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Flower-Side Chats Part 9: A Q&A with Andrew Thut, Chief Investment Officer of 4Front Ventures

By Aaron Green
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In this “Flower-Side Chats” series of articles, Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses integrate innovative practices to navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.

4Front Ventures Corp. (CSE: FFNT) ( OTCQX: FFNTF) is a multi-state operator active in Washington, Massachusetts, Illinois, Michigan and California. Since its founding in 2011, 4Front has built a reputation for its high standards and low-cost cultivation and production methodologies earned through a track record of success in facility design, cultivation, genetics, growing processes, manufacturing, purchasing, distribution and retail. To date, 4Front has successfully brought to market more than 20 different cannabis brands and nearly 2,000 unique product lines, which are strategically distributed through its fully owned and operated Mission dispensaries and retail outlets in its core markets.

We interviewed Andrew Thut, chief investment officer of 4Front Ventures. Andrew joined 4Front in 2014 after investing in the company in 2011. Prior to 4Front, Andrew worked in investment banking and later moved on to public equity where he was a portfolio manager at BlackRock.

Aaron Green: How did you get involved in the cannabis industry?

Andrew Thut: I came at it from the investment side of things. I started my career as a junior investment banker right out of school and then I was a public equity analyst and Portfolio Manager. I ran small-cap growth portfolios for BlackRock where I was on the team for a better part of 11 years.

Andrew Thut, Chief Investment Officer of 4Front Ventures

One of my friends, Josh Rosen, who came from the finance industry, got interested in the cannabis industry really in 2008. He founded 4Front as a consulting company officially in 2011 and I came in as an investor. After that original investment, I left BlackRock and I was looking for something different to do. I was tired of chasing basis points and running public market portfolios. Josh said to me “This industry needs more talent,” and I became more and more involved at 4Front as the years went on. In 2014, I came into the business full time. Originally, I was someone that was kind of the gray hair in the room when we were applying for licenses. We had to go to different municipalities and convince them that we were going to be responsible license holders. I also spent a lot of time on the capital raising side for our business leveraging my career in corporate and more traditional public finance. These are incredibly complex businesses that require a fair amount of capital in some places. So, that’s how I originally got into the business.

These are complicated businesses in a lot of cases. The “sausage making” in cannabis is incredibly complicated. There’s friction at every step along the way. As an example, when you’re buying a building where you want to cultivate your product, you can’t get a mortgage from a typical bank.

While those of us that have been in the industry like to gripe and complain about it, this friction is also the opportunity. Because more traditional investors can’t invest in this industry yet, it allows us more time to build our businesses and have some protective moats around it from a competition standpoint until those folks do come in. So, all this friction is a pain and it’s brutal, but it’s also the opportunity here in cannabis.

Green: Can you speak to the transformation of 4Front from consulting to MSO?

Thut: The original business was consulting. Our original investor was sensitive about touching the plant – it’s one thing to offer services to a federally illegal business, it’s another thing to directly run a federally illegal business. For example, 4Front would have consulting clients that were interested in acquiring a license in Massachusetts. Because of our expertise and our standard operating procedures, we could apply for licenses in limited license states on behalf of our clients and help them show regulators competence and give the regulator’s confidence that these operators knew what they were doing. So, we would help our clients win the licenses and then once those licenses were won, our operations folks would come in and help them get up running.

When I came into the business we said, “well, geez, we have quite a track record helping clients win licenses and get open. If we’re good at winning these licenses and getting them open, why aren’t we just doing this on our own behalf?” So, in 2015, we shifted the business from consulting to being a multi-state operator. We leveraged our capabilities in regulatory compliance and winning licenses to go and get those on our own behalf. We also leveraged our financial expertise in M&A to add to our portfolio, so what we ended up with was a seven-state portfolio at the time.

Green: Chief Investment Officer is an uncommon title, even in the MSO space. What does your day-to-day look like?

