Another day, another SPAC. Like Glasshouse ($GLAS.A.U) – who also came to market on a high – The Parent Company (GRAM.U) has struggled to keep initial investors from bolting. It’s also failed to demonstrate that there was a strong existing business underneath the carefully crafted roadshows that define SPAC formation.
Our last Structure on $GRAM.U identified some pretty simple issues facing the company:
$GRAM.U came in a different flavour than Glasshouse, heavily promoting a lifestyle/celebrity/pop culture angle. We’ve seen that in another outfit in ‘Cookies’. They sport breeder/rapper co-founders, and we’ve noted a ton of buzz around the brand and outfit.
<An aside, I’m curious about brands and what makes them successful. Because there’s so much intangible around branding, I don’t feel I have a good angle on what makes one brand successful versus another. It’s driving a curiosity to see if one can get in front of a successful launch, find the ‘next big thing’ before it blows out, and set conditions for making some hard returns. Whiteclaw – a fizzy vodka with flavour thing – absolutely blew out….. literally changing the alcoholic beverage market in a very short period of time. Sales of this segment are already at $12B/yr – after only 2 years of mass market existence. If you’ve seen Budweiser Hard Seltzer or Coors Seltzer on shelves – its’ because beer revenues have been declining due in part to lifestyle changes and women drinking harder and more. The large outfits responded by using their brand names to land in that new drink category. Global booze has been consolidating over the past 2 decades, and scale exists in the realm of oligopolies. Cannabis will probably get to the same state, but similarly, we’re probably looking at decades>
I asked around about Cookies at Lift & Co in Toronto, as I wanted to hear what industry knew/thought about them. I got two replies. One, that their quality control was all over the map. The set up in the US – no inter-state trade – has built walls around their production, islanding to a state by state level. If you know about growing weed at the cultivar level, you’ll also know that it needs to be exactly in the same environment with humidity/nutrients/temperature/lighting to create the same output. Consistency has been a big part of Broken Coast’s success, and I heard that Cookies’ gear is highly variable in quality state to state. Secondly, I heard a sneer that Cookies is really just a clothing brand, that they’re good marketers, and that weed is just a side-chick to a high margin business. A business line that rounds out the brand, but not a core component of it.
I can’t speak to the validity of either statement, just repeating them. Could be an example of industry envy. Either or, thought I’d pass it along.
Back to $GRAM.U – they came in almost solely on ‘star-power’ – describing themselves as “combining best-in-class operations with leading voices in popular culture and social impact”. Yep, touting affiliation with Jay-Z and ROC NATION – the ultimate branding of this outfit and products conjures images of supercars in front of a Hollywood mansion. They tack on that TPCO is all about being ‘rooted in equity, access, and justice’ – for what its’ worth.
The first two quarter’s performance has been underwhelming. One might even compare their latest to a dumpster fire. Their first reported quarter was an experience in reading in Braille – as unpriced losses on disposals of their ‘non-THC’ business (along with a lack of existing assets and reporting of their performance prior to the de-SPACing) – offered little insight into the actual quality of what assets underpinned the equity.
$GRAM.U has replaced their CEO already, announced a share buy-back (ala’ $AYR.A), and has shown more success than Glasshouse in getting dispensaries under their ownership via the recent purchase of Coastal in early October.
The Coastal deal is that the aggregate price – for ‘up to’ $56MM – was for 6 existing dispensaries. It leans heavily on paper (natch), but that a minority interest in an incremental storefront was optioned for $9MM – about double the 100% of the others. Maybe it’s a real cherry, or perhaps in a honey of a location. We’ll have to wait until next financials to see how the deal looks up close.
The market has been merciless on this outfit, star-power or not. Management has tried to stem the bleeding not only through that share-buyback, but also executed a voluntary lockup in an attempt to assuage shareholders thinking about taking a walk. It expires in late January though, which is pretty much ‘minimum security’ as lockups go. While we see an obligatory uptick prior to the financials dropping (how familiar has this been this earnings cycle?), it doesn’t look like those moves have helped much:
To the financials!
- Cash now at $200MM, down $57MM QoQ. That’s going to decrease by another $16MM next time (Coastal acquisition)
- Restricted cash up $11MM QoQ. A/R has dropped by $1MM to $4MM. Inventory has dropped by $5MM QoQ to $33MM. A/P down $7MM – from $44MM to $37MM.
- If you’re wondering why I’m listing those items, its’ because I’d like to track where that $57MM went. The items I listed account for $23MM of that $57MM.
- And, who cares. Goodwill & Intangibles has dropped by $645MM (!) YTD – with $570MM of it being impaired this quarter. Holy shit, that is $TILT level in both size and speed. $16.6MM written off in the quarter prior.
- Looks like that Caliva non-THC thing was a big catalyst. Steve Allan’s walk out the door – has already contributed to $58MM of those write-downs. Jesus, how large was the bag of magic beans he sold them? More below.
- $40MM of sales this quarter, with gross margin of some $6MM (15%). That’s set against $31MM in OPEX. Eesh.
- Margin has improved, OPEX is down by half (last quarter saw a $25MM bulge stemming from the celebrities getting paid), but ominously, sales are down by $14MM QoQ. More below.
