As we continue our quest into the land of US MSO’s, I’m going to begin this time by refining the companies into ‘Tiers’. I’ve seen some others try, often in different ways. Sometimes they are defined by market cap, sometimes by sales. Sometime by store count. Sometimes by future expected earnings (those numbers to me being a balloon without a string). My quick and dirty is below. GoBlue has been trying to find some equivalence in comparing MSO’s by state presence and store count.
It’s a challenge…especially in times of hard growth (new store openings and/or entry into new markets), and partial results reported (timing of when incremental revenue comes online during a quarter).
As a framework, I’ve attempted a ‘Tiering’ of US outfits. It’s somewhat arbitrary, and the market cap numbers are fluid (and subject to change). I’ve excluded C21 Investments (only real business is single state with 2 cows) and Liberty Health Sciences (1 state, 29 cows, and now taken out). Consider it rough. I’ve defined the Tiers by most recent quarterly sales ……..Tier 1 >$100MM; Tier 2 $25 – $100MM, and Tier 3 – <$25MM:
This is intended to illustrate current valuation relative to expected annual revenue. Note the highlighted ones, they imply high expectations. Which, appears as a very bullish outlook on $CURA’s and $TER’s prospects, while ‘discounting’ $ACRG’s and $HBOR’s……relatively speaking. That said, we’ll be trying to integrate GoBlue’s attempt to create comparables at the state level, to see if we can further refine the information.
<I’ll caveat this all heavily. The sector is in a period of hard growth: significant legal and regulatory catalysts will need to occur, and DCF calculations are derived largely from unknown margins and unicorn farts at this point. The numbers also have little to do with actual financial performance. Yes: expectations are there, there has been demonstrable earnings and profitability, and weed’s a consumer good that’s going to be a staple for a significant percentage of the population. Cool. I simply caution about leaning on the numbers for more than use as indicators and reference. The values do suggest some utility for trading, though I wouldn’t use the data in isolation>
Today’s focus is on Jushi Holdings ($JUSH), which, is pretty much right on Tier 3’s ‘average’.
$JUSH has announced they are opening their 16th dispensary in the US next Tuesday (it’s 4th in Illinois). In PENN, they claim 8 operating dispensaries.
$JUSH has been shopping of late, taking a grow op and dispensaries in PENN off of $VREO‘s hands for $37MM, and in California with 2 in the hopper, and one in operation since last October. One of those three additions in CA will come with a non-controlling interest ($JUSH acquired only a 78% interest). Another (Culver City) is a ground up ‘bespoke’ build – something we see pretty often in US cannabis – but not in virtually any other retail sector.
Regarding PENN, the three dispensaries they picked up leaves only 4 left to open…as PENN caps license holders to 15 locations in-state.
Here’s hoping I will finally get a glimpse into segmented CALI operations, it’s a mystery to me, and I can’t think $HBOR represents the entirety of the business there. More than likely I’ll never see it, but hey, a guy can dream.
2 dispensaries in Illinois, a ‘pharmaceutical processor permit’ in Virginia, along with a grow-op and retail store. Nevada’s just a licence at this point. They’re supplying services to somebody in Ohio, in providing an MSA, the deal is expected to begin 1st Q 2021. In New York, they’re only packing an industrial CBD hemp processing licence, although they do have a storefront for products at the ‘Dent Neurologic Institute’. I doubt a picture of it is in their pitch decks. Online sales too.
They claim as of writing that they have cash on hand of some $133MM, and it looks like they’ve got plans to spend it. Their cash balance was helped along by a recent $40MM raise.
Yesterday morning, $JUSH announced a warrant acceleration: some 3.7MM in warrants at a $3USD strike were forced into conversion by the company (it brought in $11MM). The stock’s been on a tear (which MSO hasn’t?), and it’s blew through the forced conversion value back in mid-November no less.
$JUSH provides forward guidance, and they put revenue in the upcoming 4th quarter to be $31-$32MM, and forecast 2021 revenue to be ~=$225MM. That’ll be triple the sales they expect to report in 2020….which is strong (!) growth.
All dollar values in USD unless noted, let’s get started.
