Verano effectively ‘launched’ just a quarter ago, and really hit the ground running. They’ve also been a darling of the Sell-Side Holy Trinity (Todd Harrison/Brady Cobb/Jeff Schultz) – who have figuratively pumped the shit out of this thing long prior to its’ current formation.

Before I get into the Structure, a couple of thoughts.

Lately, I’ve seen some reality coming from analysts who have begun actually acknowledging the regulatory purgatory that legal cannabis exists within. Small steps one supposes. Looking back….and ignoring the build ups and subsequent shattering of hope across the regulatory dreamscape….nothing significant has really happened. For years.

Sure, there’s been incremental states come online. But references to DCF models predicting ‘generational wealth’ are now as old as the Sumerian civilization. The great promise of ‘NEW YORK!’ flipping was muted by the existence of retail caps, and the commitment by legislators to ensure a higher level of competition in place than what had been done in other states. That whole ‘total addressable market’ (TAM) thing got legs with the converted – but is meaningless in the absence of actual policies and laws that provide some sort of certainty around operations – and actual sector profitability. Remember the references to ‘wait for September‘? Another wet fart peddled by the carnies. As is the line that ‘the worst thing that can happen is the status quo‘. In the absence of regulatory certainty – what exactly is the ‘status quo’? More uncertainty.

Which is where we are.

The prospect of Trump coming around to dope during his Presidency didn’t happen. The Democrats taking over the White House and Senate hasn’t mattered either. At least yet. Despite the introduction of the Schumer/Booker/Widen draft legislation – which remains (after 5 months) a ‘beta’ release – it’s currently dead in the water……and subject to revision at some point in the future. It now faces competing legislation from the GOP in the proposed Nancy Mace’s States Reform Act.

The result of this on asset pricing in the sector has been correspondingly stop/start and emotional: introducing volatility and chop and churn against a backdrop of a general decline.

Without a hard deadline – or a significant political catalyst – nobody in the wider world of voters and the citizenry really seems to give a shit about weed either.

It reminds me of the recent Lift & Co. event in Toronto, Canada. I spoke with several activists and industry sorts over several days who were in concert moaning about the current state of affairs and sector profitability in Canada. They decried the federal excise tax – which screws patients and small producers in dry and deep and equal measure. They remarked on State Monopoly intrusion into the private sphere – with the ‘activists’ concerned about the lack of social spending and support provided to their respective communities (good luck pulling off an argument using moral suasion on those ghouls now, they already have your money). Industry noted (accurately) that an order from a State Monopoly isn’t actually a sale……but simply putting their goods up on consignment.

These items can’t be directly transposed to the US market. But. The inertia of the political class around issues of legal marijuana (and broader drug policy) can. And it applies to both countries. Concerns about regulatory resolution down south – or simply acknowledging issues in what’s been already done up north – don’t seem to be high on any legislators list of ‘to do’s’.

In Canada’s case: ‘hey, you got what you wanted….why are you bitching?‘ In the US: what is going to drive votes?

In the US – drug policy has fallen prey to higher priority issues. And as to that vote driver? Why would it be one? 36 states currently have medical or recreational access regimes in place. ‘Them’s already a sellin’, and the states…..they’s already a taxing‘.

BLM/BIPOC urgency has waned – aptly framed by President Biden just before Thanksgiving. When he was asked about granting clemency/pardons to drug war prisoners during the traditional annual ‘turkey pardon’, he simply cracked a joke.

I didn’t laugh.

So, where does it go from here?

Current thought is that Schumer/Booker will introduce something less drafty sometime in the New Year, that they’ll presumeably work with Republicans around Mace’s States Reform Act counter-negotiation proposal, pass something federally, job done. But if a year in politics is a lifetime, and having no overarching impetus to get this done will leave the sector in the general malaise it’s been in since the pumpers and Wall Street Bets crowd were so optimistic last February. The gains have long since vanished – leaving a vacuum for the pumpers to fill; the converted to hold tightly to their convictions; and the vast bulk of folks out there wondering when this cluster-fuck will get eventually get sorted.

I expect there will be a similar reaction to the sector as last February when it finally does get unfucked. Cannabis will always remain a ‘guilty pleasure’ product….but the broader market should lose its’ tentativeness around the legality/acceptability of it to whatever degree. I expect that some US MSO’s will take a cold hard shot to the face – depending upon the ultimate regulations installed. It’ll be driven by specific operational profiles too: having a significant retail or cultivation or distribution business model – set against finalized regulations and attendant meteor strikes – will create winners and losers. By region and company.

The volatility one holds currently in the SSO/MSO sector is not pretty at the moment for investors. Trade should love it, particularly the options sorts. But if one is holding a large amount of exposure to volatility without attendant returns – you ain’t doing it right (at least according to any credible book on investing ever written). Perhaps that’s your personal risk tolerance. And that’s just fine too if that’s your thing. It ain’t for me.

So, we wait.

When this thing finally goes, it’ll be a great day for everyone. The companies, the consumer, the investor, the citizen.

It can’t happen soon enough for any of them either. And if I’ve a Christmas present I’d wish for – it’d be for the US to legalize with expungements…….sooner than later.