Thut: I spend an awful lot of time helping management plot our strategy, and then figuring out how we are going to pay for our growth. Not only structuring finances for the company, but also having contact with our existing and new investors.

I spend a lot of my day to day thinking about where we want to be as a business and what geographies we want to be in. If you look at cannabis longer term, we have less interest in being cultivators or farmers. We think that’s going to be the most quickly commoditized piece of the value chain. We like retail as a business, but I think that we have less interest in managing hundreds of retail locations scattered across the country. We ultimately want to be a finished goods manufacturer. What we think is going to matter longer term is establishing low-cost production.

There is a lot of price elasticity in the end markets for cannabis meaning if you get customers a quality product at a much better price than the competitor, you’re going to take outsize market share. To offer that lower price, you have to be efficient. Over the years, we have figured out how to bring the labor cost out of our production. We have 25 different brands with 1000s of different SKUs of products that have dominant market share in states like Washington. And we’re now putting them into Illinois, Massachusetts, California, Michigan, and hopefully New Jersey.

Green: Do you have a preference towards acquisition, or do you seek growth through internal investments?

Thut: We are always weighing build versus buy. We want our products to have dominant market share, or very strong market share in every state we are in, and we have a lens towards what gets us there faster and most efficiently. For instance, we have two cultivation facilities and one production facility here in Massachusetts – about 15,000 square feet of canopy in the state. That will just about serve our three retail locations in Massachusetts.

Back to our bigger investment thesis, we believe that we should be a finished goods wholesaler in every state that we’re in. We know our products are incredibly well received and we know that consumers love our price point. In Massachusetts, for instance, we’re currently evaluating if we need more capacity from a cultivation standpoint and a production standpoint. And if we do where do the lines cross in terms of whether we should build versus buy that additional capacity?

We are currently in five states, including our facility in Washington has dominant market share in one of the toughest markets in the world for cannabis – somewhere close to 9% market share in Washington. Our brands are in the top 10 of every single category from flower to vapes, to edibles everything across the board. And what we’re doing our strategy is simple. It’s taking those tried-and-true products and operating procedures that have been so effective in Washington, and we’re replicating them in other states where we have licenses: Massachusetts, Illinois, and Michigan, California and hopefully New Jersey. We’re looking for more state, but we want to be deep in the states we’re in.

We also have a lot of confidence that you know, having been having translated some of these, having been able to effectively take our Washington success story and port it to other states. We’re looking for other states to sort of bring into the portfolio because we feel like we’re in a position now to stamp it out.

At our facility in Washington, which is the number one edibles manufacturer in that state, we produce the edible Marmas which is our the number one selling gummy in Washington. We produce 3,500 boxes of those in one shift using 25 people in Washington. Our facility is one of the lowest cost producers in the country.

We are opening what we think is going to be a very disruptive facility in Southern California right now. The facility is 170,000 square feet of purely automated finished goods production. So, rather than making 3,500 boxes of our gummy squares in one shift using 25 people, with the automation that we have in California, we can make 30,000 boxes. So, 10x one shift for the same number of people. We look more like the Mars Candy Company than most investors would think of when they see a typical cannabis company. We’re bringing that kind of scale and automation.

Green: What are some of the industry trends that you’re watching closely?

Thut: We keep a close eye on limited license states. States like Massachusetts and Illinois. For various reasons Massachusetts is very tough to get zoned. So, there’s going to be a limited number of players in a state like Massachusetts, which means you can have pretty good moats around your business and pricing will hold up over several years. We love limited license states like that, where price is going to hold up. On the other hand, we’re not afraid to enter a state like California where we think our low-cost production expertise uniquely qualifies us to go into a huge market like that and be disruptive and take a lot of the pie.

“You’re starting to see the market expand. There’s some anecdotal evidence that we’re taking a fair amount of share from the beer industry.”What we’re seeing in terms of industry trends, particularly on the THC side of this business, has just been phenomenally strong. You’ve had robust medical markets where, by and large, we’re seeing those dominoes start to fall quickly and going recreational. When that happens, the size of the market increases – call it from 2% of the population to as much as 10% of the population. So, from a state regulatory standpoint, having states go form medical to adult use is a huge deal in terms of the market opportunity.

