The cannabis industry is no different from any other industry when it comes to talking about success. Figures and financial statistics dominate. Whether it’s the more traditional or industry-specific metrics like production cost per gram, these figures can provide a good basis for evaluation of a company’s potential in isolation and for creating a good comparative base.
Or do they?
What Makes Up a Number
Take Operating Profit as an example, or EBIT, as it is sometimes referred to. It’s a number that works well as a comparison figure. While EBIT can be useful, it suffers from coming after some other subjective costs have been removed. These are depreciation and amortization. The former deals with the declining value of a company’s physical equipment and machinery, while the latter deals with more intangible assets such as patents, trademarks, and franchises.
The reason these costs are subjective is there’s no standardized way to account for them. While one company may decide that their new office computers depreciate at a rate of 10% per year, every year, another might say they lose 50% in the first year and 10% per year after that.
This is where EBITDA comes in, it adds back in the figures removed for depreciation and amortization as an attempt to shore up the number for use as a comparison. This mostly works, and its use by everyone from marketers to financial journalists and analysts shows that it has merit for use as a comparative figure,
But caution is still advised, even when comparing EBITDA.
Variation Still Remains
Take for example, these numbers being used to examine even of the most recognized multi-state cannabis brands, MedMen. The company often includes their EBITDA figures in both quarterly reporting and forecasting, but also includes a sizeable amount of execution risk associated with them. This risk stems from including non-operational assets in their growth figures, such as dispensaries that are still in development for example.
So when you compare the MedMen estimated EBITDA projection for 2020 of $197M CAD to Harborside’s $29.7M CAD for the same period, it can look one-sided. The latter figure, however, is a more straightforward estimate that doesn’t contain potential risk or non-operational unactualized components.
Comparing the raised capital figures between the two companies also provides a false dichotomy. While it should be acknowledged that Harborside Inc. ran as a NFP entity until 2018, they’ve shown that where there has been financing, it has come in regular points across the last three years and has been used towards development goals.
On the other hand, while MedMen has had multiple successful rounds of financing and raising capital, they’re burning through that cash. Since listing on the CSE in 2018, MedMen has performed two large equity raises, exchanging ownership for operational cash. The second of these in November led to a decline in the share price from which the company has yet to recover.
In March 2019, MedMen agreed $250M of private equity from Gotham Green Partners to be issued as three separate tranches (100k ,75k, and 75k respectively).
For the first six months of 2019, MedMen reported revenue of $51.4M, almost ten times the same period in 2017, but operational expenses were up as well. Comparing Q2 2018 to Q2 2019 the figure increases from $16.6M to $150.7M. MedMen’s operational losses for the first six months of 2019 is likely to equal around $125M in total. (Source: Motley Fool)
With continued expansion plans, including a relentless program of acquisitions, it is completely conceivable they will burn through a quarter of a billion dollars of capital this year.
Investors should always seek clarity on what underpins the figures that they are presented with by companies like MedMen. As a relatively new entrant to the cannabis market, they have a freedom of operation, and accountancy, that was not available to the institutions that fought for legalization and formed the foundation of the industry.
The First Laws of Cannabis
For many years Harborside was required, by law, to operate as a not-for-profit entity. Having played a historic role in patient advocacy through chairman Steve DeAngelo, they led the charge that brought about legalization, and as a result, had extraordinary financial and operational demands placed upon them. For example, one of the terms for the Oakland dispensary operating license was a restriction on accruing financial reserves greater than $500,000.
While other multi-state operators have been able to raise more capital as a result of being for-profit from day one, Harborside spent that time developing their offering. This means that in 2019, the company’s revenues are amongst the industry’s most reliable as a result of operating under stringent conditions. As they transition to the position of a public company, there’s every indication they will keep the operational model that has made them a success, despite the restrictions placed upon them.
As a functioning business, they continue to focus on the vertical alignment of the company and the reduction of costs such as price-per-gram. For customers, they’re providing a broad product offering that meets customer needs while offering a deep knowledge of the medicinal and recreational role that cannabis plays in people’s wellness. Their ongoing plan of acquisitions and asset investments focusing on accretive value is of great interest to investors.
Other companies can raise capital (and their EBITDA estimates), but Harborside is raising the bar on what a cannabis company can and should be for consumers and investors alike. Remember to account for differing numbers and metrics when evaluating your current investments. When possible, examine numbers from all perspectives and with a critical eye. Reading financial filings in full, doing your research on each company that you’re interested in, and understanding what short-term and long-term effects each number you’re analyzing could seriously impact your portfolio.