2023-12-21 08:45:00 ET
Summary
- Nick Gastevich, aka CannaVestments, on Q3 earnings. Focusing on cash flow and profitability, avoiding dilution and adding further debt.
- Companies like Green Thumb and Glass House demonstrate financial discipline and strategic market allocation. Who's best at protecting shareholder capital?
- The future of 280E tax and its potential impact on the industry remains uncertain, but companies like Trulieve and Jushi are exploring ways to mitigate its effects.
- 7 stocks - what's working, what's not.
Listen above or on the go via Apple Podcasts or Spotify .
Nick Gastevich, aka CannaVestments , talks Q3 cannabis efforts; avoiding dilution, equity raises or adding further debt (2:30). Navigating the industry as a retail investor; companies that protect shareholders (14:00). The future of 280E, catalysts definitely needed (24:00) 7 stocks - what's working, what's not (30:00).
Rena Sherbill: Nick Gastevich, welcome back to the Cannabis Investing Podcast. Always happy to talk to you, and always happy to have you on the show. So, thanks for making the time.
Nick Gastevich: Rena, as always, it’s a pleasure to be back on and excited to talk more cannabis as always.
RS : Yes, absolutely. Anybody who knows you as CannaVestments on Twitter, on Seeking Alpha, in the land of the Internet, and outside of it sometimes in real life, I think knows the wealth and the depth of your insight and analysis and desire to bring more clarity and transparency and understanding into the sector, into the investment world. So I know I personally really just appreciate what you're putting out there into the world and into the cannabis investors hands and heads. So shout out for that.
And anybody who doesn't know your work under CannaVestments and all the good you're doing out there, check Nick out in that regard. And you've been on a few times before.
I’m happy to have you on now, mid-December 2023. How are you, or how would you articulate how you're looking at the cannabis market these days and if you want to intersperse broader market trends that may be afoot, happy to hear that as well.
NG : Sure. Yeah. I appreciate the warm welcome as always and certainly echo the sentiment for all you do, Rena. Just wanted to start off with that.
Yeah, as to the market, I mean, it's kind of classic cannabis right now, as volatile as it can be, obviously, with all the news around Schedule III as of late and what the potential timing on that looks like. And we've seen the ups and downs. I think MSOS kind of as an indicator, we were up like 70% on the announcement. We essentially gave it all back, and then past couple of weeks, we were up 45%, 50% and now we've started to give some of that back.
So, just crazy times as always, but certainly keeping a keen eye on all the evolutions at the federal level, but then also with essentially all the Q3 earnings now in, looking at kind of a company specific basis and seeing the evolutions there as new markets have come online, most notably Maryland as of late, and with new markets ahead like Ohio turning on adult use.
And I think an overall trend I've been observing and certainly companies have echoed the sentiment is obviously just the focus on cash flow and profitability after so many years of focusing on growth. And I think we can go into a few companies specifically.
But I think at a high level, Q3 was a good initial indicator from my view that the efforts companies have made to shore up costs and right size operations have definitely started to take hold. And at least from my end, that was a good thing to see just in terms of companies being able to avoid dilution, or equity raises, or adding further debt.
RS : And who would you say, best exemplifies that? When you're talking about that, who are you thinking about?
NG : Yeah, I mean like -- you could go across the board, like there is this – if we're talking about some of the Tier 1s to begin with, I feel like most of your listeners would know them the best. You have companies who kind of have always had that mantra of cash flow and profitability like a GTI ( GTBIF ), who's been pretty consistent, has only gotten better at it over the years.
But then if you look at, I’ll callout Trulieve ( TCNNF ) as an example, if you look at their headline numbers from a top level, the revenue has come down over the last two years from kind of like low-$300 million. I think they did about $317 million in like Q2 2021. And now this most recent quarter they’re into $280 million, or $275 million.
So from that perspective, you'd be like, hey, what's going on there? Their top line is shrinking. But if you look at what they've done from a casual profile relative to last year, you can actually see that they've shored up cost quite a bit. OpEx has come down.