We’re also seeing states get a lot more comfortable with the idea of selling cannabis. I’ve been around for close to seven years in this industry. When I started and I went into a municipality, and I said we wanted to open a cannabis store you’d have people following me to my car with pitchforks. As these municipalities open and public acceptance comes around, people are realizing that these stores are providing jobs and providing a good tax base for communities. So, the acceptance of cannabis has a snowballing effect that just continues to roll.

It’s not just the ultra-frequent users of cannabis who are totally driving the bus in terms of the demand growth for your business. You’re starting to see the market expand. There’s some anecdotal evidence that we’re taking a fair amount of share from the beer industry. So, the fundamentals of this industry are phenomenal. I think that we’re probably in the second inning of what is a mega-trend of legalization of cannabis and the investment opportunity here.

Green: I think one of the interesting things about the fundamentals is you’ve got this hardship of 280E, that all the companies are facing, and yet you still have groups that are surviving, profitable and growing. What are your thoughts on 280E’s effect on cannabis businesses? Do you foresee anything happening there?

Thut: There was a huge liquidity crunch in cannabis in 2019, meaning it was hard for people to come up with capital to grow their businesses. You had a bunch of companies that had licenses who didn’t really know how to operate and weren’t really focused on profitability. That liquidity crunch of 2019 made people get religious about being profitable and being efficient with capital allocation. Fast forward to 2021 and if you look at the top 10 cannabis MSOs in the US, I think we’re all profitable.

So, here you have an industry with accelerating top line growth and they’re already profitable. That profitability should only improve as you’re able to leverage your operating expenses and that’s a unique thing. When the internet craze was started in 1999 you had companies that a weren’t profitable, didn’t have business models, and no one really knew what they wanted to be. You have companies here in cannabis that are growing the top line 50% a year, and they’re profitable, and they’re trading at under 10 times EBITDA, which is totally disjointed.

Sen. Schumer unveiling the Cannabis Administration and Opportunity Act

So, that leads me to your question on to 280E. 280E has been a problem. Banking has been a problem. Having to list our companies over the counter instead of on exchanges like the NASDAQ and NYSE – that’s been a problem in terms of attracting capital. But the good news is Senator Schumer, Senator Booker and others have put out some bold initiatives on what they want to achieve from a legalization standpoint. From an investment standpoint, the biggest thing that investors should be focused on is access to banking, which is included in the senators’ proposed legislation.

Once we get access to banking services, the federal government is basically acknowledging cannabis as an industry will be able to not only have more traditional financing for our growth, but it will also lead to uplift into exchanges and real institutions like the Fidelity’s and the BlackRock’s of the world being able to come and invest in these companies. It also acknowledges 280E is an antiquated law. Getting rid of 280E will give us a much lower tax rate and will allow us to have a bigger proportion of our pretax cash flow into growing our businesses rather than having to go outside for that funding. My crystal ball is probably no better or worse than others in the industry, but if you fast forward 18 months to two years, I have a tough time seeing 280E still in place.

Green: Last question here. What’s the thing you’re most interested in learning about in the cannabis industry?

Thut: I’m just fascinated to see how these various business models will play out. People are placing bets on picks and shovels. People are placing bets on whether being a finished goods manufacturer works. People are placing bets on whether a retailer business model is going to win the day.

If you look at the leadership in the cannabis industry today, it’s totally different than it was four years ago. People that were foregone winners four years ago like MedMen had to do significant recaps. I put Acreage in that sort of bucket too. The leadership had shifted and so I’m really curious to see just from an intellectual standpoint, how this business evolves.

