Well, it’s been a couple of interesting days for the legal cannabis sector as several new 52-week lows have been tested among US MSOs and Canadian LP’s alike. The MSOs ETF’s value has been cut in half over the past year, running at price levels some couldn’t envision:
Over the past couple of weeks, I’ve been extremely busy in my portfolio and began realigning/repositioning exposures. Readers will know of my extremely limited exposure to legal cannabis right now, and it remains so. I began swing trading this week, acquiring Green Thumb ($GTII) and Terrascend ($TER), and exiting those positions on a 24 hour hold……predicated on a dead-cat bounce.
Whether today’s gains reflect a trend reversal is a different question. As of writing, the only legal ‘cannabis’ exposure I hold is 22nd Century ($XXII). As policy continues to gestate federally, I expect continued volatility in the short term, and struggle seeing suitable returns coming from cannabis on a risk adjusted level.
Both GoBlue and myself expect that news federally in the US will likely be a positive sector catalyst. That said, I’ll also mention that the Democrats taking the White House and an incremental Senate seat was a positive sector catalyst (and look at where that got the sector). Politics is a far less tangible risk factor than measuring sales rates or gross margin velocity.
Friday before last, I mentioned seeing downside risk remaining in the sector. The Bank of Canada kicked the ball on an interest rate hike this morning, the US is expected to announce their decision at 1100hrs EST. Some might see interest rates as largely exogenous to legal cannabis – but inflation is a threat to the larger economy – and interest rates impact equities.
It’s been awhile since our Q2 F2021 Structure on Terrascend ($TER). You can find our wider body of research on them here.
Regulatory movement in New Jersey (and its’ relatively glacial pace) has had an outsized impact on $TER, as their 140ft2 facility and storefronts will suffer from some degree of under-utilization until the switch gets flipped, and cash flow incites.
My previous $TER piece on Q2 F2021 financials highlighted a capital structure packing a raft of moving parts. Since then, the Gage acquisition has been approved by shareholders of both outfits, I’m curious to look at how contingent consideration around the KCR acquisition is being valued/booked, and to have a look if/how their optionality is being crystallized.
I’ll reiterate from last time: these financials are a slog. Since $TER’s share price decline over the summer, they’ve found some support and until the past couple of days, and had generally been rangebound:
To the financials!
- I’ll defer to GoBlue’s erstwhile and erudite Rundown on $TER’s Q3F2021 regarding operations and stick to the capital side of the road.
- Contingent consideration came down from the clouds, and is flat at $11MM. $10MM is current, no change QoQ. This is a dial to watch, particularly for the Gage on-boarding.
- I’d expected the KCR acquisition to up this number considerably. It hasn’t. KCR came into the fold for ~=$70MM, with $80MM of the purchase price (!) was attributed to Goodwill & Intangibles.
- The net liability was in deferred taxes ($18MM), but for that $70MM ($26MM of that in cash), $TER bought $6MM in inventory and PP&E.
- Back in 2019, $TER had purchased 10% of KCR for $1MM. This 10% was revalued in April 2021, and stated to be worth $7MM. The totality of KCR is 3 dispensaries in PENN that report $22MM in sales over the first 9 months of 2021.
- Warrant liability came off some $70MM QoQ, corresponding with share price decline (net $43MM YTD). This value will have a pretty wild delta go-forward due to the size of underlying position. It’s comprised mainly from 2 sources: the Canopy ‘investment’ and from a private placement (during some pretty lean moments) in early 2020. The warrants in the latter remain live until May 2023.
- Goodwill and Intangibles $300MM out of $671MM in total assets (or 45%). Lean in comparison to some, but I believe it still presents potential exposure.
- Note 24 (Commitments and Contingencies will probably induce the reader to grab a beer after reading. It details the Pharmhouse saga. $TER sees any potential impact as immaterial, and they’ve already paid for the weed (which they said they’ll sell).
- Great reconciliation of income taxes in Note 16. Best in sector that I’m aware of.
- 12MM of 5 year $4 options on the books,
Ok. Nothing much really going on here that I can add.
Regarding warrants, a handy schedule is included in Note 13. 15MM at $3.25 – which expired on January 14th. Coincidentally(?), $TER’s price dropped $1.10 (~=18%) over the 2 following days. Volume over those three days never exceeded 400k/d, so I’d suggest that’s doubtful:
$TER’s been pretty quiet on the new release side – with the only real notable item (aside from Gage going ahead) is about finding a new COO. The previous one – Kevin Keegan – had been both CFO and CEO of Beleave. He took over both roles when Janet VanderMarel (of $TGOD fame) abruptly walked after only 2 months, and wasn’t exactly effusive about what she saw at the shop. Beleave dutifully went under shortly thereafter, and $TER picked up Keegan as COO. He only lasted 9 months. The new guy (which took 9 months more to find) is CPG friendly, and also took over as President. That’s their 3rd COO in as many years, and my guess is that they’ve struggled with the role simply because it’s such a virgin industry.
I mention only because they’re one of the few larger MSOs that has seen turbulence up top. More disruption there might signal a genuine trend rather than just maturation.
This is essentially a ‘bridge’ quarter – inasmuch as several initiatives they have on the go – but not yet in their financials.
New Jersey’s sluggish roll-out has had a large impact on $TER, and can’t happen fast enough. We’ll look at their year end when it’s released.
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 position in $TER, not in any of the other companies mentioned.