They're working primarily out of that large scale facility in Florida. And I got to shout them out there, their cash flow profile has improved significantly, even though they've had that top line decline. So, I think that's something you're seeing kind of across the board.
Curaleaf ( CURLF ) is definitely doing that to an extent. They have, I would say, like the most to do just given how big they were. But I think they've pulled out of four states now in California, Colorado, Oregon, most recently Vermont, and they've downsized facilities in New Jersey and then in Nevada.
And I was looking at the number yesterday, I think they’ve dropped their employee account to by about 750 over the course of the year. So, I think they still have more work to do, but you can see in their operational cash flow number, tax adjusted it's improved quarter-over-quarter from the start of the year till now.
So, I think that's a trend we're kind of seeing across the board and it was a much needed trend mostly just because these companies got over levered and really didn't have ability: number one, to add more debt; and number two, that it would have been very harmful for them to raise equity at these prices and really dilute the shareholder base.
RS : And looking across the market, well, are there any smaller players you want to shout out, or use as examples in addition to the bigger names?
NG : Yeah, I mean, one name I would shout out to start is much smaller. There's a company called Grown Rogue ( GRUSF ). It's a company I like. I think it's definitely gotten more attention despite its size as of late.
RS : Yeah, I was going to say, there's a number of, I would call them quality analysts that seem to like that name.
NG : Yeah. And you can see why. They know what they're good at. Even if that's growing indoor flower at low cost and they've operated in some of the toughest markets that are in Oregon and Michigan. And most recently, they moved into kind of like their first more limited licensed state in New Jersey.
And even operating in those tough states, they've been putting up impressive cash flow and adjusted to EBITDA figures, even though they are -- it's a smaller company, but impressive nonetheless. So, I would definitely call them out as a company that's similar exemplifies, knowing what they're good at, not over leveraging and doing what they're best at.
On the smaller side, I mean, as a counter example, like we have seen some companies kind of go in the opposite direction, like MariMed ( MRMD ). I feel like it is a name I hear on your podcast a frequent amount and it’s a company I've liked in the past and do still think their management does a good job generally.
But if you look at their cashflow figures from last year to this year, as well as their margin profile, it's come down quite a bit. So, I think you definitely have to look at each company in great detail and the evolution quarter-over-quarter and year-over-year is definitely something I'm keeping an eye on.
RS : And what would you point to at MariMed? What do you think that they've gotten wrong over there?
NG : Yeah, I mean, it's not so much that they necessarily gone wrong. It's kind of just what everyone has been facing in that, there's price compression everywhere. And I think a lot of their numbers going back to 2021 and 2022, where they had a really good cash flow generation tax adjusted. It was, I think a lot of that was coming from the Illinois market, which continues to be a very strong market. But it's a state where they, up until recently, they've like added a craft grow operation.
So they will be vertical now. But that hasn't come through the numbers yet. But they historically had four stores, mostly they’re like located downstate closer to the Missouri border. And as soon as Missouri turned online and combined with the fact that Illinois has added quite a few more retail doors. So those two major effects have just led to those stores, reduced revenue, lower margin profile and I think that really carried through the numbers, and probably similar attributes in Massachusetts where they have operations as well.
RS : When we're looking at these companies and these states go online and you're talking about the Missouri, Illinois situation. And you mentioned Ohio and as states more and more come online and companies have to do this dance between borders and cash flow coming from different directions.
Is it kind of an impossible situation that these companies are in in the sense of it's impossible to know timelines and so it's somewhat impossible to plan for these things? Or I guess let me ask you to kind of articulate how you see that, you mentioned that they didn't, MariMed here didn't necessarily do anything wrong. They're kind of victim to these sector wide issues.
What would you say that companies can do well? Or is there a certain futility built into the sector as we stand here, still awaiting all these regulatory changes?
