Another ‘MSO’ that we are becoming more familiar with is Columbia Care ($CCHW). And like other MSO’s, they’re active. On December 22nd, they announced a $240MM acquisition that will get them 400k ft² of production and processing, as well as 4 operating dispensaries (6 more permitted) in Pennsylvania, Maryland, Ohio and Virginia.

They currently claim to be ‘market leading’ in California and Colorado via 2 previous acquisitions:

This is a another first look at an MSO for myself, $CCHV hadn’t had much in terms of presence (or revenue), and hasn’t been eye catching. With a strong increase in sales and acquisitions a’plenty, that’s no longer the case.

This one is all in USD unless noted. To the financials!

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• Sales at $49MM, 35% margin (or $17MM). Ok. Hard ramp this quarter – which totals half the sales of the entire year so far.
• G&A at $26MM. Not ok. Reflective of organizations in build, G&A ramps and takes a few quarters to stabilize.
• That ramp is still rocking – in the last 6 months: July…sale/leaseback on 2 properties; 21 dispensaries and cultivation in Colorado acquired in September, in the same month bought 4 dispensaries in California, and raised $20MM the following.
• Naturally, their MD&A only looks at YoY, and ignores that this company didn’t look like that company then. Standard MSO issue.
• Which, brings to mind GoBlue’s posit about companies in build: QoQ evaluation is going to be challenging. Incoming assets, under ‘new’ management and operational ‘synergies’ put into flux…….pro-forma predictability of revenue and profitability should be approached with much caution. Trust me when I say: the future is uncertain. It needs to be said (about all MSOs). More below.
• Acquiring minority interests (NICs) isn’t cheap at this stage. Like we saw in $CURA and Palliatech, that last mile to full ownership can be a long one. $CCHV put out 7MM shares out this year plus €5MM…..for 2 incremental interests (that I can spot). 8 more to come.
• NIC’s are currently reported as a liability of <$1.9MM>, but I see total optionality around them currently at $42MM. That’s definitely napkin….and the best I can do with what they tell me. Any impact will be felt in the equity box….I’m doing optionality across MSO’s at the moment….more coming in the new year on this. $CCHV will be included.
• As much as I’ve seen, if there is something funky in capital structure, it’ll be in the RTO. Nothing extraordinary that I can spot so far.
• 35 subsidiaries exist in $CCHV, most down to state level operation, and in some cases….store level. Another genuine ‘feature’ of MSO’s in general.
• 19.3MM warrants, 40k proportionates remain at 100:1. More than half of them were converted this year, and you’d be right to recognize those proportionates as a small cornice over shareholders.
• $8MM in SBC for the quarter. These guys aren’t shy about striking paper….and they ramped it pretty hard this quarter relative to the previous 2. RSUs, PerfRSU’s, et al exist. $CCHV’s capital structure is laid out, yet sadly, it’s not written with a consumer of this information mind.
• Speaking of paper, they have 307MM shares outstanding (fully diluted), a 42% increase so far this this year…..30MM of 100MM alone coming from that ‘Green Solution’ acquisition. More below.
• Their RTO has some hair on it – standard. It goes back to 2018, and there’s some obligations extending through 2021. Again, I don’t see anything too funky right……model coming next structure.
• Hey, they’ve got a subsidiary in Puerto Rico (a multi-‘semi-kinda-state operator’, or MSKSO?). That’s probably gonna take Business Development some time. First I’ve seen PR mentioned at any rate.
• And………….Puerto Rico didn’t last long. $CCHV just created a disposal corporation to take the punches, and the operation (or probably just office in a strip mall) is a write-off, with the assets up for sale. Immaterial, simply folly getting cleaned up.
• Financing isn’t cheap for these guys. They picked up $20MM in October – exchanging shares and warrants for cash. Those warrants cost $CCHV shareholders $130 per $1,000 raised (or $2.6MM of the total, a 13% sweetener), and the units themselves hold a 13% interest rate. Total cost of this is in-line with what we’ve seen in similar.
• (Another) immaterial curiosity – $CCHV booked a provision for ‘obsolete inventory’ for $1.3MM. I didn’t know $CCHW carried Tweed beverages (ha ha). Seriously, this is the first declared provision for that I’ve seen in MSO’s – which – is why its’ a curiosity. Most probably just roll it through COGS, but TheCannalysts prefer disclosure.
• That said, these guys are near $GTII in terms of quality of disclosure. It’s really awful. Notably so to myself.
• Strike prices on options arising from the RTO are priced in CAD – which is different than their balance sheet currency (sometimes referred to as the ‘native’ currency of the reporter). This kicks in IAS 32 reporting rules. The impact is that overhang can be grossly understated.

