4Front Holdings CEO on Cannex Capital Group (CNSX:CNNX) Transformational Business Combination
4Front Holdings, LLC CEO Josh Rosen provides details regarding the company’s merger with Cannex Capital Group (CNSX:CNNX) (OTCMKTS:CNXXF). Rosen believes the companies are a great strategic fit because Cannex has significant expertise as a cultivator and processor, while 4Front’s strengths are its retail and regulatory knowledge. The merger allows the combined company to apply its knowledge and expertise, refined in established cannabis markets like Washington State, to new jurisdictions with less competition. In particular, Rosen is excited about the opportunity states like Massachusetts and Illinois provide, as those jurisdictions move toward full recreational legalization. The new company has a footprint on both coasts, the potential to become a leading multi-state operator, and represents “a hybrid of West and East that just doesn’t exist in the industry today.”
James West: Joining me is Josh Rosen. He’s the CEO of 4Front, right?
Josh Rosen: Correct.
James West: Now tell me, Josh: are you now the CEO of Cannex Capital as well?
Josh Rosen: Not formally, no.
James West: Not formally?
Josh Rosen: But announced merger, yes.
James West: Oh, that’s interesting. So tell me how that whole transaction came about? It sort of came out of left field from where I sit, having had some exposure to Cannex. But so how did you guys get involved, and how did you end up sort of coming to this merger?
Josh Rosen: Yeah, certainly. So it actually goes back, we formed 4Front back in, kind of the germination was 2010; our origins going back to 2010. Formed 4Front in 2011, though we’re a private company, so not a well-known commodity at this point relative to public markets, unlike Cannex, in this case.
And so we’re a multi-state operator in the US, and ultimately, what, two years ago, I first interacted, someone referenced Leo Gontmakher, the COO at Cannex – or actually pre-dated Cannex, it was a company called Northwest Cannabis Solutions at the time. Kind of immediately did a tour of Leo’s cultivation and processing operation in Washington. It was at the time, and still to this day, one of the most impressive single operations we’ve seen, and been around for a while, and then more recently, you know, prior to putting this together, kind of re-did that diligence trip.
When we come across folks that we like in the industry, I tend to put it on my calendar to check in with them once a quarter or so.
James West: Sure.
Josh Rosen: Had kind of consistently checked in with Leo and his team, followed the progress through the getting public with Cannex and stayed engaged, and then went back and visited his facilities. And since then he had expanded Northwest Cannabis Solutions and related entities into a second facility, a cultivation facility done at scale, similar to the first facility, unlike anything I had seen in the industry in many regards in terms of just, you know, productivity, processes, etcetera.
And relative to 4Front, which I’ll get to in a second, great strategic fit. We kind of pushed pretty aggressively to find a way to work together. 4Front’s background, the 30-second version, is very strong on retail and very strong from a policy state regulatory vantage point in the US, and so we had been looking for the right partnership opportunities in cultivation and processing. And what Northwest Cannabis solutions was able to do at scale, and then what Cannex was able to acquire from an intellectual property and facility standpoint, we think, is unmatched.
James West: Interesting. So then, is this operation, Northwest Cannabis Solutions, going to be part of the Cannex mix now?
Josh Rosen: The facility itself is; Cannex owns the facility, and it’s kind of the principal strategic operating tenet of Cannex.
James West: Oh, okay.
Josh Rosen: In the state of Washington.
James West: Oh, okay, it’s the Washington asset. Okay.
Josh Rosen: Yes, exactly.
James West: All right, it’s hard to keep up with all these companies. So then, tell me: in the State of Washington, there’s typically been an increasing level of competition as more suppliers bring more product to market. And is that causing a price competition that is making it tougher to survive as a company operating in the Washington State market?
