Green Thumb Industries – Structure & Current State Q3 F2020
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Green Thumb Industries ($GTII) has been on the same bull run as many other MSO’s, and a position held from July until now would have realized a 100% gain. Such is the ebullience of the US MSO market right now.
Long time readers will know that that I have absolutely nothing against risk. Nothing. Hey, risk exists everywhere. Might as well accept it as a part of life, and move on, right? You might not ever learn to love it (there’s times I embrace it and invite it home), but it can easily be friend as much as foe.
Volatility is a great measure of risk. Companies that put up better numbers are likely to show less share price volatility than peers within volatile sectors. For the retail investor, especially after a run like the last 3 months, one would hope their particular MSO puts up numbers to support new altitudes.
I just went over GoBlue’s recent ‘Quarter in Pictures’ on $GTII – with a company whose opaqueness in financial statements I’ve moaned about plenty.
They’re beginning to open the throttle, let’s have a look at the breadth of their capital structure as it stands, and see if there’s supports in place.
To the financials!
- 48 stores open as of financial statement date. Goodwill and Intangibles at 62% of total assets.
- You’ve heard me mention ‘Contingent Consideration’ before – $GTII also uses ‘Deferred Shares’ to book payments as well. More below.
- Inventory largely flat QoQ. We see this more often now in MSO’s: some states permit robust wholesale markets, allowing supply and demand imbalances to be managed. The quality of that management will be reflected in margins.
- They recorded an $11MM gain in investments. I can’t tell why or who – it’s simply a gain via ‘Convertible Notes Receivable’. Looks like goes back into 2018, likely part of corporate incitation. Fully amortized now, nothing more than a curiosity.
- The option parameters they use are good (.42% risk-free rate and 100% rolling vol). There’s maybe 3 companies that do this right…. $VFF is another IIRC
Ok. Most of my observations are below.
‘Contingent Consideration’ is a liability account, typically used in companies to accumulate (potential) future payments to acquisitions/counter-parties who meet metrics established when the deal was struck (like revenue or gross margin targets). It’s a place to see where liabilities may crystallize (or vanish). In $GTII’s case, they’d also booked some contingent consideration to ‘Deferred Shares’. Nothing material, but if you thought they only have to pay out a maximum of total ‘Contingent Consideration’ – you’d have missed another $21MM in equity that went out the door as exactly the same thing. Too often, deals are remembered for initial costing only. Contingencies can end up exceeding the initial cost of an asset:
Most analysts will tell you that hitting earn-outs isn’t a bad thing. After all, one would assume earn-outs are calculated to the valuation model, and if they get hit – it was predicted. Thus, planned for. Yep. That’s the way it works. But the real world isn’t as clean, and acquisitions with contingencies need to be evaluated against performance as time goes on.
Another way to think about contingencies is Goodwill. One could look at it as a ‘Contingent Asset’: that an acquisition needs to perform well enough to absorb related goodwill and its’ amortization over time. If it doesn’t, the asset is impaired. Where the ‘benefit’ of a reduction in liabilities goes (or ‘loss’ via impairment in assets) is straight into the equity box.
I linger on this because we’re going to be seeing the fruits of both of these asset/liability trees ripen over the next couple of years within MSO’s. A couple of outfits (like $MMEN and $iAN and $TILT) have been ahead of their time in this regard, but all companies will have to deal with acquisition performance at some point where significant intangibles exist. Just like Canadian LP’s.
The change reported in aggregate share count is a great spot to start when looking at a capital structure. These financials report a 21% growth in shares outstanding since the beginning of the year:
There’s a lot of information in this table. First, that there’s been some $20MM in SBC booked this year (via RSU’s), to be amortized over 2, the remainder in options. This will be a rolling value dependent upon stock price and new issues:
In $GTII’s case, they began the year with $33MM in total SBC, amortized over 2 years.
I’ve mentioned it before: there’s an upside to having a balance sheet with a native currency in USD……and CAD denominated strike price on nested optionality. These type of exposures need to be reported as a liability (as opposed to a capital reserve or derivative). In $GTII’s case, last summer they’d granted lenders of several loans (which included the CEO/CFO/CCM) 2.4MM at-the-money warrants with a 6 year tenor. That liability is reported at ~= $24MM CAD (in addition to interest). That number is also within $100k of the number I calculated for it (for an analyst, that’s a happy place).
I’m not emphasizing their SBC or related party transactions here per se, the preceding is provided mainly for reader orientation. I will remark that pre-paying oneself SBC is kinda quaint: one would expect some linkage to performance in general before writing themselves a cheque. I’ll also add that the $24MM liability booked should be accounted for by investors. Shareholders are paying value – whether it’s in cash, or optionality.
