Green Thumb Industries – Structure & Current State Q4 F2019
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Finally, some financials we can (finally) look at.
This company – along with notable bunkmates Acreage Holdings and Harvest Health – chooses to issue a press release touting <select> the financial performance of a reporting period, but, doesn’t release the financial statements. The same way a child says they did their homework, but doesn’t submit it.
It’s an irritation for the parent of that child to find out they flunked an entire subject (or two) after the fact. For an investor (with actual capital out there), it’s not just about getting a grade in school. And to myself, it’s is not a question of applying best practices or not: this is simply an insult of disregard.
Hilariously (or perhaps darkly), they even amended the press release, restating their quarterly loss as being $5MM lower than initially reported. Wow, good news. Right? Hardly.
At any rate, let’s have a look at their final quarter and year end for 2019.
To the financials!
- Cash down $20MM QoQ, A/R stable at $7MM
- Inventory up $15MM to $46MM. With sales this quarter of some $50MM+, they’re at a brisk pace.
- Gross margin for the year around 49% ($109MM), which is good. The bad is that SG&A is rocking at $134MM.
- And SG&A blew out, climbing to $54MM for the quarter – much higher than the previous one of $30MM. For perspective, sales previous Q were around $70MM, and for this one, $76MM. Meaning ,that SG&A went up 5x as fast as sales.
- Holy. Goodwill and Intangibles now $820MM (out of total assets of $1,167MM). Contrast this with the $156MM in property and equipment they report to get an idea of how much air there is in this tire. This is flying at the same altitude as $iAnthus. And the air is pretty thin.
- Unlike others though, they claim cash does remain available to through various notes and facilities.
- But $GTII executed $100MM in sale/leasebacks with Innovative Industrial Properties (IIP) in the past 5 months, which, is pure financing. One can find various opinions on whether or not this sort of financing is ‘good’ or not, it boils down to management’s perspective, and preferences. More below.
- Despite $70MM+ in sales in the quarter, it’s a relatively thin income statement and balance sheet. Like many MSO’s, it’s what’s in the notes that counts.
While it’s getting kind of old to be saying this: despite the breadth and scope of their operations, there isn’t any granularity around operations by state or product class or functional area or by region. It’s a competitive industry, not only for customers, but for assets as well. Much of this data – like retail in Canada – is considered sensitive information.
Their inventory isn’t ballooning like what we’ve seen in $TRUL. And like most MSO’s, it’s particularly difficult to divine production capacity and facility potential. Deals with IIP include references to inducements funded by the lessor to upgrade production. In one case, this means some $41MM in a grow op in Oglesby, Illinois. Given the asset was sold by $GTII for $9MM – and they are planning to put in another $9MM on it, the total investment in this single asset is expected to be $50MM. With numbers like this, one can’t help but wonder if it was fit for purpose in the first place.
The company that’s providing that $41MM is Innovative Industrial Properties – who was the subject of a ‘short report’ by something called Grizzly Research. Much of the market reacted to it by doing absolutely nothing. Those that did react, pretty much stated the short report was – in a word – bullshit. As background, Grizzly also did a hit job on Trulieve awhile back, which, elicited the same reaction in the market.
Most of the allegations in the one about $TRUL are breathless and airy. I have been critical about the husband of the CEO (like, pull up your big boy pants pal and go get your own gig, rather than leeching off the wife). As to ‘shady sources’ of financing, allegations of ‘lies’, and mentioning FBI investigations….all without proof positive….I can neither speak to nor opine upon. I’d guess the larger market’s reaction was probably driven by the same thought to some degree.
Their last financing was completed last November. They do have capacity for more under existing facilities………..The images below present changes in cash, via the raising and deployment of capital.
Notably, ‘operations’ hasn’t been a positive contributor to cash position. They’ve burned $18MM this year on operations itself, losing a total of $60MM on the year against $216MM in sales. Big numbers all around.
An acquisition in ‘Integral Associates’ did add $15MM in net tangible assets to the balance sheet, but at a cost of some $366MM. This buy did add 3 retail outlets and 2 grow/processing operations along with it, and it is in-line with ratios we’ve seen other MSO’s buying existing operations at. There’s also another $56MM contingency, which would add to the purchase price if some milestones around earnings are hit. One can’t find that unless they read the details of the transaction, or look in Note 18 (Financial Instruments and their Level 3 valuation). The distinction at $GTII is the sheer size of the numbers around intangibles and goodwill:
Goodwill and Intangibles are so much of the total assets, it’s hard to get past it. We’ve seen others in the space beginning to impair – $TILT is in the majors here, along with $CGC – and one has to muse if $GTII will be moving a step up from the beer leagues to join them. $GTII is applying a raft of accounting changes for the upcoming year, and treatment of Goodwill/Intangibles is included. From page 70 of the filing:
In the aggregate, $GTII’s Goodwill is best illustrated in an image:
In terms of everything that can be said about this outfit…..if one boils everything down to a single thing that should give an investor pause about $GTII ……to myself: it’s capital structure. While they have a current 128MM subordinate shares outstanding, there is also 1.1MM of ‘Supers’ and ‘Multiples’ on the books. A single one of these converts into 100 subordinates, which, would result in 110MM more shares coming online…..whenever they want. There’s no reference to a sunset clause to be found. A cynic may suggest that if these multiples and supers are beginning to be struck, it’s probably a good time to head for the exits, as it would imply management sees share price weakness incoming.
Excluding ‘Right of Use’ assets (leased back properties), $GTII has only $180MM in hard assets and investments. The latter having been halved since last financials, coming down from $48MM previous quarter to this one’s $24MM.
GoBlue’s going to provide some ‘purty pictures on operations over the next day or so, and I have a good idea what they’re going to look like. But simply based upon their capital structure, there is also significant potential for dilution. Goodwill (and to a lesser degree, intangibles) continues to threaten to jump into the front seat and pull at the steering wheel.
As we go through time regarding MSO performance, some defining characteristics emerge from those struggling at the moment (like $iAn and $MMEN). $GTII shows some of those same characteristics, despite having a decent margin and demonstrating QoQ sales growth.
A couple of quarters ago, we mentioned seeing a considerable amount of risk here – even if sales and margins do distinguish themselves hard from some that have had little of either (hello again $iAN and $MMEN). If anything, these financials tell me that an investor’s overall risk hasn’t changed except to increase.
A week or so after their ‘press-release-from-management-of sculpted-metrics-of-pseudo-financial-reporting’, $GTII stated that their President Armen Yemenidjian is stepping down to spend more time with his family, that there are thanks all around, and even a 6 month transition period. Maybe the new person will look to find out what happened in SG&A.
The succinctness of it mirrors so much of this particular business. I see a very high level of risk here relative to peers, and a balance sheet that needs tending. Unless sales take off far (far) more than the $5MM/Q they saw this quarter, the tending that needs to be done won’t necessarily be at their leisure.
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, $iAN, $MMEN, or $TILT.
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