focusing on being lean, being efficient and getting the cash flow positive,” he said. The CEO added when the company began in Washington, it wasn’t allowed to be fully vertically integrated and had to make a choice between retail and production/processing. “Ultimately from day one, I’m a big believer that long-term brands and long-term success will be created in this industry through finished goods, the likes of vapes, tinctures and capsules, much more so than flower at the end of the day,” he said. “We decided to start off in that position and we also very quickly learned that the profit margin stretches much farther with derivative goods than it does with just flower.” The CEO added that bringing on the retail piece was a legacy 4Front business and as the company moves forward, it is looking at retail more in the sense of vertical integration. “In any states where we spent a lot of money, we feel really good about the regulatory structure and where we’re building out large processing/production facilities, we want to support those with retail because it just helps stretch the revenue,” he said.
COMPETITIVE EDGE: When asked about the company’s key differentiators, Gontmakher said he views 4Front’s low cost production and its time in business as an edge over competitors. “We believe we are one of the lowest-cost producers on cultivation and on processing, taking flower and derivatives from their raw form and actually making it into a finished packaged good,” he said. “I also believe our advantage is our time in business and having those skinned knees, making mistakes and learning from them.” The CEO noted the company’s five years in business in Washington and said 4Front made a lot of mistakes, but also learned a lot. “We were put through five years of what we believe was one of the most competitive and lowest-priced markets in the country,” he said. “It really helped us get position and really drop that cost even lower than what we thought we could.”
EXPANSION: The company is currently in Washington, Illinois, Massachusetts and is working on California and the CEO said the company’s near-term expansion plans are all within the current licenses that it holds. “Our license in Illinois allows up to 220,000 sq ft. of flowering space,” he said. “That’s a nascent project that we’d like to expand into. Finishing our California project and expanding our footprint in Massachusetts would be the next two things in line.” Gontmakher said. He added, that as far as looking at M&A, the company is open to the idea but is focused on current goals. “We want to make sure that we don’t stretch our bandwidth too thin and that we do keep that laser focus until we’re more in control of our own destiny, which we feel very good about, being cash flow positive at the end of Q3 this year,” he said. “When that happens I think we entertain M&A but it has to be a perfect scenario for us.”
CHALLENGES: When asked about the biggest challenges facing the industry, the CEO noted capital has been a large hurdle in the space but said he views personnel as the main obstacle. Gontmakher said the current challenge is “being able to build a solid team in an industry where there’s really not much precedent.” The CEO said, “Taking people from the CPG world or a big company or taking a botanist and assuming she’s going to be a good cannabis grower just hasn’t really panned out yet. We’re in an industry where really the talent and the people behind that talent are being groomed as the industry goes along.” He added that in his opinion any business is really about the people behind it. “That’s where a lot of my time and effort goes, making sure we cultivate the correct talent,” he said.
OPPORTUNITIES: As the cannabis space develops, Gontmakher said the opportunity is “massive” in general. “In my humble opinion, we’re in the top of the second inning for the industry,” he said. “A lot of players that exist won’t exist and a lot of new players are still coming on. I still believe that the biggest opportunity exists in finished branded goods.” The CEO added that he thinks that while herb will eventually become a commoditized agricultural crop, that is not the side of the equation that 4Front wants to bet on as its only bet. “Overall efficient, low-cost production at this point gives you the biggest chance of having large market share in a state-by-state basis,” he said.
CORONAVIRUS: When asked about the impact the coronavirus outbreak has had, the CEO said sales have been up across the board at the retail and production/processing levels. “We’ve been blessed enough to only have a very limited amount of single-digit cases that have come up throughout all our operations and luckily everyone that did get infected is completely okay and is back at work,” he said. “The team has really come together, people are helping each other. We had employees in multiple states offer to donate their PTO to other employees who weren’t feeling well and needed to go home.” Gontmakher added responding to the pandemic has “been a phenomenal culture building experience” and he believes 4Front will “come out the other end a much more mature and stronger company”. Additionally, the CEO said the team has followed all CDC guidelines, put tape down in all the stores to ensure people are standing at least six feet apart and implemented sneeze guards around each cash register.
FLOWER VS. DERIVATIVES: As cannabis products become more diverse, Gontmakher said the trend so far in legal states has been flower decreasing and derivatives increasing. “As we’ve seen in every market open so far, it’s been flower heavy opening as high as 80%-85% flower vs. derivatives,” he said. “Washington as an example started 85%-15% which is now closer to 65% flower and 35% derivatives.” The CEO said 4Front’s sales monthly are split even at about 50/50 between flower and derivatives. He added in California last month, according to BDS, there was just under $140M sold in derivatives and just under $130M sold in flower and pre-rolls. “We’re already kind of seeing the flip happen here and I think it just continues to move in that direction,” he said.
OTHER CANNABIS STOCKS: Other publicly-traded companies in the space include Akerna (KERN), Aleafia (ALEAF), Aphria (APHA), Aurora Cannabis (ACB,) Auxly Cannabis Group (CBWTF), Biome Grow (BIOIF), CannTrust (CTST), Canopy Growth (CGC), Canopy Rivers (CNPOF), Cresco Labs (CRLBF), Cronos Group (CRON), CV Sciences (CVSI), Delta 9 (VRNDF), DionyMed Brands (DYMEF), Elixinol Global (ELLXF), FluroTech (FLURF), General Cannabis (CANN), Green Thumb Industries (GTBIF), Greenlane (GNLN), GrowGeneration (GRWG), Harborside (HSDEF), Hemp Inc. (HEMP), HEXO (HEXO), India Globalization Capital (IGC), Indiva (NDVAF), Innovative Industrial Properties (IIPR), ICC International Cannabis (WLDCF), Khiron Life Sciences (KHRNF), Liberty Health Sciences (LHSIF), MediPharm Labs (MEDIF), MedMen (MMNFF), Mjardin (MJARF), Neptune Wellness Solutions (NEPT), Organigram (OGI), Origin House (ORHOF), Planet 13 (PLNHF), Real Brands (RLBD), Sproutly (SRUTF), Sunniva (SNNVF), Supreme Cannabis (SPRWF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Valens (VLNCF), Vireo Health (VREOF), Wayland Group (MRRCF), WeedMD (WDDMF), Westleaf (WSLFF), Wildflower Brands (WLDFF), YSS Corp. (YSSCF) and Zynerba (ZYNE).