Thanks to a subscriber, I’ve been given a reprieve from doing Curaleaf’s ($CURA) capital structure for an hour or two.
I was asked about my thoughts on Grown Rogue International ($GRIN). They’ve been yet another in a long line of cannabis sector companies that had benefitted from the in-rush of lost WSB/GME sorts who flooded the sector back in February. For a small cap languishing in low-double-to-single-digit share price of pennies, it must have been like the seas parting for existing shareholders:
Always up to look at a Dive Bar contender, I thought I’d have a quick go at their financials. Fortunately, their Q1 came out on April 1st, and I can avoid the pollutants of having to reconcile YTD v QoQ reporting. Given their <ahem> modest share price history, I’m not going to go terribly deep but for a high level look at this point.
$GRIN presents a typical story of a small family startup in search of weed riches. Apparently able to convert some notoriety around producing decent flower, they’ve expanded cultivation into Michigan (via a subsidiary owned by the CEO, natch). They claim to have an indoor grow, 2 outdoor grows, and ‘sales’ (they have a retail license/store, having spent $3MM on a layaway plan and service agreement) in ORE, and a 92% holding of that indoor grow in Michigan.
Some of the details aren’t as flattering, as the recent indoor addition in ORE is under a management agreement awaiting license transfers (so common). The outdoor grows produce at 30% of the yield of the indoor, despite being twice the canopy size (and less than 2 acres). $GRIN also seems to follow a perpetual harvest model – which can produce multiple harvests per month. There’s plusses and minuses to it (as with everything). It’s more suited to smaller producers, because it can generate relatively consistent cashflow and can be adapted quickly to changing tastes. The flip-side is that yield suffers.
Comparatively, $GRIN’s doing more in annual revenue than $GTEC is. Yep. 2 years in a row. They also claim to have #1 market share for legal flower in ORE, which would be no small feat (unverified).
There’s also some incongruence in the storyline. For example, they tout holding 45 acres of outdoor, yet have <2 acres in production. Of the 2 grow sites, they’ve given one up, and have begun paying $40k/yr in a lease somewhere else…and are relocating it. They’ve begun transferring the licence. I can’t tell if they’re going to miss the grow season or not, but it sounds like a mistake has been made somewhere in planning.
All dollars in USD.
To the financials!
- Margin’s good in the mid 50’s. G&A is hideous at 3x GM
- They took a gut punch last fall, repricing $2MM in debentures, re-issuing existing warrants, and shooting out another 1.5MM of them as an apology
- $1.3MM in cash. $1.3MM in payables.
- Paying management in shares, and granting some to a lender in support of ‘business development’. Umm, yeah.
- 25MM warrants outstanding. They all came into the money during the run. As did 5MM of stock options. I can’t help but look next time to see how many folks lit them up. 2020 was a looooong year for these guys.
- The CEO has deferred $225k in salary. $GRIN also owes $165k to trade vendors for more than a year. No word on when they might be called.
- Related parties aren’t cheap, at least in non-cash. To wit: a non-controlling interest in that Michigan property (which the CEO owns), whose spouse got 500k in options for $3,750.00 in services, 2MM in options shot out to management, $460k of debt owed by same. They’re pulling about $55k/month in cash out between 4 of them, which, is relatively lean.
- No other choice, especially with G&A actively strangling them.
- A big challenge is looming, as $4.7MM in payables and liabilities is coming due in the next 12 months. $GRIN claims to have increasing (positive) EBITDA and forecast $6MM this year of it. They’re gonna need it.
Ok. There’s quite a bit more, but pretty much all of the same flavour: short on cash, long on dreams, with dashes of complexity littering the place.
Lots of activity past the date of these financials (Jan 31, 2021).
On February 5th, management issued a ‘second tranche’ of an offering of 8.2MM units at $0.16, which came with a full 2yr warrant. Only 2MM of those went external, the remainder were ‘subscribed’ to by management, which, likely means no cash. Sigh.
Also in February, that Michigan grow – which had initially been set up with an offer/purchase by a $GRIN subsidiary – was terminated and re-struck under a different company owned directly by the CEO. Looks like his outfit was further down the licensing road than the $GRIN sub, a feature of the differing US regulatory systems. Could be a feature of the CEO wanting a payday paid by the company, I can’t tell which.
Convertible holders triggered $500k in debt to equity in early March at $0.125, probably tickled pink that $GRIN came so much into the money so fast. $1.9MM remains.
Well, if you hadn’t guessed they desperately need a raise (those subscription IOU’s and $500k won’t cut it), you’d be right. And on March 5th, 8 Capital obliged in what one could characterize as
a shakedown mugging rather expensive. When share price was $0.25, 8 Capital placed $3.7MM in ‘special warrants’ at $0.225 which contain a full share and 2 yr $0.30 warrant within them. They’re exercisable immediately (natch), but they’ll be considered exercised nonetheless on the earlier of another raise, or July 6th. A ~=6% cash fee went out, and a Titanic sized amount of optionality as well. There’s a deemed 10% ‘penalty’ if they can’t get an authorized prospectus authorized within 30 days of the initial agreement, so, expect another raise shortly. Deemed exercise of the special warrants will occur on the earlier of the date…….:
$GRIN got lit the fuck up right there. Perhaps said more accurately, existing shareholders got lit the fuck up.
All this money and cost is in pursuit of Michigan grow op, the retail store, and presumeably, being able to float their G&A a while longer. I crack about G&A again, but seriously, a company around this long that can’t figure that out for whatever the reason (whether it’s their friends working in the shop and could never think of letting them go), will ultimately see the place liquidated anyway. A more serious question is whether their model is capable of less G&A without sacrificing output quality.
$GRIN ended this first quarter with some 108MM shares outstanding. Next quarter will see them end up with some 140MM. What the lenders haven’t tied up, the capital firms have. And that’s only what the owners haven’t already welded to the floor.
And it’s a familiar story around small caps that didn’t get off the ground fast enough, and had to start going to folks one really doesn’t want to have to do a deal with.
Is there a business here? Perhaps. I like the idea of a smaller focused cultivator of quality gear, especially with differing geography and where retail is expanding.
If I was to ask a question of IR, I would ask for the exact date that G&A will be brought under control, assuming it can be while maintaining operations. Not the quarter, not the fiscal year. The precise date and exact time of day it will be brought under control. If I got an answer about Adjusted EBITDA or ‘we’re working very hard’ or anything other than that exact to the second time and date………. I’d hang up the phone.
$GRIN looks like a shop where a couple wanted to build a company and get rich. You know, pursue a passion and the American Dream. What they now have is an incredibly leveraged, 2 (maybe 3) quarter runway to get to free cash flow. Equity gains are going to get eaten alive by new and existing optionality. That’s not to say that equity price gains aren’t possible (it is the cannabis sector after all). But the risk profile in this is downright silly, and if they are taken out as a ‘brand’ or for the assets – gains won’t accrue to shareholders, as any acquirer sees the same thing I do.
I wish them well as a business. As an investment, it’s a hard pass for now.
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 $GRIN