Time to take our second run through Columbia Care financial statements.  Others might have more knowledge than I… so give me a Q or two to get up to speed.

Their earnings release.

Their MDA is not very helpful in the least, and they do not segment retail and wholesale, and no QoQ analysis.  Tough to do analysis without data points.

Their earnings release has a numerous regional data points, and gives sequential growth and YoY growth, problem is … they offer no starting point to run a calculation.  Frustrating.

In Q2F21, they closed in gLeaf transaction and signed an agreement to acquire Medicine Man.

Acquisitions of note:

• Full Q this Q: June 11, 2021 acquired Green Leaf and July 7, 2021 Green Leaf Ohio. Purchase Price $280 million with Goodwill/Intangibles aggregating $294 million or 105% of PP. Contingent Consideration of $125 million.
• Medicine Man… not closed.  PP $42 million

Guidance for F2021:

• Revenue $500-530 million. REVISED GUIDANCE: $470-485 MILLION
• Adjusted GM % 47%. REVISED GUIDANCE: 46%
• Combined Adjusted EBITDA $95-105 million. REVISED GUIDANCE: $85-95 MILLIOMN

Progress:

• Revenue Tracking at $453 million (Q1+Q2+ 2xQ3) Tracking below revised guidance
• Actual GM was 47% for Q3
• aEBITDA theirs $86 million. (Q1+Q2+ 2xQ3). Tracking to revised guidance.

Open the fins and MDA and let’s dive in.

Income Statement Drivers & Breakeven Sales: Trend

CCHW operates in 15 states with 2 more on deck, with 76 retail dispensaries (+4 QoQ), and 30 processing facilities.

Stores:  CA 6, CO 22 (4 to be acquired via Medicine Man), FL 14, AZ 2, IL 2, UT 1, PA 3, MD 4 (+1 QoQ), DE 3, OH 5, VA 2 (with 10 more on deck), NJ 2 (+1 QoQ), DC 1, NY 4, MA 4(+1 QoQ), MO 1 (+1 QoQ).

Manufacturing: CA 2, CO 5, FL 4, AZ 2, IL 1, OH 1, UT 1, PA 1, MD, 1, DE 1, VA 2, NJ 2, DC 2, NY 2, MA 1, MO 1.

Sales increased sequentially by 29%, an increase of $29 million, of which $25 million is the Greenleaf acquisition. Netting Greenleaf from last Q and this Q evidence sales growth of +5% or $4 million.

No retail or wholesale segmentation is provided.

From Investment deck: (all listed alphabetically)

• THIS Q: Top 5 Markets by Combined Revenue: California, Colorado, Massachusetts, Ohio, Pennsylvania. No change QoQ.
• Last Q: Top 5 Markets by Combined Revenue: California, Colorado, Massachusetts, Ohio, Pennsylvania.

Cali is top in revenue but not so in GM or EBITDA. They do indicate in Investor presentation that they are generating positive EBITDA in 14 markets and 13 market generated positive cash flow… You will have to take their word for it.

From the tea leaves of presser: revenue increases QoQ. Bold are their top 5 this Q.

• CA -10% (+4% last Q)
• CO “up slightly” (+7.5%… GM 42% last Q)
• AZ +23%
• FL -7% (+46%… first harvest from Alachua greenhouse last Q)
• IL +14% ( +15% last Q)
• MA +6% (+6% last Q)
• MD +380%
• NJ +45% (+20% … with + GM last Q)
• NY +4% (+11% last Q)
• OH +17% (+18% new dispo last Q)
• PA +51% (+28%… last Q… gleaf driven.)
• VA +225% (+227% (new dispo) last Q)

These number are meaningless without the starting point and the weighting by state.

Retail Sales: Peer and Trend

N/A until segmentation.

Wholesale: Peer and Trend

N/A until segmentation.

Annualized Sales $ per (PPE + ROU + Goodwill/Intangibles)

What I have done above is annualize the last Q’s sales and divided it by the aggregate of PPE +ROU + G/I (UPDATED to include ROU) to see how much sales are being generated and what the trend is. I added PPE + ROU + G/I to try to normalize the companies that have gone an organic path (TRUL and CWEB until their new acquisition) versus the more acquisitive (VRNO, Cura and GTII)

Kind of an odd Q in that ROU decreased $102 million QoQ, where as PPE increase $78 million and G/I fell $3 million.  I would imagine some of the gLeaf assets that were acquired under ROUs may have been sold off or the leases paid out (leases decreased $102 million) and/or converted to PPE. In any event, the denominator decreased $27 million while numerator increased $30 million.

The $0.52 is the seventh in peer group.

Income Statement Drivers & Breakeven Sales: Peer

CCHW is 5th in sales.

Gross Margin: Trend & Peer

GM% improved from 42% to 48%, but without inventory step up from acquisitions would have been 49%.  GM was $63 million +$20 million.

Expect the step up to continue next Q as they bough $41 million in inventory that they will need to sell through.

