August 3, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
CAPITAL RAISES
There were two more transactions and a $7.0 million higher volume than last week. Three more transactions closed than the previous year, and volume increased by $45.1 million. The average deal size was $8.1 million this week vs. $2.9 million in the same week last year.
Cannabis capital raises are off 63.3% YTD.
Total Equity issuance is off 74.1% y/o/y, with a more significant 78.2% decline in Canadian equity financing. Debt, at 53.2% of total capital raised, remains the highest in history for comparable periods. The graph below shows that U.S. activity dominated capital raises for the first twenty-nine weeks of 2022, with 76.9% of all capital raised. Public companies accounted for 72.9% of total financing YTD, down from 82.6% in 2021.
The U.S. Cultivation & Retail sector has experienced the sharpest changes in capital raise activity.
Total capital raised is down 64.1%, but equity capital raised is down nearly 97%!
Debt accounted for approximately 94% of all capital raised; a record 1/3 of it was raised by private companies.
63.6% of total capital raises YTD were completed by public companies, down from 79% in the same period in 2021.
Seven capital raises totaling $56.9M closed this week, well below the $145M LTM average.
OUTLOOK
Cannabis stock prices (measured by the MSOS ETF) dropped by 7.6% from last week.
The ETF is down 54.4% YTD to a 13.3% decline in the S&P 500. The flurry of discussion regarding the CAOA and SAFE+ bills has died down, removing some of the boost from the market. We continue to believe the CAOA is DOA but have continued to revise our perception of the likelihood of some version of SAFE+ upward. We expect the + aspect to be significantly scaled down to include funding for cannabis research and a grant to the states to support a state right for expungement. We see little support for more comprehensive funding of social equity initiatives or broader federal legalization/ regulation moves.
The potential impacts of the SAFE+ Act are subject to widespread disagreement. We don’t view the direct effects of allowing bank lending and accounts to be particularly significant drivers of cash flows or stock prices for the MSOs. They are already well funded and generally have multiple banking relationships. Moreover, we don’t see the large banks barreling into the cannabis lending business. It’s too small to move the needle. We estimate the US cannabis industry’s entire market cap at around $25B. Meanwhile, JP Morgan had a $1.07 Trillion loan portfolio at year-end. So they could make a loan to buy the entire market cap of the industry, and it would only account for 2% of their loan portfolio! With the incremental KYC/AML effort and specialized industry knowledge required, we guess that big banks will acquire specialized cannabis banking subsidiaries to participate. More important, in our view, is the likelihood that SAFE materially increases institutional investor participation in the industry. We think that can happen in two ways: 1) banks and brokers will be given additional cover and confidence to custody stocks for investors. And 2) major exchanges may become comfortable enough to begin allowing uplistings. No law currently prevents the exchanges from uplisting; it is simply a matter of them gaining confidence that the risk of legal or reputational damage from doing so is minimal. We think SAFE may well be enough to accomplish that. The uplisting and increased institutional investor participation will chiefly benefit the largest MSOs initially but indirectly benefit smaller players from a rising tide of stock values which revitalizes acquisition/consolidation activity.
Investor attention will be on the release of 2nd quarter results by most of the industry over the next two weeks. We see some upside surprises from New Jersey competitors with potentially weaker than expected results from California companies, where pricing has continued to drift. We will be chronicling the price movements of cannabis stocks in relation to their earnings surprises over the next few weeks.
We are frankly more interested in how analysts revise their 2023 estimates. Sell-side analysts have already made significant reductions to their 2023 revenue and EBITDA estimates over the year, as shown in the table below. In aggregate, the consensus EBITDA for 2023 is now 25% lower for the group than at the beginning of the year. More than 1/2 of this revision happened before the release of Q1 earnings. Since June, EBITDA has been revised downward by only 3%. Although we recognize the important positive impacts from New Jersey, and hopefully, New York, we believe that more cuts are likely due to pressures from stagnant to declining wholesale prices mixed with significantly higher energy, fertilizers/nutrients, and other input costs.
This week’s Viridian Chart of the Week (copied below) shows the leverage of the top 21 cannabis companies by market cap arranged in increasing order of leverage. The graph uses total liabilities/market cap, the highest weighted of the four variables we use to measure leverage in the Viridian Credit Tracker scoring model. We think it’s essential to pick up all the various liabilities in the analysis: debt, leases, taxes, and others.
