Time to revisit Columbia Care ($CCHV), a company in hard expansion mode the first time we looked at them. They were relatively unique among the MSOs at the time, entering Colorado (Green Solution – TGS) and California (Project Cannabis) a few quarters prior to most.

Our look at their fiscal 2020 year end back in late April saw that heavy expansion continue – both in revenues and SG&A. An unprofitable year despite sales of $179MM, more than double year prior. And they aren’t slowing down this year either: closing a quarter billion dollar acquisition in June, buying property in N.Y. for $30MM, and have issued debt and equity for some $200MM thus far.

Their share price mimics the sector though – as federal regulatory doldrums appear to have settled in hard:

I’ve just gone back over our material on them to refresh, and I’m reminded of the overall opacity in their financial statements, which is a challenge. Hot and heavy ramps are another challenge for an analyst – direct QoQ comparatives are nigh, and incremental operations require absorption/stabilization within their new ‘home’.

For those unfamiliar, the term “Under New Management” can mean a lot. When a company is bought/taken out – its’ often on the premise that the acquirer sees potential that existing owners can’t (or won’t) exploit. It could be in having centralized data and systems and corporate efficiencies brought in. A more efficient supply of cultivation (cost or yield), better distribution, brands…you get the idea. But changing an organization isn’t like flipping a light-switch, and personnel and culture changes are always a part of integration. Taking up to a year to transform and stabilize that ‘under new management’ moniker is common.

$CCHV’s acquisition rampage isn’t unlike the Green Thumb’s ($GTII) or AYR’s ($AYR.A) (among others), but it remains to be seen how quickly they can stabilize assets added to their fleet. Incremental asset addition during integration keeps the ‘whole’ of operations difficult to see. Without segmentation (grr!), we’re sometimes doing analysis in Braille. <Ok, whinge over>.

I’ve no specific inclinations towards this outfit (yet). GoBlue made a crack to me the other day about an MSO buying assets that had a total amount of Goodwill and Intangibles that were 115% of the purchase price. Reviewing my notes reminded me that $CCHV is the title holder – their TGS buy was at 127%.

$CCHV is a little unique in the breadth of non-controlling interests (NCI’s) they’re sporting.

To the financials!

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• $148MM in cash, inventory has burgeoned to $165MM (up $47MM QoQ).
• The split between ‘WIP’ and ‘Finished Goods’ is almost even. Looks like Green Leaf came in pretty much turnkey.
• Sales up from $88MM to over $100MM – the hockey stick ramp is still in play. This is a heck of a bump. They sport a 42% margin, which is weak relative to peers, and almost counters claims of operating within limited licence jusridictions. I’ll defer commenting on operations to GoBlue’s QIP for this quarter.
• But for mentioning SG&A still exceeds gross margin. And that ‘Sales’ (the ‘S’ in ‘SG&A) isn’t split out. $CCHV is an outlier in terms of disclosure in the sector. I’d describe the sector as ‘poor’ in general, but $CCHV is consistent in lowering that bar even further.
• $540MM in Goodwill and Intangibles (35% of long-term assets) which is relatively lower than many MSO’s. This is countered by $331MM in lease liabilities, which is as hard a skew in the opposite direction from peers.
• Contingent Consideration has increased by $80MM since the start of the year, largely in part by the Green Leaf acquisition. The purchase saw G&I attributed at 105% of total price. Outside of cannabis (or extremely speculative sectors), this isn’t considered ‘normal’. More below.
• Green Leaf brought in $20MM in PP&E for their $280MM price tag.
• $CCHV had lost $15MM in litigation around a previous acquisition (Sun-Bulb) after indemnifying them for existing legal action. <I wonder if that can/will be capitalized?>. Another ongoing issue is lagging from October 2019, where a previous partner/stakeholder has sought and is engaged within arbitration against $CCHV’s CEO. No numbers or probabilities assigned….it has been going on for awhile though.
• There is other claims as well it seems – but as yet unspecified. They come with a disclaimer that any possible negative judgements aren’t reasonably reliable at this point. Those were the same words attached to the initial Sun-Bulb contingency when it appeared in Q3F2020.
• Curiously, these financials look like the first time $CCHV has mentioned the ongoing 2019 Arbitration. Note 13 – Commitments and Contingencies.
• $5.1MM in SBC this quarter, $13MM YTD. They’re not shy in granting themselves it, despite paying people to buy their weed (via negative operating margin). This is in addition to proportionate share conversions.
• Another $3MM was paid for the taxes owing on that SBC this year as well. It’s a creamy deal for those receiving it.
• Only ~=3.5MM warrant in-the money (out of 11.6MM).

Ok. I’ve been bumming around these financials for more than half a day now, and I don’t think there’s much more I can add.

A note around the texture of $CCHV: Last Structure – we’d noticed $CCHV was in the middle of doing a proportionate share ‘clean up in Aisle 3’ – and noted it positively. TheCannalysts currently hold the opinion that <several> capital structures within the US MSO space will require such ‘cleaning’ prior to movement to the ‘big boards’….otherwise known as ‘up-listing’.

This will enable access to a wider pool of funds and investors – and we view this as being synonymous with accessing capital pools that are – in general – more sophisticated than existing. We don’t see these pools having the same tolerance for the existence of significant $0 dollar rated equity laying around within a corporation (either in the existence of compressed/proportionate shares), or, with significant amounts of control residing within a relative few (vis a vis ‘super voting’ shares).

We believe the ‘institutional’ investment that lie within those potential capital pools – will be contingent upon the winding down of many of these particular capital structure ‘features’. This in turn could be disruptive to equity prices during, and after, this process. Viewed from this perspective, $CCHV looks more prescient than most in terminating/winding down the proportionate share holdings.

The impact on $CCHV is illustrated in the table below, where a full $90MM in equity was issued via proportionate conversions since the beginning of this year – with no corresponding cash/asset inflows:

One may look at this in light of $CCHV’s current leverage – demonstrated in the amount of debt and lease liabilities they are currently packing. With $600MM total in debt and contingent consideration – along with $8.6MM (!) this quarter in interest costs attributable to those – $CCHV’s got a pretty tight drum skin on here.

Regarding that ‘Contingent Consideration’ with the Green Leaf acquisition, $CCHV puts forward the most convoluted calculation of it I’ve seen in sector to date. The aggressiveness of discounting might (or might not) be warranted. I can’t tell. While this disclosure/dialogue is more than I’ve seen around most contingent consideration, I’ll point out that what it says in totality is nothing without source documents. This is more common than not: Jushi ($JUSH) presents great disclosure around earn-outs (unlike AYR, whose opacity is simply frustrating), and is why I was able to nail their number. Here? Whatever it is……. it is:

To myself, this is still a ‘wait and see’, with an investor requiring heavy reliance on management to fulfill the expectations they’ve set. Revenue is growing at a good clip, not much more I can say. $CCHV has planted a Q3 flag as to EBITDA (unadjusted) being positive. To me? Whoopee. They’ve $32MM currently in annualized interest charges, their share count is metastatic, and they have $126MM in current accounts payable and accruals.

Should $CCHV’s ‘hockey stick’ level growth in revenue continue, SG&A showing stabilization, and with improvements in gross margin occur – the income statement will sharpen up fast. At this point, they’ll need all that and much more to compensate for their balance sheet. Poor disclosure aside, and as it stands…..I see $CCHV as a very large leap of faith.

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 holds no position in any of the companies mentioned.