Despite threatening to publish a Structure on Chalice Brands ($CHAL) – that romp through Vext Science ($VEXT) the other day has given me pause.

Not because they’re analogues, far from it. In $VEXT I see a loot-box for management over-riding a poorly disclosed business model and potential gross margin fuckery. In $CHAL, all I’ve see is pretty good disclosure and relatively erstwhile management – willing to freely engage. Conflating the two would be a sin.

Nope, I’m putting off $CHAL because I’m irascible this morning, and I’ve got a $VREO Goodness Growth Holdings ($GDGN) itch that needs to be scratched. No point in taking a bad mood into something that doesn’t deserve it.

Harsh? Un-professional?

Let’s talk about how they’ve booked their warrant liability. Or perhaps about a usurious loan that effectively offloads decision making from the C-Suite, and grants it to the bankers. In my opinion, this thing is a flaming pile, and worthy of spending time on when yours truly is packing a crappy attitude.

I’ll aspire to be open minded and fair – but the first thing I’m looking for is if those convertibles have been finally forced.

As I was doing prep for this one, I reviewed some of my earlier notes on the company, which led me into a couple of spead-sheets that priced the capital structure out at the time. If I was in a bad mood before, it’s gotten worse, and was reminded about a comment I made about their last year end:

It’s a middling business run by middling self-dealing management that lacks vision, and got lit up by a carny (Linton) who walked by and showed a little leg. Taking Victor Mancebo onto their Board is a negative portent to me, and I can’t help but think that $VREO’s ultimately going to be busted up/parcelled off/absorbed at some point, with the good Doctors walking away with bags of shareholder cash for their efforts.

Vireo Health – Structure & Current State Q4 F2020

That opinion hasn’t changed as of yet Let’s have a look at their latest financials, and see if they are able to turn any dials. $GDGN’s share price is relatively flat YTD, but has more than halved since those heady days in February:

To the financials!

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• Cash down $20MM QoQ, to $21MM. Inventory growing sequentially over the past 3 quarters by ~=$2MM in each. Now up to $17MM.
• PP&E up only $6MM QoQ ($12MM YTD). Largest increase in ‘Building and Leasehold’ improvements, they’re in spend across the board.
• Everything else asset wise largely flat. A/P down $5MM. Convertibles ($900k) now gone. $1.7MM gain reported on derivatives. More below.
• $14MM in revenue, abut the same as last. Margin at 48% (or $6.9MM). SG&A a vigorous $8.3MM.
• Interest expense another $2.8MM. Reported loss on Q of $5.5MM. Wow.
• Share count up to 77MM from 51MM start of year. 25MM of them from option/warrant exercise and conversion of multiple voting shares. For all of those shares? $GDGN brought in a total of $3.4MM.
• If you have a hat on, I’d take it off for a moment……and pay respects to shareholders. If you’re a shareholder, you have my condolences…..you just got lit up.
• Still another 16MM in warrants/options on the books. Everything in the money was cashed out. Literally (I’m not kidding). $3.7MM in SBC recorded YTD. The $0 rated multiples shot out $26MM in equity value. For nothing. There’s another 42MM of them to go – thus while the trade-able float sees 77MM subordinates, fully diluted is 125MM.
• There’s some latent legal action concerning their RTO and MINN assets transferred at the time. Quite the snarl, no estimates available nor possible apparently, and ongoing. Not uncommon.
• And there’s the underbelly here: 24MM stock options at $0.55 on the books, 6 years left in them. 16MM live now at $0.34. Well, if you want an example of where leverage remains in this thing, there it is. 3.6MM of them were exercised in the quarter.
• Such float expansion – when matched with business contraction/asset disgorgement/restructuring through 2020 – is ungainly.
• They have picked up another dispensary in Baltimore ($8MM), and claim a total of 17 in-system. The margin is pretty good, but individual store run-rates aren’t close to being comparable with many other MSOs.
• 80/20 retail/wholesale split – more testament to the moat that is retail atm. Surprisingly good disclosure of revenue by state in the MD&A. Almost 40% of all system revenue came from MINN which has 8 dispensaries, an additional 31% of revenue came from NY’s 4 dispensaries.
• Quick math says NY is running at about $300k/mo/store, MINN at ~=$230k/mo/store. But that NY number has a significant wholesale figure in it (33% of total sales), while MINN has $0 wholesale. Imputing, NY and MINN run at about the same monthly sales at the register.
• Also notably, MINN has sales same period last year of $4MM. This year: $5.6MM. But this year has 4 completely new doors open there, implying sales on a per store basis that sales have backed up by about $1k/day in MINN YoY. Hmm.
• That’s quite the gulf on a per store basis versus some of the rock and roll we’ve seen in others w/adult-use. Probably a function of their ‘medical’ focus, and there has been much emphasis on getting their supply chain up and planing. Ive heard several times about a lack of selection being a major drawback of these guys. If that’s beginning to take hold, it’s not showing it yet.
• AZ has shown a pretty good increase, with the single dispensary there being the best of their fleet ($500k/mo run rate). and that’s where the bulk of their build is going, as they ramp cultivation and processing there.
• $GDGN has shown solid improvement in COGS YoY. They attribute it to throughput improvements, I’d venture a guess it was helped along by that PENN asset they sold to Jushi ($JUSH), who recently initiated a large capital spend there. Several signs suggest the facility was a bit of a mutt.

