Well, that took awhile. Our last Structure on Jushi ($JUSH) was awaaay back in late January.

And we saw an outfit with an ornate capital structure, middling sales (relatively speaking), and a soon to be boom! of contingent consideration incoming. I was curious about the ‘how big?’ of a blast radius that warrant liability would leave behind….but without being able to examine the entire contract, it’d be foolish to go too deep into the woods chasing it. Derivatives can have many moving parts, and valuing one with incomplete information is like trying to repair a car without being able to open the hood.

As it was, shareholders (and analysts like me) were treated to a Greek Tragedy this spring, as $JUSH announced on April 21, 2021 that they weren’t going to make their April 30th filing deadline for their year end. This launched a 6 week/14 press release odyssey of commitments to release them, but missing several in succession (May 24th, May 28th, and June 4th).

The statements finally(!) dropped this week, and the reader is treated to not one – but 2(!) sets of financial statements – as both Q4 F2020/Q1 F2021 were released. The length of the delay allowed $JUSH to lap themselves, and working papers only needed incremental adjustments. I’d heard some speculation as to the ‘why’ this took so long (because of the warrant liability), while $JUSH had initially blamed the auditor (hey, there’s only so many hours in the day you know). I think the former suggestion is more credible.

At any rate, $JUSH has puked out 2 sets of financials…..and a reader gets to guess on SEDAR which MD&A you’ll open. $JUSH is hosting a conference call in a couple of days….I might listen in if there’s anything here that jumps out. For me, I’ll be looking for how they respond to questions about their liability. I might tee one up if sell-side softballs get irritating.

I’m not going to spend much time on the year end right now……unless it’s pertinent to the latest quarter. GoBlue made a crack about how $JUSH’s management could easily guide this conference call away from questions about the fourth quarter (Hey, that’s in the past. We’re moving forward on several fronts and have made adjustments of which we’re already seeing the results of….). $JUSH has been ‘kinda’ active in the interim, announcing incremental openings in PENN (they’re now operating 6 stores out of a cap of 13)….they closed the Virginia deal, and (re)announced 2 CALI dispensaries coming into 100% ownership, and have also opening that third one optioned in Culver City. Really though, all old news.

$JUSH’s share price has largely shrugged during this waiting period, apparently indifferent. Perhaps it was just holding its’ breath. All dollars in USD unless otherwise noted.

To the financials!

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• Cash at $162MM, double that as of the end of the year. They raised hard and successfully during the run of Jan/March. Probably one of the most successful of the smaller outfits at executing.
• Inventory up $5.5MM – to $18.4MM. Notable, because they’re revenue has blown out – generating some $41.6MM in this quarter. PENN sure came on strong.
• Still a break even outfit operationally. G&A kicking them in the groin.
• Interest expense kicks it as well, $6MM reported this quarter. $JUSH also had to take a $9MM charge on their derivative liabilities, and also incurred another $3.8MM on ‘warrant modifications’ (I can’t find the drivers of this).
• Which, that warrant liability now sits on their balance sheet at $211MM. Note 14 is where it’s broken down. I’d thumb-nailed it coming in around $210MM. And I didn’t need a Monte Carlo for that. More below.
• They timed a raise in early January well, and followed it up in early February as well (bringing in some $85MM at $6.50 and $10(!) respectively). The timing was bang on.
• Taxes are running hot, they accrued $5MM this quarter on that $41MM in sales, or 25% of their entire GM.
• Gross margin is at 45%, not uncivil. Current liabilities a bulgy $50MM.
• $18MM in inventory. The US is really distinct in this category in comparison to Canada.
• Notably, cash generated from operations is negligible, at $461k. They brought in $3.5MM from sales of Cresco stock.
• SBC at $3.5MM. No need for it with $400MM in free shares sitting in management’s desk. Not terribly expensive though in terms of cash payments to the executives. These guys are an outlier in that regard.

Ok. Enough for now.