- Contingent consideration has collapsed due to their share price doing the same. The liability – around $90MM just six months ago – is now under $10MM.
Ok. I’ve spent quite a bit of time on these, and really, the write-down and forward prospects are what these financials are about.
Given 70% of the deal to buy Coastal was in paper, and that their share price has retreated by a full third in the past 7 weeks, it wouldn’t be a stretch to view this deal’s certainty decreasing. If I sold a performing asset to a third party – with paper a large component – price softness would be a consideration. Sure, they’ll still get $40MM worth of that paper despite the price. But, once received, I’d want to have some faith that it wasn’t heading down 80% again in a year’s time. Just musing, but that would be where my head is.
Always know – cash is king. And presumably $GRAM.U could have done the Coastal deal in all cash, which, would have likely brought those assets on at a percentage discount (to the deal they inked) well into double digits.
It’s one of the central challenges of being an analyst (and investor): unless we’re a fly on the wall……. and have a look at Coastal’s financials a priori…..it’s ultimately a leap of faith.
That share repurchase plan – initially slated for $7MM – had only one event, and it was for half the announced total. They’ve also written the remaining repurchase commitment down by almost half, reflecting share price decline. Existing shareholders actually subsidized folks for selling their shares in that first tranche. I sincerely doubt that was the intent, but it is certainly the result:
Regarding run rates, $GRAM.U remains a wholesale primary outfit at this point. Despite this, a (very) modest gain in retail was swamped by wholesale revenue collapsing QoQ:
IF the dollar value of throughput was driven by declining prices at wholesale – I’d think that’s a negative, and indeed, CA indoor flower prices were noted as coming off 15% during the 3rd quarter. The 3rd quarter typically sees the highest prices of the year for indoor. That 15% doesn’t account for the 37% drop in sales though. Despite some relatively robust disclosure (compared to others), their MD&A is silent on the important stuff:
The numbers around the intangible impairment are massive – and a reading of Note 10 discloses that pretty much all of the amounts written off relate to changes in assumptions around future cashflow. Here’s the impairments by business unit:
For the $740MM $GRAM.U paid for Caliva/LCV – they realized about $7MM for the sale of ‘non-THC’ assets on disposal, which I’d guess is what triggered the impairment test. I’d look it up to get the actual numbers, but honestly, this is a level of cluster-fuck that doesn’t really need to be examined in detail (at this point). That $GRAM.U needed to get in front of this before year end is telling, and year end audited statements will no doubt bring more information forward. I can’t even contemplate how there can be such variance between asset valuation in such a short period of time. It’s been less than a year between the acquisitions, and their subsequent reval. And so $TILT like, it’s almost like listening to the same song.
As to $GRAM.U, they chalk most of it up to changes in California’s operating landscape, whereby wholesale has collapsed, and the future is now far less bright than barely just a year ago:
It makes me think about Glasshouse (among a couple of others) who have said they expect the California market to begin repairing itself into 2022. Like – what is the actual deal here? The implication of having operations there will be less to Trulieve ($TRUL) – as Harvest Health ($HARV) had trimmed CA exposure down to only 4 dispensaries by the time $TRUL acquired them. But what about a Cresco Labs – who’s CA distributor Origin House – saw $291MM of Goodwill and Intangibles written-off in their latest quarter?
I can only think that these kinds of signals coming out of CA could hold an example of where East Coast assets could go if/when interstate and increased competition come to those limited license states. No wonder we see such choppy sideways action across the MSO space.
And I’d urge the reader to think about the sell-side pumps and ‘generational wealth’ tropes in light of this. Hey – I ain’t hand-waving, nor crying Chicken Little here. But if the single largest weed market in the world is struggling to find a durable and defensible and profitable legal market for cannabis, I think that speaks for itself. We have a real-live-in-your-face example of what legacy markets ultimately become in the presence of competition. Sure, one can point to the persistence of the illicit market in CA as an outlier. CA’s regulatory is also far from ideal (or even useful). But we can still stare WA and ORE straight in the eyes, and see much of the same in terms of operating environments.
I’d shared one of my Structures with a CFO who has exposure in one of those legacy states, we engage industry often, and do fact-checking frequently. I thought I was pretty harsh on their profitability and prospects. Their response? That they much ‘appreciate the love for the hard way we run’. Yeah.
That’s what commerce looks like in legacy markets: it’s pit fighting. And it’s exactly what every other retailer in every other sector faces too.
That was a bit long-winded, but, whether you agree with me or not – I think it’s important to have expectations about returns that don’t come from a pitch deck.
At any rate, $GRAM.U – and their new CEO – really has their hands full at the moment. They’ll have 11 storefronts plus a couple of distribution hubs up and running shortly (assuming Coastal closes). We’ll have a look at their year end – persistent and significant expense is coming through in both SG&A and salaries. That cash balance – which is decent from a distance – is put into perspective when one realizes they began their life just 3 quarters ago with $582MM – and now are down to $200MM in just 9 short months.
Man, what a story. This is as ugly as I’ve seen anywhere in legal cannabis.
The preceding is in the opinion of the author, and is in no way written nor intended as a recommendation to buy or sell any security or derivative. The author holds no positions in any of the companies mentioned.