YTD Sector Performance
This week’s Viridian Chart of the Week (copied below) shows the leverage of the top 21 cannabis companies by market cap arranged in increasing order of leverage. The graph uses total liabilities/market cap, the highest weighted of the four variables we use to measure leverage in the Viridian Credit Tracker scoring model. We think it’s essential to pick up all the various liabilities in the analysis: debt, leases, taxes, and others.
Best and Worst Performers of the last week and YTD
Vibe Growth( VIBE: CSE) was the week’s best performer, up 43.1%. We saw no news to account for the move.
Statehouse (STHZ: CSE) was the second best performer of the week, up 27.5% on information that it had settled its past 280e taxes for a discount on the amount owed.
Planet 13 (PLTH: CSE) was the third best performer, up 14.6% on news that it had won one of the new Illinois licenses, further establishing its MSO credentials.
Sundial (SNDL: NASDAQ) was the worst performer, down 27.9% after doing a 10 for one reverse split and having the shares slide further. This is often the case with reverse splits since it signals that the languishing stock price is likely to be a long-term issue.
Glass House (GLASF: OTC) was the second worst performer, down 17.9%. The stock was up strongly last week, and part of the decline is likely to be just a reversion to the mean; however, news that California pricing is continuing to weaken may be a driver.
Verano (VRNO: CSE) was another poor performer, down 13.5%, on news that it was restating
EQUITY RAISES
On July 25, 2022, 22nd Century Group (XXII: Nasdaq), a leading agricultural biotechnology company with interests in reduced nicotine tobacco, hemp/cannabis, and hops plant technologies closed a $35M direct offering of units.
Each unit consisted of one share at $2.05 and 1 warrant with an exercise price of $2.05 (0% premium) and a 5-year expiration. XXII sold a total of 17.03M units.
The long-dated, zero premium warrants are worth approximately $.61 per share, reducing the net share price to $1.44, a 30.7% discount from the preannouncement trading level. This is a more significant discount than we would have expected, given that the issue only increased the share count by about 8%.
The issue implies a market cap of approximately $340M and an Enterprise value of $266M. Enterprise value to projected 2022 revenues is approximately 4.55x.
XXII is financially solid with a cash flow adjusted current ratio of 6.55x and virtually no debt. The company is negative cash flow but has produced over $22M from sales of marketable securities over the last three quarters.
Proceeds will be used to expand and accelerate the launch of the company’s VLN reduced nicotine content tobacco cigarettes in additional markets, procurement and development of other intellectual property rights, and general corporate purposes. Proceeds will not be used to repay indebtedness or to fund the company’s GVB Biopharma subsidiary.
Public Company Raises:
Five of the seven companies that raised capital this week were public. Three trade in Canada on the CSE, three trade in the U.S. (two on Nasdaq and one on OTC), and one trades in London on the LSE.
Equity vs. Debt Cap Raises:
Equity accounted for four of this week’s raises and 92.7% of the funds raised.
DEBT RAISES
Debt accounted for 27% of trailing 4-week capital raises, the second lowest since June 2021.
Debt accounts for 60.7% of LTM capital raise but marks the third consecutive week with minimal debt issuance. We expect to see the percentage recover to closer to the LTM average.
The Week’s Largest Debt Raise:
On July 29, 2022, Australis Capital (WWT: TSX), (DBA Audacious), an emerging MSO headquartered in Las Vegas with operations in California, Massachusetts, Missouri, and Oklahoma, entered into a $2.5M credit facility with Lola Ventures, an entity controlled by Company CEO Terry Booth.
Details of the credit facility were not provided.
Audacious has two development stage cultivation projects commencing to service the New York recreational market. Work has started on the company’s project with the First Americans of the Saint Regis Mohawk Tribe. The company entered into a second agreement with Hempire farms, LLC, a NY-based cannabis company with licenses to cultivate, process, and distribute cannabis products in the State.
MERGERS & ACQUISITIONS
Four M&A transactions closed this week with a total disclosed transaction value of $16.14M compared to three transactions for $29.98M in the prior year.