NG : Yeah, it's a good question. I think it's something that both companies need to do and for investors to realize is using Maryland as an example is that, the numbers that are going to come right out the gate, and sometimes can last for a few years, aren't going to be the long-term numbers. And I think that's just like an important thing to realize. And I think companies have gotten better than this.
I think a few things they can do. One is being vertical definitely seems to help because when you can shift, if you go from a market that's very wholesale heavy, early on, and you can make good margin on wholesale. But that market gets more competitive over time from a price perspective.
One thing we've seen companies do across the board is, if they are vertical is just sell more product through their own doors. And that's a way to protect margin and to ensure your product has somewhere to go. So, I would say that's number one.
Number two is certainly not to overbuild. I think looking back to 2021, that was just the most common occurrence you can kind of in hindsight see is, we saw companies across the board building 250,000 square foot plus facilities in multiple states and a lot of that was a factor of growth seeming, probably a little stronger than it was with kind of the COVID stimulus boost and people being at home, but also just cheap capital out there, a lot of companies to do that. And in this new reality, I think, not overbuilding and kind of knowing to right size operations towards that future market is something that companies need to do from the beginning.
So, I’d kind of highlighted those two, obviously things like brand quality and getting in many doors and having a good reputation is of course important. So, I think those are kind of top three.
But then, obviously as investors, we have to recognize that too, that if you have a company highly indexed towards a specific state, just realize look at the licensing landscape, look at the, like we saw with Illinois in this example, look at the bordering states and what's going on there and how long the reality can last, or how quickly it can change is an important factor for investors and companies to keep an eye on.
RS : Yeah. There's been a lot of talk about, or I guess there's always a lot of talk about the financial sort of machinations of cannabis companies and what they're forced to do and what some of them do very much on their own. But how retail investors tend to navigate that and it's oft times very difficult for the average retail investors to navigate the cannabis industry .
A, who do you think is best at, or some of the best at, I guess, being kind to shareholders in terms of how they go about all the things that management has to do in terms of keeping shareholders happy, not just the bottom line of price which is out of their control, but in terms of dilution and things of that nature.
Who do you think is the best kind of steward of capital from a shareholder perspective? And then also, I mean I know it's a bit broad, but what are some of the ways that retail investors can protect themselves from the sector?
NG : Yeah, another great question. And I see probably like two main aspects of that, in terms of protecting shareholder capital. I would say, one is looking at just dilutive factors and which mostly relates to balance sheet quality from my perspective, as well as profitability.
I was actually looking at just some statistics on some of the bigger Tier 1 and Tier 2 names in terms of how their share accounts have grown over the past two years, and how that exists like relative to their revenue growth profile because if you're a company and you grew revenue 100% as an example, but your share account jumped by 200%, you can certainly question whether that growth was worthwhile as a shareholder?
So, identifying companies who don't need to dilute the shareholder base in order to grow, I think is one characteristic I frequently look for. And from what I saw, amongst some of the bigger names like GTI as an example, their share counts in terms of fully diluted in the money share count only grew about, by about like 1% since the end of 2021 until this most recent quarter, and in that time they grew revenue by 13%. So that's a very good generation of revenue.
It might not be like the top generation of revenue growth, but they did it off a very stable base of total shares outstanding. And that's one factor that I certainly look at.
And then the other kind of caveat to, I would say like being a happy shareholder and what companies can do is probably just transparency and connecting with shareholders.
And I think you can point to a company like TerrAscend ( TSNDF ), who has a very visible CEO or Chairman, and Jason Wild who frequently connects with his investor community and he's buying shares himself. I think all of that – things like that certainly point to a good connection with the shareholder base and something you should look for as investors.
But other forms of transparency, I'll give credit to Verano ( VRNOF ). In their most recent Q3 call , they released a new subset of, kind of data in the press release, where they broke down all of their sales by state, which I think there's other than maybe Goodness Growth ( GDNSF ) who's quite a bit smaller and there's probably a few others.
