Last time we looked at Columbia Care ($CCHW), we saw a company in hard ramp and full acquisition mode. Let’s check in with their 4th quarter of fiscal 2020, and see if they’re continuing on that path. All amounts in USD except where noted.
To the financials!
- Quarterly revenues a hockey stick right now, up to $76MM this quarter – woot. YTD margin 36% (34% YTD in Q3) – which means improvement QoQ – and yep, it was. 39% this quarter versus 35% prior.
- $38.6MM in SG&A to generate $30MM in gross profit, so currently operating at a loss. YTD is unseemly, with $65MM in gross profit swallowed by $111MM in OPEX. Likely acquisition driven. No segmentation at all (grr!), so I’ll have to check a couple of other places.
- $111MM in inventory – higher than what we’ve seen in other MSOs, but lean compared to many places. Managing this kind of ramp must be quite an adventure. I wish I could get a look into The Green Solution. Oh, wait…more below.
- $29MM in SBC for the year ($5MM 4th quarter). More modest than others in the space I guess.
- Really whacking the raises – with $135MM coming in in the first 2 months of this year. They’re going to need it, as just prior, they did a massive deal (relatively speaking) for $240MM acquiring Green Leaf Medical LLC – which they declare an MSO in itself. Only $45MM in cash though, rest in paper. More below.
- Project Cannabis partially closed in December, and 50% of a related entity was acquired. It’s a relatively complex deal (hey, it’s California), where a purchase option on real estate was bought for $16.5MM, which will be paid for by executing a sale leaseback on other properties in the subsidiaries.
- At this point, Project Cannabis is showing an annual run rate of $24MM.
- 30% of all assets are in Goodwill and Intangibles. This will increase, still relatively lower than peer roll-ups for now.
- 8MM performance share units (at $4.42), 12MM RSUs (at $3.64), management has money to burn, optionality ~=$60MM in-the-money. ‘Capital Appreciation Units’ and ‘Income Incentive Plan’ exist as well.
- 13MM warrants, not long dated. Most expire 2023.
- They pulled the pin on proportionates – more below.
- Disclosure has improved modestly, likely it being a year end.
And these financials are a test. $CCHW presents a complex basket of acquisitions across multiple jurisdictions and differing operational states. To give you an idea, here’s a list of non-controlling interests. Leafy Greens seemed to be uninteresting, as ‘Leafy Greens’ sold membership interest to a third party, reducing $CCHW’s holding below threshold:
The Green Solution (TGS) was a 23 dispensary vertical in Colorado, purchased for some $143MM. That came with a $181MM in Goodwill and Intangibles(!) as there was $50MM in liabilities, excluding lease liabilities of $96MM. I don’t think I’ve seen this steep a price paid for existing tangible assets in the space. As an aside, the goodwill and intangibles attributed to the Project Cannabis acquisition also exceeded purchase price:
The good news is that TGS exceeded initial annual revenue projection ($114/yr actual versus $88MM/yr forecast). $CCHW says they generated ‘income’ of $11MM from the unit, but I can’t back into the EBITDA at the segment level to compare with forecast.
$CCHW is hanging their hat on being EBITDA positive in the 3rd quarter of this year. Given their burn rate, yep, they’ll need to show the whole thing will sing. At this point, their annual shows $110MM of losses on $179MM in sales.
A relatively complex 3 1/2 year convertible debt facility was created in June of 2020, Initially at $12.8MM, it was increased by another $6MM somewhere in the last quarter. The interest is relatively cheap at 5%, but the optionality has raised an $11MM derivative liability on the balance sheet. I calculate it at $24MM though, which is a substantial break. Where it’s a little hairy to me is in the subsequent $6MM increase – it’s at the same strike as the initial deal date ($3.79CAD) – despite share prices accreting. That financing must have been important to them at the time, or, perhaps part of a longer ‘relationship building’ exercise….it’s generous.