I sometimes scratch my head, you know, do you really want to be a cannabis company with 200 retail locations? You’re going to have a tough time growing same store sales in three to five years in 200 retail locations. So, I’m just most curious in proving out our thesis of being finished goods producers and low cost finished goods producers in the value chain. I’m most curious in seeing how that plays out. I think we are seeing our strategy play out in the most competitive markets in the world. We have a high degree of conviction that we’re on the right track here, but our eyes are always open and we’re always making little pivots here and there trying to make sure to stay on top of the sweet spot in the value curve.

If you describe the cannabis industry generically and you didn’t say cannabis, you said “widget” I think it’s the most fascinating Business School case ever presented. If you’re taking this market that already exists, it’s just illegal. So, all it needs to do is switch from the black market to the legal market and then you’re always trying to plot a course and steer the ship towards where the highest value creation can be. So, I’m fascinated to see how it’s going play out here.

Green: That concludes the interview. Thanks Andrew!

Thut: Thanks Aaron.

Flower-Side Chats Part 1: A Q&A with Sam Ghods, CEO of Connected

By Aaron Green
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Flower continues to be the dominant product category in US cannabis sales. In this “Flower-Side Chats” series of articles Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.

Connected is a vertically-integrated cannabis company based out of Sacramento, CA and one of the most sought-after brands in California and Arizona. Having formed as a legacy operation in 2009, Connected has created a cult-like following over more than a decade in business. According to BDS Analytics, Connected Cannabis and their acquired brand Alien Labs now boasts the highest wholesale flower price in any major legal market – their average indoor flower wholesale price is 2x the CA average – yet also has the highest flower retail revenue.

We spoke with Sam Ghods, CEO of Connected to learn more about his transition from tech to cannabis, how Connected thinks about product and his vision for future growth. Sam joined Connected in 2018 after getting to know the founders. Prior to Connected, Sam was a co-founder at Box where he stayed on for 3 years after their successful IPO.

Aaron Green: How did you get involved in the cannabis industry?

Sam Ghods: I originally came from the tech industry. I co-founded Box, a cloud sharing and storage company, in the mid 2000s with three other friends. We grew that from the four of us to eventually a multi-billion-dollar public offering in 2015. I stayed on a few more years after that until I took some time off trying to decide what I wanted to do next. I looked at a number of different industries and companies, but personally I always had a real passion for artisan and craft consumer goods. It’s a really big hobby of mine. Whether it’s going to Napa or learning about different kinds of premium consumer goods, I really had a deep love and never knew cannabis could be like that.

When I first met Caleb, the co-founder of Connected, he instantly got my attention by telling me that they had been selling out of their product in the volume of millions of dollars a year at more than two times what everybody else was selling for. That really piqued my interest because creating a product that has that level of consumer passion and demand is maybe the single hardest thing about building a consumer goods business. For them to have been so successful in what was a very difficult and gray market to operate in at the time – this was mid 2018 that I was speaking with him and he had been building this company since 2009 – is a really big challenge, and really impressive.

Sam Ghods, CEO of Connected

So, I started spending time with Caleb and the Connected team and learned a lot about the business. Everything I learned got me more interested and more excited. The way that they thought about the product, the way they treated it was with a reverence and level of sophistication I had no idea was possible.

I was so excited to just learn about the space. I mean, honestly, it feels like the internet in the 90’s- The sheer possibility and excitement. The only difference here is that the market already has existed for 100 years plus: the gray and underground markets for this product are actually phenomenally mature. And now we’re lifting up billions of dollars in commerce that’s already occurring and attempting to legalize all of it in one fell swoop, which creates such an interesting set of challenges.

I first got involved as an advisor on fundraising and strategy. And then a few months later, they were looking for a CEO and I joined full time as CEO in September 2018.

Aaron: What trends in the industry are you focused on?

Sam: It may seem basic, but I think product quality in the broader cannabis markets nationally and internationally is really underrated. Because of the extreme weight of the regulatory frameworks in so many different markets, it’s resulting in a lot of product being grown and sold just because it can be by the operators that are doing it. In many markets, they count the number of producers by the handful, instead of being measured in hundreds or thousands like in California or Oregon. And in that kind of environment, you’re not really having competition, and you’re not really able to see the quality that has existed in this category for years and years and years.