From Investment deck:

• This Q: Top 5 markets by Adj GM: DE, FL, MD, PA, VA

• Last Q: Top 5 markets by Adj GM: AZ, DE, IL, MA, NY

I don’t know if the above is absolute $ or %.  FL, MD, PA and VA supplant AZ, IL, MA and NY.  Quite the turnover. And of their top revenue markets only Pennsylvania makes the GM cut.

We have seen Retail GM% disclosed by ACRG, HARC and CL via Non-Controlling Interests.  This has straddled 50% with a narrow range. I am wondering if the 22-store fleet in CO brings down the GM%? It is 31% of total store fleet.

Realized Fair Value on inventory sold is a $59 million versus $26 million last Q. That is quite the increase for a 25% increase in sales. Unrealized Fair Value of Bio Assets increased to $68 million from $37 million QoQ, yet bio assets increased $11 million to $60 million.   They are packing 50% Fair Value increment on inventory; seems high given GM is 48% and FVI would not include selling costs.

The aggregate of the IFRS voodoo is a +$9 million flat to the previous Q.

Annualized Gross Margin $ per (PPE + ROU + Goodwill/Intangibles)

This is our attempt to normalize the companies growing organically from the roll ups.  We have annualized the gross margin and divided that by aggregate of PPE + ROU + G&I.

The denominator gets improved as does the numerator. This increased to $0.25 from $0.16. Seventh in peer group.

Gross Margin: USA Peer

CCHW is tied for 9 highest in this peer group with CL.  

Gross Margin: North American Peer

CCHW is 9th highest on a North American basis.

One thing I want to point out… Village Farms, a Canadian LP, pulled down a 44% GM on their cannabis business this past Q (their negative margin Tomato business pulls down their overall GM% to 25%).  This is in Canada, where we have national pricing, competition is fierce and there is no verticality. 

A concern we share is that the margins of US MSO’s should be much better than Canadian LP’s given their lack of competition, no national pricing and verticality.  The MSOs are certainly better, but it will be interesting to see if they can continue this level if/when competition and national pricing is in the mix.

We get the argument that costs will also come down with interstate, but in order to generate the same level of GM$’s (to pay your bills) with say a 50% cut in retail prices (which we have seen and more in Canada), the company will need to work that much harder to maintain that GM$ level. Production costs might go down, but SGA will likely need to increase.

SGA & SBC as % of Sales: Trend

Aargh… no split of selling and G&A and no schedule. MDA is completely useless for any idea as to what went up or didn’t QoQ.

Combined SGA was $57 million an increase QoQ of $11 million, as gleaf was on board for the full Q, to 43% of sales from 45% last Q. This is very much above peer group which has a pretty tight range at 25-29% with GTII leader at 24%.

SBC is $5.0 million versus $5.2 million last Q.  SP has come down this Q.

Depreciation they do not even break out.  I have to go to Cash Flow Statement which does not break down the CGS and Opex elements.  This was $20 million this Q versus $13 million last Q as gLeaf assets are on books for full Q.

Opex increased by $10 million to $61.5 million and decreased to 46% of sales from 50% last Q.  

SGA & SBC as % of Sales: Peer

Agg SGA of 43% is well above most peers with only MMEN and CWEB worse.  Keep in mind they have a big fleet of dispensaries that leads to more SGA.  But even TRUL and CURA, with more stores, are well below this level.

This is the biggest critical item in CCHW versus peers.

+Net Operating Profit Sales Breakeven divided by Current Q Sales: USA Peer

Net Operating Profit before IFRS voodoo was +$1.5 million versus -$8.2 million last Q.  The increase in absolute GM (no IFRS) by $20 million was offset by $10 million in increased Opex expenses.

Other Income (Expenses) and Taxes:

Other Expenses for the Q was negative $60 million versus negative $8 million last Q, which was largely comprised of

• Interest expense -$11.2 million versus -$8.6 million last Q.
• Income of $4.8 million in Fair Value of derivative liability versus $2.1 million last Q
• Other was -$54 million versus nil last Q.  There is $75 million in “Accrued acquisition and settlement of pre-existing relationships YTD”.  This was not in the previous financials.  Note 15 is where you have to go to try and unwind this item which involves lawsuits/arbitration.  From note 15: “During the period ended September 30, 2021, the Company anticipatorily accrued $68,000 for potential share issuances and cash payments for purposes of acquisition and settlement of preexisting relationships, inclusive of prospective acquisition costs relating to the third-party entities and other litigation costs.”.  This might be settled in shares as contingent consideration reduced and accrued expenses increased. I have searched the MDA, financials and earnings release and I cannot find narrative around this.

Taxes were a credit of $12 million versus payment $5.0 million last Q.   

Net Income after Non-Controlling Interest and before IFRS Voodoo was – $46 million versus negative $21 million last Q.   With IFRS voodoo the reported Net Income was -$37 million versus -$11 million last Q.

+Net Operating Profit Sales Breakeven divided by Current Q Sales: North American Peer

In the North American Peer group CCHW ranks 8th best.

