Last time around, I’d spent a lot of time looking into some of the minutiae of Green Thumb Industries’ ($GTII) capital structure and operational model in California.

Since then, the MSO space has been trading largely sideways. It’s still packing the same volatility though, and intra-day/week moves are higher compared with many ‘mature’ sectors. Yep, its’ an emerging industry. And as much of our analysis reveals, without a stable/predictable earnings platform, ones’ going to see volatility.

I largely cringe when I see #MSOGang comments about legal cannabis stocks being the ‘best investment’ anywhere, or flat statements about predicting the precise operational states of the future. Canada’s experience is that most of the predictions were crap. Most predictions about the future are. They always have been, and always will be. I expect the same in the US.

Sure, one might be able to pick off some aspects. Perhaps even get a big one right occasionally. But to assume that’s repeatable is foolhardy. There’s been much academic study and mathematical law applied to the notion of returns on securities and relative risk. I won’t go on (I’ve done that plenty), but the takeaway is that recent downtrend/volatility of MSOs is perfectly in line with their existing volatilities. I harp on this because whenever I see a sell-side bromide: Rising share price? Told Yah! A drop? Opportunity!. This kind of shit is sloganeering to myself…..it describes an outlook, not an objective viewpoint. It’s fine if that is indeed one’s outlook, but qualified in that the outlook is that it needs to adapt to changes in reality (regulatory/competitive), or when results continue to diverge from that outlook.

That’s a large reason why TheCannalysts look to initial claims versus reality over time. Many folks will give me a ‘gotcha’ if I’ve been relatively dour about a company, and it’s price shoots up. “See Molly you moron!”. As to price moves, I don’t give a shit. I care about losses/returns relative to risk, and I analyze financial statements to derive opinions about that. I don’t predict price moves. And I sure as shit aren’t going to take credit if they puke either.

I will take credit for things like Fire & Flower ($FAF), where I don’t talk about share price, but noted Couche-Tard lighting up common shareholders via repricing the option they’d bought from $FAF. As it turns out, $FAF dropped a $56MM liability on their balance sheet at year end, reflecting the wheelbarrow of common shareholder capital $ATD.B walked away with (I think it should have been $90MM btw). Has it hurt $FAF’s share price? Hard to tell. And that’s the point. Share price in emerging industries can be wildly disconnected from asset value. Expect this as the price of admission.

Assuming your goal is to make boatloads of money (likely a safe one), keep in mind that returns are always relative to risk. I know I go on about this, but it’s fundamental to always keep front of mind. Especially if your holdings go deep green. I’ve seen far too many get wrapped up during the run…..now wondering why their $40 buys are at $30 instead of $60. It’s painful to see greed swamp reason. And I’ve seen it a thousand times, often with horrible, life changing outcomes. Anyhow.

Given volatility in this sector, a $2 drop in $VFF in a day is absolutely ‘normal’ given its’ historical volatility. If you are investing in MSOs, expect that this volatility will attach to pricing. And that volatility applies to moves in both directions.

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$GTII’s first quarter of fiscal 2021 came in with much fanfare, but share price didn’t react as well. There’s some confusion out there, particularly when much of the market is up, legal cannabis ‘seems’ not to be very well correlated. Yep. That there is sector uncertainty to myself, and nothing more. In our latest podcast – coming out later today – we talk about parallels between the Canadian and US legal market developments as time goes on.

GoBlue and I see many – despite differing regulatory regimes and operational models – they share(d) many of the uncertainties about future profitability and operational states in their respective development. I don’t see many (any?) people talking about this, only the inverse. Whether you see us as ultimately ‘right’ or ‘wrong’ is an aside. Considering the possibility is all I encourage. It’ll reflect an open mind, and help keep you as objective as possible, no matter your particular outlook.

$GTII has seen $15 swings (!) over 5 a week period recently. Let’s see what their latest quarter looks like, and check for changes in capital structure:

All dollars are expressed in USD unless otherwise noted.

To the financials!

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• Warrant liability up $14MM to $45MM. The gift that keeps on giving to the folks who coughed up a 40 day bridge loan – and a subsequent financing – hit a jackpot.
• Out of some 2MM warrants related to that, only 226k of them have been struck (at $18). The total liability will back up by ~=$7MM if price remains at this level. In aggregate, not terribly material, just expensive.
• 11k of Supers were converted during the quarter into 1.1MM subordinates. 29MM more to come.
• 5.3MM 4yr $12 options hanging around. More below.
• SBC running at $12MM/yr.
• They recently refinanced, a detailed look a that can be found here in Part 1, and here in Part 2

Relatively good disclosure in these statements.

Mentioned last time, $GTII presents an intrinsic value calculation of their stock options, and it’s the first company I’ve seen do this in-sector. And it’s good honestly. If I had to divine a reason – I’d also lump Columbia Care’s recent collapsing of their proportionates and $TRUL’s disclosure around volatility that may be induced by their existing capital structure – I’d say there’s some external pressures beginning to emerge around the optionality being packed around by the cannabis sector. It could be me looking for some badge polishing 😉 but, as share prices have risen, so has overhang. Its’ existence is unattractive to Wall Street and the larger funds/institutional types, who’ll discount assets due to its very existence. There’s always going to be some of course, but 20%+ of a market cap residing in 3 people’s desks won’t fly outside of high school.

If this is a sign that cannabis sector is maturing and beginning to prepare for a new reality (and larger capital pools), I think it’s nothing but positive, and that the sector might soon be leaving adolescence (and its’ acne) behind:

$GTII splits out their non-controlling interests (they refer to them as ‘variable interest entities’), more good disclosure:

The reader might note that both in this and the previous Structure – I’ve included notes about risk and returns and the MSO landscape and such. It reflects my thought processes – as I’ve been looking at $GTII hard. It’s caught my eye due to operations (they present one of the best SG&A profiles out there) and despite a couple of ‘bad’ moves (cost wise) during the fire drill hunt for cash early last year – and they haven’t repeated those sins.

Their moves in financing are orderly, front office doesn’t have their hands too deep in the capital till (still, 30MM shares out of 180MM sucks), management participation in the latest financing was modest, they appear operationally focused, and seem to keep an open mind as to alliances. $GTII isn’t as landlocked as $TRUL (which isn’t the case anymore), but have demonstrated they can operate in multiple states, which, isn’t yet the case for $TRUL.

In other words, they’re showing me leg.

This one will be short – combined with GoBlue’s latest Quarter in Pictures, my previous Structure and recent writeup on their re-financing….there’s not much more to say at this time.

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 $GTII