An important thing the table above does show is a 27.5MM ‘Exchange of Shares’ happened this year, which, accounts for 80% of the total increase in shares outstanding. Where did they come from? The ‘Multiple’ (MVS) and ‘Super Share’ (SVS) classes.
A single MVS is exchangeable into 100 Subordinated Shares (SUB), and they hold 100 votes each. A single SVS is convertible into 100 SUBs as well, yet holds 1000 votes per share (SVS can also be converted into MVS at 1:1, a useful tool for management to have). There are currently 379k SVS and 129k MVS o/s respectively.
Between those SVS and MVS…..they represent another 50MM subordinated shares. These will ultimately appear out of thin air (or, perhaps never. Unlike $CURA, there is no sunset clause on SVS/MVS at $GTII). The SVS hold some 379MM votes at the annual general meeting. Whoever owns these SVS’ own this company until the point there is 300MM more subordinated shares in existence. Hey, I don’t necessarily like/dislike this sort of thing (I don’t in general), but I do believe its’ vital for a shareholder to know prior to investing. If you’re getting into bed with someone, best to know if they have handcuffs before you start.
The Integral acquisition (I calculate the cost around $420MM CAD, detail here in USD) brought them a sum total of $21MM in net tangible assets (!). From acquisition date (June 5th, 2019) until calendar year end of Dec 31, 2019 – Integral reported $77MM in revenue and a corresponding loss of $10MM. Since then, I can’t tell you a thing about it: disclosure around operations is not useful here. There was a $57MM USD trigger within the deal – an additional payout in $GTII stock that would have happened within 12 months after close if milestones were hit. They weren’t. Aside from that, I don’t know….I can’t see what they even were.
I can tell you that $GTII paid $420MM to buy Integral, and for that they got: 3 dispensaries and 2 cultivation sites in Nevada…… along with a brandname of the stores (Essence). This name itself had $77MM attributed to it as trademarks within the acquisition. Put another way: they paid $77MM for a brand that exists by and for three stores, within a single state. I presume the thing’s portable at least. Perhaps it’s got something going B2B wise, but branding means virtually nothing in that channel). This reminds me of Nevada being a tough place to make a go of it…….and reminiscent of the MPX and Blackjack acquisitions in terms of cost relative to hard assets acquired. Integral looks equally spectacular.
‘Related Party’ transactions appear 11 times in these statements, in one of two places: leases or warrants.
‘Mosaic Real Estate’ is a company several insiders own, which, owns buildings that $GTII operates stores in:
Take from it what you will. There’s already been a sale of a property from Mosaic into $GTII, who then executed a sale/leaseback with IIP over it. With respect to materiality, any related party issues would boil down to how many storefronts and how much dollars in real estate is represented by $1.3MM USD/yr in cost to lease:
The leases above don’t look inordinate, and management is laying it out. The number of warrants that went out to management for the bridge financing last year weren’t much (<90k), but more were issued to Mosaic (30k) for another storefront bought by $GTII in June of this year:
Ugh. This is painful. It’s because I really can’t see much in here.
And what to say? I’d like to see what the values are for the assets they are moving around to themselves. Materially, there isn’t much to look at. The MVS and SVS are a relative black box. They’re dilutive, and centre around control of ownership. That leaves Goodwill and Intangibles. Which, they have plenty of.
GoBlue and I have been discussing differences between the US and Canadian legal cannabis sectors, and two things that’s emerged from the US is in ‘asset quality’ and ‘region’. Take a look at how many MSO’s are lining up to enter Washington State. Or Oregon. Or Colorado. Not many right? These states represent saturated markets, and bring low unsaturated margins. There’s similar conditions state by state in existing and future markets.
As to asset quality, we see a wide array of per store performance (when we can). As you’ll see, GoBlue’s been working on getting some comparables together to see if we can’t tease out where quality may lay.
For $GTII, look next quarter for continued sales expansion. They do provide some commentary around financial drivers, but it’s extremely limited. We’ll be looking for changes in margin, incremental openings, and anything else we can find. This is such a difficult company to present and comment upon due to the opacity of their financials.
I’ll leave you with this thought:
$GTII has never been much for or around disclosure. For a company in relatively early days……with hard revenue expansion and in an extremely ‘live’ growth sector – most outfits with a good quarter or story should be walking around town naked with a sandwich board on and an airhorn. Jugglers. Clowns. Marching bands. Bouncy castles. Firework. The whole shebang. All while showing off that coolness and spelling out exactly how they are killing it.
$GTII – whether presenting ‘selected’ values in press releases ahead of actuals….. or within their financial statements – have been barely audible in this regard, and much, much too modest. To a fault.
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
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