I don't see many companies giving that level of detail on a state-by-state basis. And as an investor, I really appreciate getting that detail and being able to see how is this company doing in every single market quarter-by-quarter? And it really allows you to kind of have insight into the company more than you would otherwise.
RS : I appreciate all that color. In terms of portfolio allocation . As we sit here, there's I think a repeated topic of conversation on this podcast, and others is the notion of timelines and how important that is to investors and to be looking at what your investing timeline is and also what the timeline is for the cannabis catalyst to come. And how much we don't know about that obviously.
How would you advise investors or what do you think is a good way of allocating? I mean, we talked about specific names right now. But in terms of ETFs and in terms of understanding how long there is to go and in terms of bigger players and smaller players and MSOs and if you think there's any worth to putting money towards Canadian names, or like U.S. optionality to come, what are your thoughts there?
NG : Yeah, I think some of the primary factors I look at is just the idea that investing is going to be very personalized and everyone's going to have their own risk profile and the balance of cannabis investing within, I would say they're a larger investing framework or what they do in work in general. Everyone's going to have a different risk profile and how much risk you want to take on will certainly vary by company quite a bit.
And I think we've seen that in these past couple of months pretty keenly. If you look at a name like Ayr ( AYRWF ), or Columbia Care ( CBSTF ), which are, I would say two of the names that jumped up the most upon the initial HHS Schedule III announcements. And simultaneously those are the names that were beaten down quite a bit prior to that.
So, arguably those are names that someone with a slightly higher risk profile, but in pursuit of a higher return could pursue. But from my perspective personally, like, this is already a very volatile industry and a risky industry to some extent, and that federal reform is so uncertain that I think you can also take the more conservative approach and really invest based on balance sheet quality and stability of operations.
And maybe you don't get quite the upside on a catalyst like a Schedule III announcement, but you can also sleep well at night and have a little bit more downside protection. And I think that certainly was apparent in the past couple months in terms of what names moved up the most initially, but then subsequently dropped after kind of the initial fervor wore off.
RS : Anything to say specifically about ETFs or Canada?
NG : Yeah, I mean, I don't personally touch the ETFs, or the Canadian names too much, but always keep an eye on them.
Like as much hate as the (MSOS ) ETF gets, it's really the only vehicle towards any institutional exposure in the space. And it generates a significant amount of the volume on its underlying names. And I don't think they've done a perfect job of allocating capital, but given they are an active managed ETF, but for the most part they have exposure to the big buckets and are usually fully invested as an ETF would be.
Obviously, having that option also gives people the ability to play options if they want, which is not something I do because I'm not a trader, but there's certainly benefit to having that ability at the least.
As to Canadian names, I do think that market has stabilized from a price perspective to some extent. And I think that is good to see there. We're finally starting to see some of the -- for them, it's called license producers and the license is that Canada as a whole has stabilized or even started to come down as some of the smaller players are falling out.
So it's still not a market that I would love to be in. I think the structure with the government there and the excise taxes they pay is just egregious. And everyone always jokes that, it's like the Ontario Commission there is essentially the most profitable operator in Canada, because they really do charge an arm and a leg just to be a facilitator of, like a distributor of product.
So, I think some of that aspects makes me hesitant. But I think there are certainly some interesting names up in Canada, like I think a ( HITI ), High Tide Inc. has approached the industry from an interesting angle, just going heavily all into retail and seemingly doing that pretty well. It's definitely a low margin business, but they are producing a little bit of cash flow and seem to have found a good niche in that market where they can scale.
But in general, I'm still not playing the Canadian names. I think you could play the usual names like a Tilray ( TLRY ) if a Schedule III announcement goes through, even though it'll have nothing to do with it for the most part.
RS : Yeah, right.
NG : As always the stock could run on just hype and most people's inability to invest in the U.S. names.
RS : And investors everywhere are saying, we'll take it. Yeah, not everywhere, but you know. Can I ask you your thoughts or if you have any thoughts on 280E, the possibility of that going away and the possibility of something taking its place , or the possibility that companies just rejoice and benefit wholly from that?
