There was an article posted last week on Trichome Financial’s ($TFC) restructuring of James Wagner Cultivation ($JWC).

$JWC blew up late in the first quarter of 2020, and was forced into creditor protection. $TFC came to the rescue (as it were), and $TFC’s now claiming to be in position to move forward. GoBlue and I expect something similar to this will occur more in the Canadian cannabis sector.

A few lines in the article bring some of the issues $JWC was facing to light. Namely:

• “It ($JWC) was a very, very top-down organization and not scalable in any way”
• “Like so many in this industry, they were able to raise a lot of capital very quickly”
• “(It was their) first business venture, (they) didn’t understand what it meant to empower those lower down in the organization and really didn’t understand who (should) fill the particular spots throughout senior management and below.”

Yikes. Quite the indictment.

I like Nathan Woodworth, the then CEO of the outfit. Longtime readers will know that I met Nathan at Lift in January of 2018 – it was TheCannalysts first Lift outing, and we didn’t have a name really outside of Reddit. I got blown off by more than one outfit then. Flush with cash and swagger, some outfits presented like they were on top of the world and to be approached on bended knee.

<I recall how hard Harvest One blew me off at the time. They were complete and utter dinks to me, and utterly unprofessional. I can’t say I’ve shed a tear watching their business get bled dry by management, and fade into an abyss of nothing. And unlike $JWC, there isn’t going to be a happy ending for the ‘assets’ there.>

When I walked into the booth and asked a couple of questions, the rep sent Nathan over to me, and we spent time chatting. I got to know him more over time, and looked at his shop pretty hard. I loved the production modality and yield, and his gear had a Broken Coast level of adoration in Ontario. I surfaced several concerns about $JWC in the last Structure I did on them right before the fall.

Did I get it wrong? Well, I think it’s fair to say I loved the horse, but it had the wrong jockey…and that sounds like what Trichome is saying. The boat was fine, it was the hand on the tiller that ran it aground. You can decide on the quality of my take. I’ll lay claim to identifying quality of the assets and the risk in ramp.

As it turned out, it was at that very moment of ramp that $JWC ran into a wall.

The point of this article is to highlight a couple of business risks that are too often taken for granted. In the case of $JWC, that dead sexy modular program couldn’t scale. At all. I’d spoken personally with Nathan about scalability a few months earlier, and he assured me that they had their processes nailed down. That he would be able to simply photocopy the initial ark, and those yields and cost structures would multiply and divide respectively. It’s crystal clear now that that was not true, even if Nathan believed it to be so. I truly believe he believed it. But how can one validate something like this, when its’ suggested the person who does believe in it so utterly, is so utterly wrong?

‘Scalability’ can a tough one to spot. It’s a very common business problem, particularly when trying to replicate regional success elsewhere. Occasionally, operations wont duplicate well when one has a particular employee or unique asset that are ostensibly one-offs. I think of Kevin Anderson (Master Grower at Broken Coast) here. He had chosen 2 of his employees, and was intent on making them into another one of him. I joked around with one of them about that, and the response reeked of complete and utter dedication, bordering on devotion. They didn’t want to be like Kevin, they wanted to be Kevin.

Speaking with Kevin 6 months later, he said he was finally hands free from the grow. The kids were up to speed at that point, and he was free to go find the next Headstash.

I know another shop (a CDN mid-sized producer) where the master grower was playing ‘I’ve got a secret’ – holding back knowledge transfer. Likely a holdover from the black market, where any particular advantage was regarded as being too precious to ever mention. They ultimately got fired for this, and the company wrestled for several quarters to stabilize production. Nobody is indispensable, but situations like this can be costly.

‘Ability to execute’ is another common assumption. It’s what I jokingly refer to as ‘FarmVille risk’. It’s a nested assumption that the future plans of an outfit – that has money and permits and hard assets – will be able to deploy them, unlock value, and make money rain from the sky. In FarmVille – hey – just wait a day so you can take the carrots that grew overnight to market for money. Plant another acre if you need to. Perhaps 5. Maybe trade some turnips for parsnips, and sell them for enough to build a new farmhouse.

You get the idea. It’s a game. The real world isn’t. Many Canadian companies have run onto the rocks in this respect, and notably, that out of the major US MSO’s, only Trulieve ($TRUL) has really rock and rolled here QoQ. And I’d caveat that statement by saying their successful execution is confined to operations in Florida. $GTII, $CURA, $CL….and $AYR….all have a whack of deals coming online, and the goodwill and intangibles that are attached to those assets and promises of them – are air at this point. Sure there’s potential, but can it be exploited by who’s there? That’s the question, and the risk.

Assumed competency is another we see again and again. And a good poster child for it at the moment is Canopy Growth ($WEED). With their affiliation with a major multi-national in Constellation Brands ($STZ) (perhaps soon to be the majority owner), surely, they will simply make billions through pure osmosis. This line is again being pushed by the hopefuls and hope’fers as Canopy Growth takes over $ACRE/$TER/$SLNG and BioSteel (etc) with them and head into the states by the end of this year (predicting the timing of change in law is bold enough on its’ own). The assumption propagates the idea that they’re GOING to take over the US as a matter of course. As if existing participants aren’t trying to do that very same thing right now.

As to that assumed competency? Their track record hasn’t shown it. Indeed, they’ve blown $3.5B on production facilities – many of which are now worthless…..and much of what isn’t worthless has been written down. I’ve recently seen CEO David Klein’s intent around the US being phrased as their entry is what was planned all along. That now it’s all coming together and $WEED’s going to be an absolute ‘beast’ in the states with these assets.

I have a strong urge to use a vulgarity here. Instead I’ll just say that’s a silly statement.

One look at existing operations and their current state in Canada should pop the assumption of a competency balloon alone. As if they were just fiddling around while waiting for the US to be ready for their might and prowess.

That’s are some examples of assumptions, and how they can affect a mindset.

A couple of thoughts for your Saturday morning. I’m still bulldogging a couple of things on MSO optionality, I really want it off my desk. For now, I’ll be producing some Structures on US companies until then, I’m hunting for undiscovered US backwaters.

Asset inflation will be a ‘thing’ through 2021 as the MSO’s continue their land grabs for storefronts and facilities and permits. I want to own something that might become ridiculously expensive via bidding wars. Wish me luck, you’ll know about them when I do.

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. Of the companies mentioned. The author has recently held $TER for short periods, and holds some very dead shares in $JWC.