There’s been lots of buzz surrounding this latest release of financial statements from Green Thumb Industries ($GTII), as they announces more ‘record breaking’ results. That’s an old refrain (particularly when stating YoY results in a growth sector). But hey, their share price (like other MSOs) has been on a tear. And unlike $CURA – which dropped slightly on the release of their last quarter earlier this week – $GTII is up $1.76 as of writing.

Even $CURA’s single day pullback is in the rearview now, as most MSOs are advancing. It’s being attributed in part to the SAFE Act being reintroduced to the Senate, as well as Mexico’s impending legalization. <That NYT article on Mexico’s legalization is relatively high level, if the reader is interested, here’s a closer-to-the-ground look at the mechanics ‘ad rem‘ (as it really is)>

I see parallels in current MSO pricing as I did in Canada’s LPs early on, where share prices between outfits were largely ‘coupled’. As Canopy ($WEED) went, so did they all. Without much differentiation at this stage of an emergent industry, it’s harder to discern asset quality and earning potential. The flag-bearing $WEED of MSOs seem to be Trulieve ($TRUL) and $GTII at the moment, and their tides are likely helping to lift all boats.

TheCannalysts have been wary of consistency across MSO assets. Whether it be by State (CA/WA/OR appears to be difficult to find margin), an evolving regulatory field, or, the existence of artificial moats that bring superior returns. Denver just dropped a regulatory bomb yesterday, which has wide ranging implications for MSOs wanting to access the city. I have no doubt it’ll be litigated, and companies may indeed find ways to elude the spirit of the regulations. The larger implication is if this format is adopted within a federal schema for legalization/decriminalization. That’s a different dynamic than a 3-Tier model would bring, but could be integrated.

I’ve seen some wags suggest any 3-Tier installation will be years off. Perhaps. But I’m pretty sure changes in share price won’t wait until Day 1 of it actually happens.

As we mention in our latest podcast – TheCannalysts believe there’s a probability that there’s some real mutts in the cannabis fleets of the MSOs. The lack of segmentation presented by companies in formation/build don’t provide us with as much information as we’d like (sadly). We’ll do our best though.

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We lingered on $GTII’s overall asset quality in our last Structure on them. This time, we’ll focus on operations, the Integral acquisition (as GoBlue rightly points out: it won’t be reported on a consolidated basis go forward since the transaction closed in 2019), and, changes within their capital structure. Fiscal 2020 is a wrap, let’s see how they are prepared to take on 2021.

To the financials!

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• $83MM in cash, $21MM in receivables, $69MM in inventory.
• They’re gonna have another $150MM in cash – 2 sequential raises in January in the low $30’s – went out smoothly. Those raises are already $8 in the money (!)
• Accounts payable and income taxes at $36MM. Accrued liabilities are at $56MM, I can’t divine what’s included in these though. 2020 saw $GTII spend $18MM on them, they’re said to include the loyalty program (~=$3mm) and extinguished a non-controlling interest during the year of $400k (KW Ventures). Since they began the year with $37MM, there’s growth. I can’t see in what.
• Inventory went up by $14MM QoQ. Not much impact given throughput. Most of change ($8MM) is in finished goods, probably reflects timing of harvests/purchases to facility throughput and finishing.
• Working capital overall is orderly. And supported $176MM in sales (up $20MM from prior), bringing in a crisp 56% margin (3% better than prior). SG&A up $3.5MM.
• I’ll defer to GoBlue for more of the operational results.
• Net income was recorded at $15MM, after an $83MM provision for income taxes on $100MM gross income reported. Eep.
• Interesting mention of ‘favourable adjustments’ to contingent consideration. Integral didn’t hit their EBITDA targets for 2020. While they did get their license (triggering a $4MM milestone), $7.5MM in those contingent payouts were written down due to EBITDA targets being missed.
• Their only listed acquisition of 2020 was a dispensary in CT, “Southern CT Wellness and Healing”. It cost some $15MM, assets listed as immaterial, so the entire price went to goodwill and intangibles.
• That bridge financing we’ve mentioned before just stands out so much. Note 11(a) details a $12MM loan made on April 12, 2019 that went out with 218k in 3.75 year near-the-money warrants. $GTII paid it back in full May 22nd same year. That 40 day loan was paid for with $3.2MM worth of options.
• Subordinate share count has grown from 129MM at the beginning of the year to 178MM at year end. More below.
• Good reporting on optionality in Note 13(c), where intrinsic value calculations are presented. They’ve got $85MM SBC now accrued. It’s a little clever in excluding the extrinsic side, but share prices vary, and I can see a reasonable argument being made for this sort of presentation. I don’t agree with it, but it’s understandable, and could fall under professional judgement.

Ok. At 140 pages (including schedules), this thing isn’t exactly a fun read. My overall impression is ‘boring’. As in ‘good’ boring. Operations seem to be chugging along.

The total subordinated shares fully diluted is at 212MM, but issued and outstanding is 178MM. The 49MM increase in ‘issued and outstanding’ came into existence from:

• 5.7MM issued for acquisitions and earn-outs
• 1MM in SBC and warrant strikes
• 43MM from Super and Multiple voting share exchanges.

