CCHWF - Columbia Care Needs Cresco Labs To Avert A Cannabis Liquidity Crunch

2023-04-24 17:55:46 ET

Summary

• Columbia Care is down over 90% from its IPO with unprofitability and an increasingly precarious cash position forming a headwind.
• The company's cash and equivalents stood at $50 million as of the end of its fiscal 2022 fourth quarter.
• Total debt of $567 million was also held on its balance sheet and is due for repayment over the next four years.

Is Columbia Care ( CCHWF ) now a buy after a more than 90% decline from when it went public? It depends. The New York-based cannabis multi-state operator owns 32 cultivation and manufacturing facilities to support 94 dispensaries spread across 16 US jurisdictions. These dispensaries mainly trade under the Cannabis retail network but Columbia Care also operates gLeaf, The Green Solution, and a medical cannabis outlet that it takes its name from. The stock has mirrored the broader cannabis retrenchment built on what has been a structurally unprofitable ramp-up of legal cannabis sales in North America.

The wave of state legalization promised wealth from an industry that for much of its history was mired in infamy and kept in the darkness. The reality of legal sales has been jarring with capital losses distributed wholesale on the back of dilution and cash burn.

Whilst Columbia Care does not face the pressure of being delisted as it trades over the counter, the stock faces an uncertain future with its cash and equivalents at $50 million for its last reported fiscal 2022 fourth quarter, down from $89.2 million in the year-ago period. And whilst the company realized positive cash flows from operations of $5.2 million for its fourth quarter, operating cash flow for the full year was negative at $111.4 million.

Further, Columbia Care held total debt of $567 million on its balance sheet as of the end of the fourth quarter, down sequentially from $605.5 million but an increase of 34.6% from the year-ago comp. Against this backdrop, it's hard to concretely state whether the current market cap at $188 million is an undervaluation.

The Debt Conundrum

Columbia Care's contractual obligations and overall debt burden is driving angst. The company had at least $115.6 million in debt and contractual obligations coming due this year. However, it has since been able to extend the maturity of its 13% senior secured notes of $38.2 million that was due next month.

The repayment could be expanded again from next year but the specter of a liquidity crunch now lingers. Critically, interest expenses are chewing into the company's cash position and will present a core headwind to Columbia Care's aim to reach sustained positive cash flows. Interest expense for the fourth quarter came in at $14.2 million , up from $11.8 million in the year-ago quarter. This came as the company's broad profitability metrics saw some weakness versus their year-ago comps.

Indeed, whilst Columbia Care realized revenue of $126.19 million, a 9.4% decline from the year-ago quarter, the company's gross profit at $41.7 million declined by 32.7% year-over-year. This came on the back of an 1150 basis point decrease in gross profit margin from 44.5% in the year-ago comp. Management stated during the fourth quarter earnings call that this was due to lower wholesale pricing and underutilized cultivation sites that requires the expense of cultivation overhead costs rather than capitalizing them as inventory.

Will Cresco Labs Change The Outlook?

Columbia Care is now in a state of flux. The company is chasing a combination with Cresco Labs ( CRLBF ), a deal initially announced in early 2022 and that was meant to have closed by the end of last year. To be clear, this is being structured as an acquisition of Columbia Care by Cresco Labs at what was initially a $2 billion consideration including debt when the deal was announced. The acquisition is now expected to close later this year by the end of June. Columbia Care shareholders will receive 0.5579 of a subordinate voting share of Cresco Labs for each Columbia Care common share. They should own roughly 35% of the larger company which had a combined fourth-quarter revenue of $325.8 million, the second largest for an MSO.

Further, Columbia Care is amidst a restructuring meant to reduce its operating footprint and render the company a fundamentally more profitable entity. The company reduced and exited cultivation operations in 6 markets, closed 4 loss-making dispensaries in California and Colorado, and cut corporate jobs by 25%. Columbia Care expects this to generate a net $35 million in annualized cost savings. It went a step further and exited at least 2 US jurisdictions and closed its CBD and European business to generate an incremental $3 million in cost savings.

Hence, there is a high possibility of positive operating cash flow being sustained in future quarters. I don't think its selloff has gone too far even as the still uncertain combination with Cresco Labs stands to help the company counter any near-term concerns of a liquidity crunch. Cresco Labs held cash and equivalents of $119.3 million as of the end of its fourth quarter and has a much more positive cash generation profile. Columbia Care is a hold against this.

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