Ok. I’ve been trying to get a handle on these guys, but as I’ve been moaning about, their disclosure and presentation make it challenging.

Interesting that sales assumptions lay costs in at 1:1 with expected sell price. This suggests to me that facilities and stores operate as ‘one-offs’ – unable to lever any central system. That, and that state level cannabis ecosystems vary widely:

The Ohio presence came vis an acquisition in two outfits: CannAscend (4 dispensaries) and Corsa Verde (a processing facility)- pretty early for me to comment – only pitch deck material available at this point. They mention Ohio only once in their MD&A, and that reference was to the name of a holding company. The underlying deals are a little messy to value – they came in from the State medical regime, so there’s contingencies around operating loans and notes payable, as well as prepayments on purchase options. Nothing inordinate. Prices for cannabis assets blew out through 2019, but these were done earlier (cheaper), and Ohio is at a relative discount to say, a New Jersey or Michigan – where markets are actually rolling.

California? $70MM was paid for something. Not much meat provided with the bone though. ‘Project Cannabis is a 4 dispensary chain in California (North Hollywood (2), San Fransisco (1), and Los Angeles (1))). Compare that to asset pricing on the East Coast, where in some places…… all $70MM would buy is a conditional permit that promises the potential to operate some day. We’ll see line item reporting for it under acquisitions in the next financials. I’ll bet a beer that the operations reveal a ‘marginal’ business underneath – one being run as a break-even cash cow:

Their presence in Colorado came via ‘The Green Solution’ (TGS) – a 21 store chain with cultivation (size unspecified). They paid $140MM, and booked $184MM in goodwill and intangibles on it (yes, that math is right). I say 21 stores because that’s what’s listed as open on the website – $CCHW says it’s 23. Either or, Columbia Care had promised $88.5MM in annual revenue out of the chain – in the one month of operation these financials report on, TGS booked $9.4MM in revenue and $800k in profit. Provided October wasn’t an outlier, that’s a $114MM/yr run rate (not $88MM).

A good example of contingent consideration is given in the description of the derivative liability. Jargon aside, it’s just an estimation based upon probability and instrument liquidity. Nothing sexy about it, but illustrative on how integrated future events are around estimation:

I’ll pause here to expand on probability.

$CCHW mentions that 3 of the 4 states listed in these latest acquisitions are currently medical states, and can’t be scaled ‘as is’. While there is contemplation of a move to recreational in many states (if you haven’t noticed, it’s all the rage), but, these specific states are expected to take 24 months (if they flip), and an additional year from there to get a regulatory regime up (with unknown economics). Future money? Sure. Lots of it promised.

Hey, this all can vary. And that’s the point I am making.

The more contingencies, the more interfaces (people & operations), the more potential participants that may emerge…..it reduces probability of an expected outcome. Much has been made of the recent turn of the US election and the Presidency and ‘x’ times forward multiples and ‘once-in-a-lifetime’ investment event……yadda yadda. A lot of it is true: conditions for the commercial exploitation of cannabis have greatly improved in the past couple of years. States have legalized recreational use…..4 more flipped in November. And more are contemplating it or in process. Cool.