That’s one of the things that really sets us apart – the quality is first above all else, as well as the innovation and time that has gone into it, and not many existing brands in the legal market can say that. With some of the “premium” brands on the market, it would be comparable to just jumping into the wine industry one day and thinking that you can become a premium brand, without having any knowledge of the history of the product or the industry itself. At Connected, we have a team that’s been doing this for over a decade. We did a back of the envelope calculation: there’s over one thousand lifetime harvests between our team. We’ve also brought in specialists from Big Ag and other industries to complement that experience.

Cannabis is a very, very difficult plant to grow at a very high level. It’s much more like high-end wine or spirits than other fruit or produce. I think in the cannabis community, that’s extremely acknowledged, and appreciation for that is the reason we get by with the highest prices in the legal market. I think in the broader investor and financial community, this point hasn’t really hit home, because the limited license markets aren’t mature enough, and there isn’t enough competition in many of them.

Our focus is continuing to make the best product we can, which has fed and developed our brands [Connected and Alien Labs] into what they are today. That is our number one focus, and we think it’s pretty unique to the space of not just cultivating a great quality product, but also as far as breeding, pushing the bar higher and higher on what can be done with the genetics of the plant. 

Aaron: How do you think about choosing testing labs?

Sam: So, the number one criterion is responsibility and compliance. We must be completely confident that they’re testing accurately, safely and exactly to the specifications of the state. Then from there, it is really cultivating about a partnership. There’s a lot of nuance in the relationship with a testing lab. We note things like: Are they responsive? Are they sensitive to our needs in terms of either timelines or requirements we have? It does come down to timelines and costs to a certain extent, like who’s able to deliver the best service for the best cost, but it really is a partnership where you’re working together to deliver a great product. Reliability and consistency are big pieces as well.

Aaron: Industry estimates for illicit market activities are something like 60% of the California market. From your perspective, how do we fix that?

Sam: I think it probably comes down to funding for the efforts to discontinue those activities and opening up the barrier to entry, incentivizing “illegal” operators to make the investment in the cross-over. I think the most successful attempts to tamp it down was when there were initiatives that were well-orchestrated and well-funded, allowing for legacy growers to actually cross over to the “legal” industry. You can’t launch an industry with such an extreme amount of regulation, set a miles-high barrier to entry, and then penalize legacy growers for continuing their business as-is. If the illicit market continues to be fueled by rejection, you’re not going to achieve the tax revenue that you’re expecting to see, that we all want to see. There needs to be an attitude that every dollar put into transitioning illicit markets into regulated markets is returned many times over in tax revenue to the state’s citizens.

Aaron: So, I understand you sell wholesale. Do you sell direct to consumer?“Once they hit the shelves, we blow people away again, beyond their expectations of what they had before.”

Sam: We own and operate three retail stores, so we do sell direct to our consumers, but at this point the majority of our product is sold through third party dispensaries.

Aaron: Do you make fresh frozen?

Sam: We do. On the cultivation side we have indoor, mixed light and outdoor. We fresh freeze a portion of our outdoor harvest every year, and then we use that fresh frozen for our live resin products, for example, our recent live resin cartridge. It creates a vape experience really unlike any other because we are using our regular market-ready flower, but instead we’re taking that flower and actually extracting, not just using the distillate and mixing a batch of terpenes with it. We extract the entire plant’s content across the board, from cannabinoids to terpenoids and everything in between, and then you have our live resin cartridges.

Aaron: How do you think about brand identity and leveraging the brand to command higher prices?

Sam: The cycle we’ve effectively created is that every time we do a release of a new strain or a new batch or harvest, the quality is generally going up. That quality is released under our brands, and then the customer is able to associate that increase in quality and reputation with those brands. Then for our next launch, we have an even bigger platform to talk about the products and to ship and distribute and sell the products. Once they hit the shelves, we blow people away again, beyond their expectations of what they had before. That continuous cycle keeps fortifying the brand and fortifying the product. From our perspective the brand is built 100% on the quality of the product. The product will always be our highest priority and the brand will come downstream from that. 