Interest expense looks to be around $13MM for the year, not much. But it’s in ‘Other Expenses’ where they took a whack. It’s $37MM, which is comprised of 2 major items: contingent consideration on TGS of $22MM; and that $CCHW takes a strong stance in indemnifying management and subsidiaries against claims against them. Seems a Florida subsidiary (an orchid growing plant wholesaler, likely intended by $CCHW to be flipped into weed production but was terminated) was sued by one of the minority owners. They one a $15MM award, and due to indemnification, $CCHW is paying for it. Pricy. $CCHW claims the amount isn’t material, yet included it in their financials, even though the arbitration didn’t occur until March 21st of 2021. That means they accrued for it right to the dollar – and saw it coming a mile away. In other words, a conscious business decision:
As to California, their structuring shows some sophistication, and probably helps to explain $17MM in professional fees for the year ($6MM less than prior no less). From disclosure, Project Cannabis is running at about $24MM in annual sales in CA, and that’s what $43MM will get you in that state. We’ll need to see more information emerge from the 50% NCI though to validate attributable PnL.
A possible nod to price compression is in their MD&A – where GoB is being accrued at a lower rate. Assuming they did indeed expand cultivation during 2020, this will be something to watch in other MSOs. I’m thinking that some regions are going to change faster than others:
The proportionate shares I mentioned last time were fully converted in the fourth quarter. I’m assuming management saw that cornice, and decided deal with it. $CCHW had at least signalled they might become an issue:
Thus, the company went from 117MM shares at the beginning of the year…..and combined with the Green Leaf Medical buy and 2 raises – as of writing, I see a share count of around 340MM: One might suggest these guys have been modest in SBC with respect to peers – and that’s true. It’s also true that $CCHW just gave away $600MM of equity in exchange for nothing.
Hey – that’s what jackpots for early movers look like. At least $CCHW recognized this early-ish (unlike virtually everyone else), and moved to fill in an increasingly large hole forming in shareholders equity. Take note of companies that let this drift – it’ll be a problem when uplists are contemplated – in that their valuations will be mitigated by the larger capital markets.
There’s few pictures around that show to myself how bullish the MSO market has been. At the beginning of 2020, $CCHW had a market cap of some $365MM on 140MM common shares that existed. Now? $2.36B on 340MM shares. That’s a heck of a lot of expectation that’s come into the market, and much to be upheld. Especially for an outfit running underwater.
Given the rate of acquisitions and run rates, this outfit is really moving. And the landscape they present is broad in terms of stores (36) and states (9), but compact relative to a $CURA or a $GTII. All in all, they’re tracking the same ~relative~ valuations as peers, but $CCHW differs in operations in that they’ve got a ways to go to get to meaningful OPEX. This last quarter saw them lose $15MM on operations with $76MM in sales (excluding GoB).
Despite soaring Goodwill and Intangibles (not relatively out of step with sector), the story I see here is simply if they can run a profitable business. ‘Everyone’ knows how much money there is in cannabis and such, but still, I’ve seen some outfits remain stubborn in being able to generate profitable returns. As a roll up, $CCHW is relying on hitting critical mass – and presumably being able to exploit legalization and all that good stuff when it comes around. They’re a year or so behind the ‘big’ shops, and their strategy so far seems to be willing to enter more competitive regions (FLA/CO/CA).
The Green Leaf acquisition changes that – and puts $CCHW into a heavier cultivation profile and midwest/east coast markets. It’s a private MSO – and no revenue figures are attached. If its’ standard issue, it’ll be cleaned out by the time $CCHW gets the keys, and likely pays a large price to acquire liabilities that’ll probably match the asset values.
$CCHW lacks proven operations across system, and they’ve got a ton to digest. I linger on this, because if they are indeed loading for ‘legalization’ to be a catalyst for enhanced profitability, it’ll put pressure on them to get OPEX under control if it’s delayed. Signals coming from Schumer – no vote on SAFE, and only ‘decrim’ promised in a year – is that the road to legalization has hit the Capitol, which could be painfully slow. That means $CCHW needs to get operations up and lean quick. From their MD&A – they recognize they have a way to go to do that:
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 $CCHW