$JUSH bought an existing dispensary in Grover Beach CA in early March. It’s notable for how the deal is phrased, and how much it cost. To enter a town with a population of 13,000, $4MM seems a high price (especially in CA). Perhaps they’re banking on tourists. Non-controlling interest of 22% still attached:

The overhang in $JUSH is large, in part because of the warrants driving that liability. But a large part of it is in long dated tenors, and having another 16MM subordinates to unlock via Super Shares. These tenors are really something else. They originated during a raise in June 2019 and another in June 2020. Looking at that press release, they’d been pretty confident about 2020 bringing in $200MM in revenue. Seems a lifetime ago yet it’s not even been 2 years. Annual sales in 2020 were $80MM, with a booked loss of $211MM.

$JUSH’s disclosure around the warrants (59MM of them) is good. The exception is the Supers….while footnoted…. don’t report the Supers as fully converted. $JUSH presents a separate continuity schedule that reconciles the ones related to the warrant liability.

It also presents us with a shining illustration of how the cost of borrowing is impacted when optionality is present.

In that $211MM liability, there’s 41.4MM warrants with a $1.25 strike price. These originated from $50MM in notes that are due January 2023 (their tenor is 2 years longer than the notes though). There’s an embedded derivative around a prepayment option (~=$500k, immaterial). $JUSH runs a Monte Carlo on the derivative for valuation, which, I see as pretty ornate for a relatively simple derivative. The irony about these warrants – aside from adding a whack of notional ‘interest costs’ QoQ – is that the success of their share price is what’s driving the liability. $JUSH is kind enough to present a sensitivity table on them. Given a $6USD share price, a 10% increase in that share price will add $20MM to the liability:

One part that’s notable is once the notes reached the one year anniversary from date of issue, they flip to a cashless conversion. So, $40MM won’t be coming in the door as they’re walking out.

So, between modifications and interest and changes in the derivative….they cost $19.4MM this quarter….which all stems from $50MM in 10% debt, that stands as a total of $261MM liability on the balance sheet. Yikes.

It’s a good thing they’re cashed up at the moment, $JUSH presents an ambitious capital plan, estimating to spend $80MM-100MM in the rest of this year alone. They’re doing a deal with IIPR on their PENN grow op, estimating some $30MM coming in from that as well:

Definitely ambitious. Opening and expansion in MASS, opening their maximum locations available in PENN, getting a couple more storefronts up in CA, consolidating 2 grow ops in NEV, 2 storefronts in ILL, and operationalizing in OH.

Of course, with an MSO – the MD&A could use far more disclosure. ‘Risk Factors’ takes up 24 of the 46 pages of it (another feature of MSOs). It’s wafer thin in terms of depth.

That they’ve blown out in sales will help. Whether they can make it all profitable is another thing. They’re getting enough oars in the water that sales should keep climbing over the next three quarters. PENN’s looks to be rolling, although their strategy in CA seems expensive. As to their capital structure….it’s god awful. Of 150MM shares, only 90MM of them are tradeable, and the remaining – should all optionality be struck – will bring in about $80MM (if my trusty napkin math holds). There’s also optionality in the ‘most favoured nations’ feature that I can’t see nor price.

These guys might be on track to hit a $200MM revenue number this year. Still, they’ve a long ways to go to prove they can manage ramp and make it profitable. And it packs several of the MSO features I really don’t like, like the holders of the Super Shares hold 2x as many votes as the subordinated shares outstanding, and, spending hard on new builds in storefronts.

This is a ‘wait and see’ moment, as they’ve finally seem to have gotten their business plan in ‘go’ mode. Expect some moving parts in SG&A as operations will take 3-4+ quarters to stabilize. If their share price tanks, at least the liability will reduce. And keep an eye out for sales velocity as incremental stores are added. We’ve seen several instances where the next marginal location is slowing down. We don’t have enough data at this point to tell.

All this aside – they are priced inline with the Tier 3’s, and their new sales rates are going to kick them up a division in the MSOs to Tier 2. I’m interested to look at their next financials, and whether or not they’ll finally start the process of addressing their capital structure. Other companies further down the runway have already begun, and if $JUSH wants to be taken seriously, they will need to as well.

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 $JUSH