To the financials!
- Revenue of $25MM reported with a 44% margin. Inventory at $7MM, which is lean given run rate.
- They had owned $11MM in Cresco Labs stock for some reason. They sold $6.4MM of it during 2020, and wrote the remaining investment down by $3.2MM (a total of $1.7MM left). They’ll probably record a decent gain on this next quarter.
- They somehow received a $1MM in Organigram stock during 2020. I understand Denis Arsenault is connected with $JUSH, going back awhile. They ended up on Jushi’s books under a complex transaction acquiring an outfit called ‘TGS Transaction’ (Note 8 – Business Combinations and Asset Acquisitions). The entire million has been written off.
- That warrant acceleration mentioned at the start was peddled around on Twitter, as acceleration is seen as a win for those holding them. It is. In this case, by the time the 30 day period expired, assuming folks waited…$JUSH sent out $24MM worth of shares for $12MM.
- Regarding Note 8, it’s the nuts and bolts of the why and how they look like they do today. It’s complex.
- Focussing on only one of those Note 8 deals – TGS – reveals much. More below.
- Note 8 also lets is know they’ve created ‘Jushi Europe’, creating a JV with a non-controlling interest of 49%. They want to build a greenhouse in Portugal apparently. Maybe $JUSH’s CEO likes Caldo Verde.
- SBC reported of $1.2MM in the quarter, $3.8MM YTD. Orderly. This might rocket, depending on how good they saw themselves as in 2020, there’s lots of fuel if they decide to. 9MM options at $1.80, 3MM currently live at $1.92.
- 5MM of them at $2 are held by management….with an expiry of 2029. Good fucking lord. Decade long tenors aren’t only distasteful to me, they’re gratuitous. Particularly when they’ve pumped out 4MM in Restricted Stock Grants in 2020, a total of 7MM of them on the books. These guys don’t have
muchany shame in this regard, despite reporting a relatively low SBC thus far.
- 4th quarter SBC is going to be multiples of this Q, and that’s just from what I can see.
- There’s subordinate shares of course (91.4MM). And being an MSO, there’s also Multiple voting shares (MVS) (10 votes each, 1:1 into subordinates), and Supers (SVS) (1,000 votes each, 100:1 conversion into subordinates). There’s a 149k SVS (or 14.9MM subs, 149MM votes) and 4MM MVS (4MM subs, 40MM votes). This thing is utterly and completely locked down.
- They only report the subs as total shares o/s on a diluted basis since they report a loss of $30MM in the quarter. That loss originates from Note 13 (more below). Expanding those supers would reduce the loss per share, therefore they’re excluded from the calculation.
- Of course, there’s no segmentation. There’s never segmentation. Why no segmentation?!? ‘Commercial reasons’ of course…..but from my perspective….blech.
- $34MM in current/accrued liabilities ($21MM) and short-term promissory notes payable ($12MM). Those promissory notes have their own home in Note 12, which details $14.5MM of them.
- In that note is contained ‘Accrued Liabilities’ – where we find that sales, state, and federal taxes are a major part of their life. Of the $21MM reported, $11.6MM is the total that’s been accrued (net revenue of $25MM this Q) for taxes. The account had $8.7MM in total tax accruals previous quarter ($15MM in net revenue in that Q). But, they only paid $468k in cash for taxes this quarter.
- I can’t divine an effective tax rate at this point. Year end should provide insight as to actuals though.
- Goodwill and Intangibles 55% of total assets. Standard issue.
- Note 13 (Senior Notes and Derivative Warrants Liability) stretches to 10 pages. There’s $77MM in reported senior notes – with warrants attached – that are coming due in January 2023… thus, as $JUSH rightly states….there’s 2 ‘financing structures’ underpinning reported liabilities. More below.
Ok, I am so done right now. There’s more around PP&E and such…. but enough. You’ll understand why in a few minutes.