NG : Yeah, definitely the million dollar question and what everyone has their eyes on because it seems to be the only thing that can drive stocks in this market. It’s definitely surprising to see what I thought was a pretty good Q3 report from a lot of names and just like no movement in the share price, just shows how decoupled the industry is from any kind of fundamental analysis.
But yeah, I mean, I'm certainly not going to prognosticate as to timing because clearly no one knows. I certainly saw all the kind of the sentiments from a lot of company heads and others who kind of said, by year-end or early in 2024 and from my view like if the Biden administration wants to get this through.
And then subsequently through the public comment period and kind of the last steps needed to finally get it implemented, kind of Q1 next year at the latest seems like a timeline for me that like needs to happen because otherwise we get into election season and if a new administration came in they'd have the ability to block it. So, I imagine this is something concrete he wants to run on. So, certainly looking at that timeline and hoping it's true.
As to the ramifications of it and what comes next , again, definitely a little cloudy. It seems like the common consensus certainly is that the 280E situation goes away and you have companies like Trulieve and Jushi ( JUSHF ) and Q3 even making the argument that they no longer have to pay 280E taxes.
I don't personally think they'll be successful doing so, but clearly there's some argument around that evolution and it can give you a peek into what a market looks like without -- just under normal tax situations and how beneficial that'll be to operators. I know you mentioned - I don't see the government implementing any sort of excise tax at least not initially mostly just because from my view and from what I've read is that that would have to be implemented by Congress and it seems like Congress is just completely unable to agree on anything.
So I think the idea of that being able to get the timing together to put something in place seems unlikely. So this does seem like just a very important potential change in the industry and a much needed step towards normalization. Like it’s just crazy to think that we're, the cannabis industry isn't asking for anything special. It's just asking to be treated as a normal operator. And that seems so simple, but clearly very difficult to do.
RS : You mentioned what Trulieve and Jushi are doing. Do you think that's a misstep? Do you think it's a worthy endeavor even if they don't get exactly what they want?
NG : Yeah. It’s a fascinating one. I think Trulieve is the more public figure head on that. Number 1, because they've also -- as part of it, they've essentially gone back in the past and calculated how much 280E taxes they paid to extend and are asking for a federal refund. And then on top of that, they are now -- and it's another reason that you really have to dive deep into these financial statements and calls and everything to understand what's going on.
So they're essentially taking that, what they would normally pay in 280E tax that would fall under income tax payable and instead pushing that towards their long-term liabilities under an uncertain tax position and waiting essentially for the federal government to get back to them as to whether they owe that tax or not.
I think it is, for them, I think they're able to do this. Number one, they don't have like a Curaleaf or Verano. They're not sitting on a pile of unpaid taxes from past years. They essentially are always up to date on taxes. So I think trying this, if it takes a quarter or two, wouldn't be the end of the world.
Two, they had kind of a unique situation in Florida where there was a hurricane last year, or earlier this year, and now they're able to defer their taxes regardless until Q1 of 2024.
So, do I think it will be successful? Like, I don't see how, companies have been paying 280E taxes and historically for a reason and to my understanding the IRS has ruled on this in the past saying it certainly does apply, but obviously they have found a lawyer or some sort of accounting firm who is making this argument and thinks it's at least worth a try.
I think the risk is obviously if you have taxes go unpaid, it'll generate interest on that tax basis and you'll owe more in the future. But to their credit they did kind of use this little interim period of not paying taxes to pay down some of their debt. So, they kind of traded that for unpaid taxes. So, we'll see. Again, I don't think it'll be successful, but is it worth a try like, it doesn't seem like there are too many risks of doing so.
RS : I just heard Zach Lowe on his podcast. I don't know if you're an NBA fan, but he went through with another NBA analyst just a bunch of teams, and they said nice things and not nice things.
I wanted to do the same thing with you with a few names. Can we do that?
NG : Yeah, yeah, absolutely.