Total YTD M&A volume is down 79.7% from 2021, with $4.03B in consideration and 118 deals closed versus $19.87B in transaction value and 161 closings in 2021.
Last year’s total included two of the largest M&A transactions ever done in cannabis, the $4.5B Tilray acquisition of Aphria and the $7.2B Jazz Pharma acquisition of GW Pharma. Without the two megadeals mentioned above, the volume in 2022 would trail 2021 by 50.7% YTD.
U.S. volume is down 61.5%, with 37.4% fewer transactions.
The average transaction size of $34.7M is down 38.6% from 2021. Still, it is expected to grow considerably as large public/public transactions like Cresco/Columbia Care and Verano/Goodness Growth close in the 4th quarter.
Major Pending Deals Risk Arb
The Cresco/Columbia deal spread narrowed by 220bp to 8.4% on 7/29/22. The deal still requires some state approvals and the completion of significant asset sales, which may be more difficult in the current financing environment. We expect this transaction to close in the 4th quarter.
The Verano/ Goodness Growth spread narrow by 80bp to 11.4% as of 7/29/22. This deal spread may reflect market skepticism about how quickly New York is issuing regulations for the original license holders, including Goodness Growth. We are surprised that the spread on this deal didn’t widen in response to the news that Verano is restating all of its last year of quarterly and annual financial statements. Although we do not think the restatements will be material, late or revised financials are never a good thing and reduce investor confidence in the systems and controls the company has in place.
Valuation Gap
The valuation gap narrowed to 3.48 on 7/29/22 vs. 3.85 last week. The valuation gap is the difference between the EV/NTM EBITDA multiple for the largest MSOs and the multiple for the less than $300M market cap group, which are their primary targets. This measure has been a significant driver of M&A activity since a larger gap creates an opportunity for more accretive transactions. The gap, which has averaged around 4 points in 2022, tends to increase in improving markets while declining in retreating markets.
The Largest M&A Deal of the Week:
On July 27, 2022, Hawthorne Canada Limited, a wholesaler of hardware, plumbing, and heating equipment that is a direct subsidiary of Hawthorne Lighting B.V and an indirect subsidiary of Gavita International, closed on its previously announced purchase of the Kelowna Research Station R&D facility from Flower Corporation (FLWR: TSX)(FLWPF: OTC) a total of $12.42M.
Hawthorne will pay $3.1M in cash and $9.31M in a seller note.
Flowr is using the proceeds to reduce the outstanding principal under its ATB-led credit facility to $1M.
The Viridian Credit Tracker model shows the Flowr Corporation as the bottom ranking credit among the 24 Canadian Cultivation & Retail companies in our database with market caps between $5M and $50M. The model shows that Flowr was likely motivated by its low liquidity and extremely high leverage as measured by Total Liabilities to Market Cap.
VIEW DEAL TRACKERS
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
Launched in January 2015, and having analyzed more than $60B in deals, the Viridian Cannabis Deal Tracker is a proprietary data service that monitors and analyzes capital raise and M&A activity in the legal cannabis and CBD industries. Each week the Deal Tracker provides proprietary data and market intelligence on transactions, including:
Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors – from Cultivation to Brands to Software)
Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A)
Principals to the Transaction (Issuer/Investor/Lender/Acquirer)
Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
Deals by Location of Issuer/Buyer/Seller ( To Track the Flow of Capital and M&A Deals by State and Country)
Credit Ratings (Leverage and Liquidity Ratios)
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Viridian Capital Advisors (www.viridianca.com) is a financial and strategic advisory firm dedicated to the cannabis market. We are a data- and market intelligence-driven firm that provides investment, M&Amp;Amp;A, corporate development, and investor relations services to emerging growth companies and qualified investors in the cannabis sector. Our banking practice, through broker-dealer Bradley Woods & Co. Ltd. (Member FINRA/SIPC), provides capital and M&Amp;Amp;A services to fund the growth of our clients, while our advisory practice helps to position and build their businesses. Our team’s decades of high level operating and transactional experience on Wall Street in a variety of emerging sectors, allows Viridian to provide comprehensive strategic and financial solutions that assist cannabis enterprises in realizing their full potential.
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