$JUSH doesn’t appear to do much in wholesale, with sales looking tied to harvest and/or any surplus. A reflection of the scale of grow-ops in the US, where companies don’t have perpetual supply, nor much excess in general. $JUSH appears happy to tend to their own knitting, as it were. This’ll change as the recent PENN buy brings 90k ft2 of production in a (currently) supply constrained state:
Regarding Note 13, convertible notes (at 10%) are straight forward enough, but it’s the warrant component that moves the value of the liability around. $JUSH provides a great illustration of optionality’s impact on cost of capital. To wit, here’s a couple of the reported liability values from Note 13, Q2 is on the right. Share price of $JUSH as of June 30, 2020 (Q2) was $1.76. At September 30, 2020 (Q3)…it was $3.23. Hence a reported loss of some $30MM during the Q:
Now, some will say this is fine, and tracking with the value of the company….it’s non-cash….all the balms and salves that repeat a soothing ‘there’s nothing to see here’ into the ear. Subscribers will know that the gap in warrant strike to share price represents foregone cash/capital. That’s why it’s reported as a liability. $JUSH’s disclosure is good in some respects, and it allows me to highlight this. Watch the values next quarter, as the note linearly accretes, while the derivative whipsaws (Dec 31 share price was $7.49).
Aside from that debt component, the rest of Note 13 is a layer cake of complexity. Various tranches of convertible debt exist ((characterized as ‘notes’). The form and flavour of these is somewhat unique among MSOs – and although we’ve seen some unique structuring in $TIUM, these bring an enhanced dimension of optionality in offering holders various elections under a ‘Most Favoured Nations’ clause (MFN). We’ve talked about different financing options, and how particular companies have particular preferences (or advisors, or sales sorts) for certain products and instruments.
This is the first time I’ve come across an MFN clause. Below describes its’ mechanism, but I’d have to go to the source documents to see the guts:
As it stands, one has to sift through the volume of Note 13. Ultimately, there’s a whack of warrants out, under various elections. I can’t ascribe any kind of reliable overhang value without several days of effort:
Much of this (to myself), is too cute by half. Said nicer: it’s needlessly complex. Reflecting upon about that…I’ll just stick with ‘too cute by half‘. $JUSH obviously sees value and self-proclaims competency by repeating deals with such specific clauses and elections. Meh. This type of structuring is not for those faint of valuation heart. I have a high degree of competency in option valuation, and I could probably get to a number. But. An outfit executing these – with a business un-aligned with financial services – I’m simply not drawn to prima facie.
The interested reader can find a clear example of this in SEDAR, within an ‘Other Material Filing’ made September 22nd of 2020 (it’s the contract for the Virginia Assets). There’s 10 references to a ‘Schedule 2’, which presents the stock and warrants and apportionments and cash consideration of the deal….and it’s not there. Perhaps still under negotiation, perhaps presented elsewhere. For someone trying to gage asset pricing…this is as ugly as it can get. And a clear example of why I see so much opacity in many of the MSO’s assets at a state level.
And finally, the TGS transaction I referred to above.
It is ridiculously ornate, and complex. A dispute over the acquisition of a 23% non-controlling interest ultimately ended up in court, and costing an amount at the time of $4.7MM. Depending on the the warrants and elections, this could be a much bigger number. I’m not going to bother, this thing is starting to piss me off. Here’s the result of the litigation:
It’s taken awhile, but I’ve found another capital structure as ugly as $CURA’s. An that’s aside from management’s ability to absolutely light this thing up.
At this point, I don’t really care about the outfit. I am actually irritated looking at their financials at this point. The margins are ‘meh’, but it’s apparent to me that these guys have been spending as much time on structuring as they have ops. That’s a red flag. I get it – founders and management should be compensated for the risk they take, and the unique skills they say they present. This outfit just makes me think that it’s got jack-in-the-boxes laying around every room. The deal with $VREO is the sole single acquisition they’ve done without hair on it. As to deriving a total cost of capital? I’d venture a range, confident in knowing it’s likely top 2 in all the MSO’s I’ve looked at. $TIUM isn’t anywhere near this cross-eyed.
Should the winds of change favour a pullback and rationalization of the MSO space – I wouldn’t want to be holding this thing due to the high degree of complexity and leverage within it. As it is, I don’t want to be holding this thing at all.
I need to find an emergency eye-wash station.
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