RS : All right, awesome. So, one nice thing and one less nice thing. Let's start with Green Thumb, everybody's favorite MSO.
NG : Sure. Yeah, I think I've mentioned this before. I mean, I think the nice things are fairly obvious and it's the reasons why I think it's a favorite of many and it's the largest position in MSOS is just the financial discipline and strategic market allocation. They've been generating quite a bit of cash flow since 2021 and have only ramped that up going into 2022 and then now in 2023.
And then in terms of market choice, they've just been very strategic. They haven't had to pull out of any states like some of their peers have because they've been very methodical and have chosen states carefully and seemingly don't overbuild like others have.
If I'm going to give a negative. Like others, I think their IR department can continue to be a little bit more transparent. I think in a lot of their calls, they hold things very tightly to the chest and they don't give out what their capacity sizes is in various states and you kind of really have to ask very specific questions on these calls to get any sort of forecast looking out.
So, I would say that continues to be an area that they need to improve on. But it seems like the one they continue to kind of get away with by just having good financial performance.
RS : Do you think they're going to end up like Netflix ( NFLX ), which just released their numbers , which everybody has been begging them to do for years. Do you think Green Thumb eventually kind of releases the numbers and gets more transparent? Do you think that that eventually down the line kind of comes back to bite them in some way, or too soon to tell?
NG : Yeah, probably too soon to tell. Like I would think under if this industry continues to head towards normalization and we eventually get up-listed and institutional money come in, that might just be something that institutional money pushes for and eventually gets the company to be a little bit more transparent about.
You would think they would want that, as large investors put it, writing fairly large checks. I think that is an evolution that likely would take place and it would be fairly normal to see.
RS : Yeah. All right, next, Trulieve. I mean, you just talked about them, but...
NG : Yeah. Definitely. Like I mentioned before, credit to them for kind of getting the costs, and check and even leaving a state like Massachusetts, like it definitely is kind of negative from a headline basis. It's an indication that they weren't able to compete in a slightly more competitive market. And that does say something, but I also think it was like, also somewhat prudent to kind of admit like, hey, we're not generating profits here, like, let's take a step back and focus elsewhere.
And to their credit, it does seem like they've done a good job on the application basis as well. They won that license in Georgia. We just saw yesterday, or two days ago, the Alabama Medical Program issued licenses, not -- this is the third time they're doing so because there's constant lawsuits, but Trulieve did win a vertical license there, we'll see if this licensing regime holds, but they have done a good job of that.
On the negative side, what I mentioned about the headline, top-line revenue figure does certainly – it is something to look at. They've seen revenue drop by close to 40-something million. And at the same time have added 35, 40 stores across the platform. So, I do think there is some level of issue just when it comes to growth, but like others, if Florida does flip to rec or they see a state like Pennsylvania, where they're quite large, flip to rec as well, I think that growth potential reignites overnight and they certainly have opportunity there.
RS : Alright. Curaleaf?
NG : Yeah. I mean Curaleaf is, I think kind of like a figurehead name of just the evolutions of the cannabis market. They're obviously the ones who, I would say, were growth at all costs and definitely took advantage of the opportunities that afforded them and got into good markets.
If you look at like in Arizona, where they went big on the retail side, it's a good market to have retail in. And kind of every, essentially every major market that flips to adult-use, whether it was, Maryland in July or most recently in New York, they seem to always have exposure.
And that's a good aspect of the growth at all cost opportunity, but on the opposite end, they obviously face the realities of, I would say, spreading a little bit too thin and being a little bit too aggressive and having to put money into four markets that you later pulled out of is obviously a red flag to some extent just in terms of capital allocation.
If you look at like, look at the Los Sueños Colorado deal, which was like a large outdoor grow in Colorado that they acquired via an M&A in -- it was 2021. And here we are two years later and they've exited the state fully. That obviously isn't a good return on investment as a company, or for shareholders.