Aaron: Tell me about Alien Labs.

Sam: Alien Labs was an acquisition. It was a company that had built their brand really successfully in the gray market through 2017 and Prop 215 in California and had an incredible level of quality, a really loyal and dedicated fan base, not to mention a tremendous Instagram presence and following, which is where 98% of cannabis marketing happens today. We really loved the spirit of what the founders were bringing to the table. In 2018, we decided basically to join forces with them and bring them on board, creating a partnership where they leverage our infrastructure and the systems and processes we’ve built, but still keep their way of cultivation and their product vision. To this day, Ted Lidie, one of the founders, continues as the lead brand director for Alien Labs.

Aaron: In what geographies do you currently operate?

Sam: Our primary offices and facilities are based out of Sacramento, California, but we have facilities throughout the state. Last year, for the first time we launched operations in a new state, Arizona. As you may know, you’re not allowed to take cannabis products across state lines at all, so if you want consistent product in multiple markets you really have no choice but to rebuild your entire infrastructure in each state you want to open up.

There are many brands that are expanding and launching in more markets more quickly, but they’re doing so by taking product that’s already existing and putting their brand name on it. That is something we’ve decided strategically that we will not do. We’ve spent years building a high level of trust with our customers, so we’re only going to put our brand name on products that are our genetics, our cultivation, our style, our quality of product. When we launched in Arizona, we did it with a facility that we leased and took over and now operate with our staff. We’re replicating the same exact product that you can get in California in Arizona, which is really exciting.

We launched just this past November, which has been incredibly successful. Our dispensary partner Harvest saw lines of dozens of people out the door.“We consider ourselves a flower company first and foremost, so for us, that was a very calculated strategic move.”

Aaron: Any new geographies on the horizon that you can talk about?

Sam: We’re constantly evaluating new opportunities. I don’t have anything particularly specific to announce right now, but I will say we look for states where we believe there’s a competitive environment where the product quality is going to really stand out and be appreciated.

Aaron: Do you notice any differences in consumer trends between California and Arizona that stand out?

Sam: Not too many yet. We don’t have a retail location in Arizona, so we don’t have as much direct contact. However, we have heard consistently that the Connected customer demographics – as you would imagine most interested in our product – are those looking for something special, unique, different and have a really superior quality to everything else out there. We ended up launching in Arizona with the highest price point for flower in the state, and we say that’s just the beginning. The market is still so young and immature, both nationally and internationally, that this category is going to develop into one that’s really taste-driven.

Aaron: What’s next in California?

Sam: Continued growth and product development. We want to keep blowing away our customers with more and more incredible products, different product types and categories. For example, the cartridges were a really big launch for us because we don’t really consider ourselves a vape company. We consider ourselves a flower company first and foremost, so for us, that was a very calculated strategic move. We were only going to launch the product if we could fully replicate what the consumer gets from the flower experience. We are very unlikely to ever release a distillate pen, for example.

Aaron: What are you personally interested in learning more about?

Sam: We, as a society, really don’t know very much about the cannabis plant. Pretty much all meaningful research around cannabis stopped in the early 1900’s with prohibition. In the meantime, we’ve performed millions of dollars of studies and research on almost every other plant that we grow commercially. We understand these plants extraordinarily well. Cannabis science is stuck back in agriculture of early 1900s. The most interesting conversations I have are around how the plant works, how it doesn’t work and the ways in which it is so different from all other plants with which we are familiar. Our head of cultivation comes from Driscolls, the largest berry company in the world, and even he is frequently surprised by the way the cannabis plant reacts to things that are commonly understood in other plants. So, the way the actual plant responds to different environments is truly fascinating and something I think we’ll be learning about for decades and decades to come.

Aaron: Okay, great. That concludes the interview. Thank you, Sam!