Ok. I’m of two minds after having gone through these financials. I’m impressed with *some* of their disclosure. Many MSO’s don’t offer near as much information up, and it’s much appreciated. Conversely, some things aren’t easy to find, or hard to back into. I will give them credit for improving disclosure over time.

That said, their underlying business model hasn’t much improved.

If there was any doubt about how expensive that $46MM loan they took out was, Note 15 illustates it:

If you’re following along with a calculator, that’s a 18.5% fee ($4.457MM, or $19.6MM net) on the first tranche, to get whole money ($24MM) at 16.625%. They capitalized the warrant value that went out with the loan, and amortizing over time. You’ll recall I mentioned this in our last Structure. I don’t recall seeing anyone else do this in sector. On the face of it, one might suggest this understates aggregate long-term debt. As the presentation in $GDGN’s Note 15 puts it:

I’ve spent the time required to get a handle on it.

That $8.3MM includes the warrant valuation, and this accounting treatment (ASU-2015-03) looks quite elegant….in that it captures, costs, and amortizes optionality granted via issuances. I’ll give this a tip o’ the hat, in that the cost is amortized as interest expense. The loan (and interest) is still at $26MM mind you, but it’s all there. Frankly, I like it.

Because the warrants are based off of a CDN share price (non-native to balance sheet currency), they need to be reported as a derivative. $GDGN reported a $1.4MM gain on that derivative this quarter due to share price declines since issuance. A few moving parts, but to reiterate, it’s all laid out. Kinda.

Another tranche – 13.6MM warrants issued back in March 2020 – had been revalued both at the end of March and June of this year. I cant back into any of the inputs on these though (share price), and the CAD/USD forex rate is at $1.41/$1.36 respectively. Perhaps they’re using the forward curve(?). Not much in totality, but I can’t make sense of it. All gains/losses seem to be reported YTD as well, so tying it back will take more work than its’ worth at this point. Year end reporting will bear it out, particularly if there is any true ups. I would like to know where that $0.64 share price comes from though:

The reality is, anything aside from options that was in the money was exercised, the remaining forfeit, and the only thing left (3.7MM in warrants @ $3.50) are the ones left from the $26MM financing.

I’d love to see a little more detail around that lofty G&A reported, but $GDGN uses a catch all of ‘Other’ that doesn’t split out if it’s promotional fees or marketing or a new marble fountain for the executive dining room. The account is running almost as hot as ‘Salaries and Benefits’ though:

As to $GDGN, Arizona is a flashing beacon of hope here. Their legacy assets in MINN – despite having a relative lock there – aren’t terribly impressive. NY probably can’t open fast enough, and is another bright spot on their horizon.

Yet, they’ve been printing shares without an attendant expansion in capital coming in, have got themselves wrapped into one of the most expensive financings we’ve seen anywhere in cannabis, but don’t really have much of a foundation underneath themselves. Hey, a ~=$60MM annual run rate is ok, but when one is still running negative cashflow on ops this far downrange, I think it describes why their financing was so expensive, and how poor a condition they were in a year ago.

One might summarize this as having $GDGN outsource business decisions to the capital market types before there was a solid asset base in play.

Maybe. The leverage around options is ugly as heck. And they are upfront in stating SBC will ‘continue to persist’ (their word, not mine), which is a bit disingenuous given 6 year tenors on so many cheap options. Same with multiples.

At any rate, I see this thing locked up tight, and not heading anywhere for awhile until the if/when AZ expansion is realized and NY can show some leg. Even then, assuming linear growth in COGS and G&A – I’m genuinely wondering whether they can show much profitability even then.

Like many, $GDGN will benefit greatly from legalization/decriminalization when it comes. As to their asset base and capital structure, I simply don’t view it as investable, nor do I view their management as ‘operators’ in any sense of the word.

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.