So I think they're similar to Trulieve with exiting Massachusetts. They're making the tough decisions that I think are good to make, but it's also a reflection of management probably not making optimal decisions for the company and being a little too aggressive at the same time.
RS : Glass House ( GLASF )?
NG : Definitely got to give Glass House a lot of credit. Similar to Grown Rogue just being able to operate in a very tough market and now doing so at least close to profitably.
I think they know what they do well, and that's growing greenhouse flower at scale at a very low cost. And they've capitalized on that opportunity certainly. And that was another name I was looking at, the cash flow figures and they've improved pretty significantly year-over-year, where they actually are cash flow positive this year. Some of that is due to kind of working capital adjustments, but they’re, you can kind of call them break even at worst.
So I think they've done a very good job of that, little hiccup in their forecast for Q4. They mentioned some non-optimal grow conditions that led to lower yields and I think that's just a reality you'll face with greenhouse growing. But in a market where there's just a ton of struggling operators, you’ve got to give them credit for putting out good margins and doing what they do best.
From a negative side, I definitely don't like the preferred raise that they have done as of late. It's the interest rate that's charge is just egregious. And it really puts the common shareholder in a tough spot in terms of those preferred shareholders getting paid out a very healthy dividend. I think it's like 15% cash, and then another 5% or 10% in kind.
So definitely a tough structure there, although somewhat a reality of just a tough capital raising environment. But overall, I think it's a good team operating in a tough market and seemingly doing it fairly well.
RS : I was going to ask about that, the last issue that you mentioned about the preferred shares. You just maybe alluded to it or said it out loud, but is it just kind of the nature of the beast at this point or do you think that that could have been handled differently or should have been handled differently?
NG : Yeah, it's tough to say. I thought from, they did start the raise when their numbers were still developing. It's very much a story that has changed quarter-over-quarter with their growth rate. It's been pretty impressive. And maybe at the time when they just went to market, there just wasn't that appetite for a better deal.
But it does seem pretty like surprisingly bad for a company that's seemingly on a good trajectory in terms of just like how painful that interest rate they're charging is, that I expect them to be able to get something better on the market. But like you said, I think it could just be the reality of trying to raise capital for a California operation after so many people out there have been burned over the years.
RS : Right. Also, I've seen examples where they've hit a really nice capital raise in the past. So, I think it surprised a lot of people. Yeah, curious to know if I mean, look, it's obvious that it's super hard to operate and California is no picnic for sure. Can I ask you two more names?
NG : Yeah, let's do it.
RS : Okay. Jushi.
NG : Yeah, Jushi is an interesting name and I think it's kind of unique in where they're concentrated in, the markets they're heavy in. I think like some of the other Tier 2s , I think they took on a little bit too much debt and kind of sale and lease back for my liking where they really haven't been able to inflict towards any sort of serious cash flow generation. They're still tax adjusted quite a bit in the negative so far in 2023, but I think they have some interesting growth opportunities ahead.
It's just kind of timing wise difficult to see when that inflection point happens. I mean, most obviously they have a big footprint in Pennsylvania. And that's a market where the legislature has been split party wise, and it's been tough to get something across the line in terms of an adult-use framework, but that state is completely surrounded by adult-use states now. So, there's more impetus than ever for them to do something.
And then separately you look at Virginia, where they have one of the four operating licenses in the state, well known to be what they think of as kind of the most populous and densely concentrated area. So, arguably a really good part of the state. But I think they kind of just were an unfortunate bystander in again the politics that happened in that state where an adult-use bill was formed or, an adult use initiative was passed I think it was in 2021. And then the Republican governor came in there and kind of kiboshed the whole, actually upstanding the market into a licensed framework.
So, unfortunately for them, the two biggest states that they're in have that growth potential ahead. But it kind of seems like a 2025 story like at the very earliest.
And given that and given their lack of cash flow generation and somewhat thin balance sheet, I do worry if they'll have a need to raise some sort of capital. Definitely I wouldn't want them to raise more debt or add more sale and lease back, but obviously raising equity would be tough in this market. So that is a name I would be slightly concerned about, at least in the interim.