There now remains about 35MM in subordinates to be printed, with a hard skew now to the Supers: full and complete control of this company rests in 3 people’s hands. Heck of a payday. At an average price of ~=$14 during 2020, that means about $602MM in equity went out for pretty much nothing. It’s a great contrast against their January raises, which saw 4.6MM shares go out for about $150MM.

A good example of ‘stealth’ dilution of existing shareholders. Hey – a bullish share price will absolve one of just about anything. But as we’ve seen in Canada, share prices going the other way will stress a company’s capital structure, especially one that’s been built on conversions, as opposed to actual capital (ie: cash in the door or hard assets in exchange for shares).

They hit the market perfectly in January. I’m curious to see what assets their cash will bring in. They weren’t very active in 2020 from an acquisition standpoint, and I have to believe they’re on the hunt.

As errata, SEC disclosure offers an interesting ‘fact’ included in year end disclosure:

I saw this in $BAMM’s year end too (they were at 204). And that number…. in relation to how much noise and heat and smoke and valuation a leading (!) ‘Tier 1 MSO’ puts out….seems awfully low. I’ve asked a couple in industry the ‘what’s’ about this number, but haven’t got an answer back yet.

Another $15MM was reported in ‘Other Income’. This is a bit of a challenge to to track down as the value originates from a combination of Notes Receivable <$800k> (the remnants of an $11MM $iAn loan secured by warrants was flushed); a gain on a sale/leaseback to IIP for $240k; a ‘gain’ on a write-off of contingent consideration to Integral missing EBITDA targets of $7.5MM; a $26MM gain on an investment they’d made on ‘privately held equity interests (of which they sold half of for $18MM in January 2021); a $7MM convertible note they held and struck in August 2020 for equity didn’t survive a valuation test, and was written down by <$6MM>; a recorded <$23MM> loss on warrants (issued to management for that bridge financing done last summer, payday!). Another $2MM in write-downs of contingent consideration makes up the rest:

Interestingly, Mosaic Real Estate – initially a related party transaction for the sale of a dispensary into $GTII – hit a $9MM payday by taking 35k of $9 warrants within the deal. They’re valued using the equity method, so, it’ll only appear as a change in contributed surplus. The share price run has made many people a lot of money.

As close as we can get to a wholesale/retail split is found in their reporting of ‘CPG’ and ‘Retail’ (Note 19). Eliminating internal sales, it looks like they only did about $10MM in external sales via wholesale. They can’t source their own product in CA, so they licence local producers/processors/distribution to manufacture and deliver products to their stores (Rise). No visibility to store level. With the overall margin they’re making, its can’t be faring too poorly.

Well, as MSO’s go, there’s $TRUL, and these guys.

They’re running about 20% of gross revenue in income before taxes. That, is really something else. And paying $80MM in taxes on that 20% ($100MM) in a year, is really something else too. I can’t think of another outfit that would benefit more of 280E elimination/tax reform than these guys.

That said – is this thing worth $40?

It depends if you believe their share price more strongly reflects the potential for relief from taxes, or if it reflects future potential revenues. Perhaps a combination.

In a sector of extremely high risk, there has been extremely high reward. And, regulatory changes loom large.

The only real hitches I have with these guys is their related party transactions, the vested control, and 35MM shares worth nothing to the company. If they get exchanged, $0 comes in. With an advancing share price, does it matter? No, but only if the share price keeps advancing.

Like life, MSO’s present tradeoffs. You can get the profits and plough-back of a rock star in $TRUL, but regionally concentrated and a founder choke hold on it. You could choose a wider array of assets in say a $CURA, but a heavy dose of prima facia self dealing, and goodwill up to the neck. $GTII? Looks pretty good operationally, and missing a couple of joists in the capital structure flooring.

Of the three, in such a highly speculative space, I’d pick this one . But with impending (and unknown) regulatory adjustments ahead, is further upside able to compensate for a hold?

I wish I could tell you, I honestly don’t know. My age and risk tolerance is that of a 55 year old guy who retired and bought an acreage on an island. Any position I’d take in the MSO space at this point would be measured, and relative to the risk. And everyone’s risk tolerance is their own, despite what the models of portfolio theory and the ‘life-cycle of investing’ say. I do offer these questions to ask yourself though, and hope anyone out there – whether you’ve made out like a bandit on these guys, or considering an entry – to ask yourself all of it. And do it often.

That’s because I see a lot of risk in MSOs right now. I see several parallels with the Canadian experience in capital structures. There’s opacity in disclosure. And what’ll happen to earning potential if ORE or WA or CA becomes the ultimate model for the sector in wide open fields. And in social justice and 3-Tier regulatory meteor strikes. This sector is going to be HUGE, I have no doubt. What I have doubt about is who is going to be able to profit from it the most, and who’ll get whacked hardest if change occurs.

Absent certainty of an industry wide operating model, I think valuations at this point are transitory, and not necessarily foundational. That’s a very, very large distinction. Because of that, I’m not comfortable making any hard calls.

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