My posit is that having more variables (regulatory/political) in play over time creates a far wider world of potential future outcomes. It’s not that I’m dour about MSO’s or their potential (they sure as hell could improve on disclosure). But, I am very guarded about making hard assumptions about the future.

Remember initial Canadian capital formation and ramp? How million ft² facilities were touted and an expected ‘norm’. That ‘funded capacity’ was something companies hung hats on….and how outfits would be printing money from every corner of the globe out of their shiny new GMP facilities in no time at all.

Fast forward to now in Canada.

2+ years of product inventory held nationally; 30%+ of industry greenhouse capacity is gone; outdoor is putting 200,000+ kgs of biomass into the system this season alone; and we have a dozen mid-caps out there (with builds exceeding $100MM!) in varying degrees of financial distress/marginal economics. Extraction is as dead as Rod Phillips career right now. The little guys are beginning to come online…facing a declining retail price environment (and unofficial craft spokespeople paying fealty to the benevolent overlords – happy to take $20k in pamphlets and a State Monopoly logo in exchange for 25% of their value chain confiscated. Worse, the OCS designation is meaningless for Canadian ‘craft’…….because everyone qualifies for the designation. The only constraint is on the size of the specific facility where product is produced. Suckers).

Canadian merger and acquisition (M&A) activity will increase this year – sometimes driven by an Executive’s need to present a company that looks remotely viable. In other cases, companies are bulking up and girding themselves for the next couple of years. At that point, expectations are that it’ll be as hard to alter market share as it will be to establish it. And I agree that’ll probably be the reality.

Ok, a bit of a sidebar there. But I want to prompt the reader to reflect on the Canadian ramp….and apply it to the US. How widely held assumptions don’t necessarily become reality. Even if its’ an assumption that everyone is making. Canada’s got 3 full years of watching this sector form….and while the US has a very different landscape….having a strong, healthy uncertainty about the future should be a part of any investing strategy and mindset.

I believe the weakest assumptions around the great future of US cannabis are that earnings are going to be able to be concentrated. That the trajectory of cannabis regulation will follow alcohol: that wide-spread, economically homogenous adoption of cannabis and its’ use will occur nationally. That regional success will directly translate into other regions. That regulatory regimes will synchronize, and $TRUL and $CURA would be able to morph into a Coke ($KO) and Pepsi ($PEP) (swap for $GTII and $TER, if that’s your preference).

At this point, the two BIG things that are not being talked about in the US is asset quality and time to revenue. GoBlue – like with his ‘Quarter in Pictures’ Series – is developing industry standards for benchmarking performance in MSO’s. TheCannalysts will be integrating select capital metrics into the model – to present as clear a ‘3D’ an image as possible.

With respect to $CCHW, watch for SBC next time. These guys are like many others in the US…..2020 has been a heck of a run in share price – and I expect we’ll see SBC get lit up like a mugger at a cop convention. The decision of where and when SBC is struck hard is a great view into the mind of management (or a signal that rough seas could be ahead ;)).

Hopefully we’ll get some segmentation. Also watch for SG&A next quarter too – the current ramp will put much upward pressure on every line item. Quality of execution over time is the rod and the ruler, and we’ve seen shortcomings before ($iAN immediately comes to mind).

The quality of the assets acquired in TGS and Project Cannabis are somewhat distinct in the MSO space, inasmuch as these reside within ‘mature’ and competitive markets relatively speaking. Generally, these markets have attracted less interest from MSO’s due to profitability. Whether $CCHV can generate enough RoR to cover the cost of capital will be up to how good their financial models are, and how good they are operationally. Lots of promises – and like in other ‘roll-ups’ – acquisition depth and contribution will take time to discern. For now, the sales ramp is impressive, their share count is going to increase another 25% through acquisitions, on top of an asset base with which we have little visibility into.

Yep, it’s an MSO.

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 listed.