RS : I'm debating if the last one should be Ayr or Planet 13 (PLNH). Do you have a preference?
NG : I can cover both quickly, both are interesting.
RS : Boom, that's why we love him. Let's do it.
NG : Sure. Starting with Ayr. Another name that I would say kind of fell in that Tier 2 bucket of overextending a little bit, over leveraging slightly and they had to do a fairly painful kind of refinancing where they pushed dead out, but took on quite a bit of dilution as a result. So that was kind of a painful step , but a much needed step for them.
Like kind of what I mentioned with Jushi is like they have a, I forget what the exact statistic was, but it was something like, of a company that has I think 89 stores country-wide, like only 15% or 25% of those are adult-use at the moment. Obviously with the biggest component of that being Florida that has yet to flip.
So they're, like Jushi, they kind of have that growth potential ahead in Florida especially, but as well as in a state like Ohio where they have three stores which is upcoming and then they have a decent footprint in Pennsylvania as well. So they definitely have that optionality for growth ahead.
I think they've just, over the past year or two, haven't done the best job of expanding and I think took on growth a little bit too quickly because going back to the early days of the company when they were just in Massachusetts and Nevada and they were a very profitable operation, and they kind of jumped from two states to eight states overnight.
And I think they kind of lost some of that operational excellence in that move by just doing a little too much too fast. And certainly taking on debt was a big part of that, unfortunately.
RS : Yeah.
NG : And then jump into Planet 13. Definitely a very unique operator . It’s a company that like can’t really be compared to anyone else, just in terms of what they do and how they’re structured and obviously how important that super store is to their overall numbers.
To their benefit, they’ve always had a very solid balance sheet. They have a net cash position, which is extremely rare in cannabis. They haven’t overextended, but they have started to make moves beyond just their initial Nevada market where they obviously have done well historically.
I think how well those moves have gone have been tougher. Like they’re moving to California, I think has somewhat been a bust. I think the super store, I forget what exact city they put it up in, but it did not work exactly to the level that they were expecting.
They just are opening a store here in Illinois that I think it's like essentially on the road from Wisconsin to nearby the Wisconsin Illinois border like if you were driving from like Milwaukee to Chicago. So, I think that that store will actually do really well. It's a good location and will benefit there and then probably their biggest move is in Florida, where they acquired a license and are looking to expand there. So, we'll see how well they can replicate the Nevada model to their credit.
Like I mentioned, they have a sound balance sheet, which I think there's not a ton of risk, but at least in their current form the Nevada market has gotten tougher and the California strategy didn't work, so they are slightly negative on their cash flow profile. So, I think they need one of these expansion steps to kind of prove out to show that, the superstore wasn't just kind of an anomaly that works very specific to Nevada and Vegas and nowhere else.
RS : Great stuff as always Nick. Great stuff as always. Really appreciate it. Appreciate you taking the time. And anything that you would like to leave listeners with or share with listeners or let them know how to get in touch with you or anything that you want to share, happy for you to do that.
NG : Sure. Yeah. I mean, like you said at the start, I'm always happy to check cannabis. You can find me at CannaVestments on Seeking Alpha or Twitter. Always happy to talk this industry. I think one thing I always try to leave with is, just, I try to echo on all kind of the data I put out there is that this is a complex industry and there's never a single metric, or kind of a single tool that you can use to try to understand these companies.
And the biggest thing you can do is, kind of roll up your sleeves and attack these investments from every angle possible to really understand because this is a complex industry and especially with the state by state aspect of it is something you really need to dive into deeply to understand what these companies look like today and what their potential is ahead.
Because I think with things like adjusted EBITDA and other clouded statistics, it's very easy to think of companies in a good shape when it's not and vice versa. So, definitely would say roll up your sleeves and do the hard work and spend the time looking at very monotonous financial statements and that'll prove worthwhile.
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Cannabis Investors - What You Should Know