EBITDA: Trend & Peer

My Adjusted EBITDA is $28 million.  Theirs is $31 million, as they add back $3 million acquisition costs non-core costs and covid costs which I did not add back as there was nothing to backstop the exclusion as “one time”.

EBITDA increased $14 million, as GM (less the step up) +$20 million overpowered the cash Opex increase.

From investment deck:

• This Q: Top 5 markets by Adjusted EBITDA: DE, IL, MD, PA, VA
• Last Q: Top 5 markets by Adjusted EBITDA: AZ, DE, IL, MA, PA

Not sure if this is absolute $ or %. AZ and MA get bumped by MD and VA. Again only Pennsylvania is present from top 5 revenue markets in the EBITDA top 5.

Cash Flow:

• From operations Use $19 million
• From investing Use $41 million
• From financing Source $10 million.
• Net -$32 million

Annualized Adjusted EBITDA to (PPE + ROU + Goodwill and Intangibles)

We have added this new metric to now look at who is being the most efficient with PPE + ROU + G/I based on Annualized EBITDA.

Given they removed a lot of ROU from the denominator in the Q, while EBITDA was added in Q…The $0.11 is the 6^th highest in peer and improved from $0.05 last Q.

+EBITDA Sales Breakeven divided by Current Q Sales: USA Peer

CCHW 55% sales required to be +EBITDA. They are 5^th in this peer group.

+EBITDA Sales Breakeven divided by Current Q Sales: North American Peer

Net Operating Profit + Non-Cash Expense – Interest – Taxes: $ Thousands of Dollars

This metric is meant to show how much cash went into the bank account from operations after Interest and Taxes are serviced.  Essentially EBITDA without the I + T added back. 

CCHW improved to $29 million zero last Q.  Taxes swung $17 million QoQ and EBITDA growth the reasons.

Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales

CCHW is at 22% an improvement QoQ from 0%. They are tied for second best, but the tax credit is a driver this Q. They have taxes owing of $30 million on balance sheet as well.

Balance Sheet Items of Note:

Cash position $116 million a decrease of $32 million QoQ.  They have $180 million in A/P and accrued liabilities, $56 million in contingent consideration on gLeaf purchase (a decrease of $69 million QoQ which might explain that charge taken and discussed above), and $14 million in Current Portion of leases and loans.  They will need a raise. Likely to be equity given the converts got the security.  They have time as the $55 million is due by June 2022, but they are not flush by any means.

“Waterfall” Trend

Inventory increased by $6 million to $170 million.  Quarterly Inventory to Sales ratio is 1.30:1 versus 1.61:1 last Q.

Finished Goods Delta was -$9 million to $30 million. FG seems tight to sales.

“Waterfall” Peer

Keep in mind Cura, TER, CCHW & VRNO still are using IFRS and includes Gain on Biologicals in inventory.

• Bio assets increased $12 million QoQ to $60 million.

• PPE increase $78 million to $258 million (they had $60 million in construction in process +$20 million QoQ) and ROU decreases $102 million to $230 million.  gLeaf came with $ 20 million in PPE and $110 in ROU.

On Liability and Equity side:

• A/P and accrued liabilities increased $53 million to $180 million.  This is pretty high.  
• Income tax payable shows up at $30 million owing.
• Current contingent consideration drops $69 million to $56 million.  This might be that arbitration.

Last Q:

Interesting company in that they have a big presence in CO retail, unlike most peers.  This could be pressing down on gross margins while pushing up on SGA.

Next Q there will be a full Q of gLeaf on the books and potentially Medicine Man. I will be interested to see what they paid $280 million for.

I am not sure why they have a +1 million square foot green house in NY given canopy limitations are presently 150,000 sq ft.  Maybe they know something. Maybe that is what was available.

Their debt and leases of $495 million trails (against PPE and ROU of $512 million or 97%, which is very high and they have pledged security which gives them less wiggle room) only Cura’s $650 million is higher in our peer group and is followed by CL $414 million. Keep an eye on this if you are invested.  It generally means they will need equity for any major purchases.

The lack of segmentation of revenue and the lack of SGA separation really makes this tough to compare to peers. I actually think the segmentation might make the story more palatable, as presently they are downstream from peers on most metrics.

Until they segment revenue, I do not think I will include in MSO Snapshot (sorry, Bob).

This Q:

Sales increase sharply but all but $5 million is attributable to gLeaf acquisition being on board for a full Q.

GM increase was very strong at $20 million.  Not all of that was gLeaf related given gLeaf added $25 million in incremental sales QoQ.  With GM without IFRS 48% they are in the lower end of peer group.

SGA are the main operational metric that stands out in a negative fashion. This needs to drop from 43% to high 20% range.

Cash is ok for the next Q or two, but a raise would be expected if the environment is conducive.  Debt still looks problematic with PPE of $298 million (pre depreciation) of which $134 million are leasehold improvements which traditional lenders are not keen to lend against and Long Term debt is $138 million (not including ROUs) and the security given to the converts.

I am interested to see how Medicine Man adds to operations.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in CCHW and will not start one in the next five days.