Josh Rosen: Undoubtedly. In fact, I mean, one of the reasons we’re so excited about this transaction relative to what we bring to the table and what we’re trying to get done, is to take what is an incredibly honed operations machine in Washington and apply it in states that have much less competition, at least at the outset. We expect all the markets to get competitive over time, but the states that have more limited licensing structured, they don’t have the heritage of cultivation that you see in frankly the entire West, but that California corridor all the way up through Vancouver, where, you know, even going back to the pre-legalization days, there’s just tremendous cultivation and product heritage.
You know, we think that operating know-how will migrate its way East, much like we’re seeing the capital markets from the East migrate their way West into that quality. And so for us, Washington itself was not the catalyst for this transaction; Washington itself was the proving ground for operating capabilities that we hope to apply elsewhere. We are much more excited about markets like – excuse me, we are much more excited about markets like Massachusetts, where you’ve got recreational just being implemented now. We expect Illinois to be a state that also has recreational coming before long.
You know, that type of state, applying the operating protocol systems, frankly, the talent that’s being applied in Washington into those states, we think, is a tremendous opportunity.
James West: Mm-hmm. So then, the overarching goal for Cannex going forward is to become a multi-state operator in jurisdictions where the economics make sense and there’s recreational as well?
Josh Rosen: Over time, yes. I mean, we’re in a few medical-only states; as I mentioned, with Illinois, we expect Illinois to go recreational here, the new Governor campaigned on it, and so we see some momentum behind that. But absolutely; I think what 4Front-Cannex represent together is a hybrid of West and East that just doesn’t exist in the industry today.
James West: Interesting. So what are the main sort of changes that are going to happen to Cannex as a result of the merger with 4Front?
Josh Rosen: Kind of a combination of things. I think the application of a lot of that talent in a lot of new states, so really, getting that Cannex talent base outside. I mentioned Illinois and Massachusetts, but we’re also looking at a number of opportunities in California, Nevada, Arizona, and then from an organizational development standpoint, I mentioned 4Front brings a retail heritage to the table, mixed with kind of a combination. I was actually an equity analyst at Credit Suisse in my formative days, and so we’ve got a lot of capital markets expertise on our team. Very capable of doing M&A; we’ve done a modest amount previously, and we’ll continue along those lines.
And so really just expanding the platform and taking advantage of the operational integrity that we think we bring to the table.
James West: Yeah, you bet. So in terms of these segments of the cannabis markets – edibles, medical, beverages – where do you see the biggest opportunity left to exploit that has not been fully filled by the existing talent?
Josh Rosen: So what’s interesting about that is, there’s kind of two layers to that. The first layer is in a state like Massachusetts or Illinois, but Massachusetts is a pretty good example because up until now, you’ve really had forced vertical integration. So just about all of the medical operators in that state grew and processed their own product, and sold through their retail channel.
We think in those markets where that maturity is lacking relative to the product development, that just the very high-yielding production of quality, consistent product itself is a very profitable enterprise for the first several years.
James West: Right.
Josh Rosen: I think the second phase of that in what you’re getting at, I think, is where do the more mature markets go? And that’s what’s so exciting about what the Cannex side brings to the table, is, the Northwest Cannabis Solutions platform drives 8 percent market share, round numbers. In a market that highly competitive across 300 different products, they have 7 of the top-selling infused product brands, they have one of the top-selling flower brands, they have the full spectrum, and in a state like Massachusetts, where you’re actually forced to be in the full spectrum – in Washington, you don’t need to; there are also point solutions, there are narrow solutions that do vape pens, they do edibles, they do the various pieces – Leo and his team happen to do them all well.
Doing them all well serves you much better even in the markets that, frankly, you’re almost captive to having to do them all, Illinois and Massachusetts being those two examples again in this case.
James West: Sure. Okay, well, that’s great, Josh. That’s an excellent introduction to the combined entity. We’re going to have you back soon, as soon as you officially take over, but that was a great introduction. Thanks for joining me today.
Josh Rosen: Absolutely. Thank you. Appreciate it.
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