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Back to Verano Holdings ($VRNO). Our last Structure saw a company bloated with Goodwill and Intangibles, impressive out-of-the-gates sales numbers, and 2/3rds of the entire float sitting in a couple of desks at headquarters. I see GoBlue has already completed a second ‘Quarter in Pictures’ on them. I’ll comment on operations if I see something notable, but otherwise I’ll defer to him. Subscribers will know I don’t read his material before I write, so there may be some crossover.

Despite a steady pump by barkers on the midway, $VRNO is still off 55% from its’ debut at $31.40. The share price movement mimics the last 3 we’ve looked at – with volatility in price seeing a $5 swing in just a under week:

To the financials!

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• Cash down $93MM (!) to $57MM, inventory a stunning $395MM (!) up $145MM from prior quarter. Holy Cats! Almost all of that inventory increase is in ‘Work in Progress’.
• $VRNO actually splits their acquisitions out by quarter (that’s probably the only way they – or I – could keep track of them). ‘Rampage’ is the work that comes to mind.
• This quarter’s acquisitions totalled $268MM alone. Keeping in completely in-character, that $268MM on-boarded net tangible assets of minus $55MM. Wowowow.
• They’ve got ‘deferred consideration’ littered across their deal set – I total about $160MM of it remaining to be paid out, but was included in the purchase price. There is some contingent consideration related to the ‘Territory Dispensary’ buy – but it’s not listed on the balance sheet. $8MM in that consideration was paid out during the quarter, and an adjustment of -$2.6MM was to it as well. It’s only in the SCFP we find these values though.
• I total about $80MM in contingent consideration among the deals. I’ve not seen this method of accounting done before.
• I’m also a bit flummoxed by their income statement presentation – as $VRNO reports a 64% margin (good), but an SG&A of $31MM to generate it. They’re perhaps rolling store level costs into COGS, I’ll defer here to Blue.
• Despite this – $VRNO reports a Net Income of ~=$15MM once all is said and done (and ignoring an outsized GoB). Their interest expense of $8MM matches that of $JUSH. Income tax expense reported at a 41% marginal rate – a real outlier in this regard.
• They attribute the increase almost entirely to the 280(e) provision.
• Total share count is up 80MM since last quarter – total now at 202MM.
• 57MM of those shares came from Proportionate Share conversions (13.7MM in the prior quarter). There’s still some 100MM of commons to to come from remaining proportionates – but this has been a rapid conversion rate comparatively. Several MSO’s have been sitting on their hands for a couple of years regarding these. I’m curious if they’ll continue.
• Related party transactions are negligible.
• They entered CONN vis the purchase of a single dispensary at a cost of $22MM. This closed in late October.
• A couple of weeks later, $VRNO announced the purchase of a 220k ft² cultivation facility, and a 15k ft² manufacturing facility also in CONN for some $132MM. Boom, insta-business. The cultivator is established, and has been using both facilities since at least some point in 2020 – presumeably its’ turnkey.
• They sold their 50% interest in a company called ‘ILDISP’ – I’m assuming its’ a storefront that either wasn’t performing, or perhaps wouldn’t be let go of by the other half. We’ll see the details next time, nothing more than that in these financials. If its’ material, I’ll hunt the backstory down.

Ok. Disclosure is pretty weak overall, but I’ll thank them for building out an acquisitions schedule.

‘Shock and awe’ is the term that comes to mind looking at these guys. Everything about them is outsized: the number of deals, the intangibles, the overhang, the inventory, GoB, reported tax expense, it goes on. A solid reported margin across fleet, but only a single, one word reference to ‘segment’ in their financial statements – and even that one is in the MD&A is simply “Verano’s products were designed and developed with various consumer segments in mind“.

It’s interesting to me that so many assets have been able to be cobbled together in such fast succession. It also begs the question about the other MSO’s with cash/space on their balance sheets for incremental buys. I mean, were these things passed over by others? Has personal relationships and history been a factor? Are they simply a function of price?

I’d trend towards thinking the latter given the intense amount of intangibles that’s come onto the books. Inventory levels beg a couple of questions to me as well.

Inventory specifically is not in line with any other MSO I’ve seen. Green Thumb ($GTII) – with $233MM in sales only holds $93MM in inventory. Even Curaleaf ($CURA) – which is sporting a run rate in sales north of $315MM only has $340MM in inventory. $VRNO claims 23% of sales YTD are from wholesale – which implies about $750k/store in retail per month across system. Alas, we don’t have visibility into individual states – and can’t really gage their price exposure. With this much inventory build – despite $200MM in incremental sales QoQ – it would be be a concern of mine

The largest single debt facility they pack (initially $30MM at 15.25%, and subsequently upsized to $130MM), was modified in mid-September. That amendment reduced a minimum liquidity requirement to a fixed amount – rather than as a percentage of total outstanding. It also reduced the interest rate on the initial and second upsizing – and these modifications cost some $5.1MM in fees to enact.

Of the 201.6MM shares outstanding, there’s also 1.1.MM proportionate shares (or 110MM additional common) for a fully diluted count of 315MM.

Ok. I’ve been fussing with these for awhile, it’s going to take more time to tease out individual deals, and try to back into incremental quarterly impacts. As it is, I’m staring at a big ball of yarn here. The market wasn’t over the moon with these financials, but share price has shored up (somewhat). I’m not over the moon either – and it’s really difficult to see how high this thing can eventually jump.

$VRNO is atypical of any retailer-centric MSO out there. Much more work for me to do on this shop.

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 $VRNO