Canopy cuts capacity, CURA heats up Colorado, Linton launches hemp SPAC & Caltabiano quits Cresco

Canadian indoor grow capacity to decline 7% on Canopy’s announced cuts

New Canopy Growth CEO David Klein is closing a staggering 58% of the company’s production capacity and 7% of all of Canada’s licensed indoor grow space.

The company is turning its attention to more outdoor growth, where Canopy now claims 27% of Canada’s total outdoor grow space.

Assuming these greenhouses stay closed and Canopy does not just sell them to another operator, this reduction will help the Canadian oversupply imbalance and ultimately support (or slow the decline) in pricing.

See our detailed analysis here.

Curaleaf’s entry into Colorado portends tougher competition

The Colorado edibles market is going to get more competitive with the entry of $4 billion cap Curaleaf and its Select brand via the purchase of Virginia’s Kitchen DBA BlueKudu.

When we first wrote about Colorado House Bill 1090 allowing out-of-state investment in that market, we wondered if a rush of new capital would pressure existing operators.

This deal appears to be answering that question with a solid “yes.”

Curaleaf’s acquisition of the No. 14 edibles brand in Colorado with only 1.5% market share (according to data from Headset) seems to be more of a land-and-expand acquisition strategy than Medicine Man’s consolidation blueprint or the new-market, bolt-on acquisition of The Green Solution by Columbia Care.

We doubt Curaleaf will be content with only $2.7 million of sales given its 2020 pro forma revenue guidance of $1.0 billion to $1.2 billion.

Our detailed analysis is available here.

Linton, Saunders pivot from consumer THC to industrial hemp via new SPAC

Bruce Linton and Tim Saunders, both former executives at Canopy Growth, have teamed with Geoffrey Whaling, the president of the National Hemp Association, to form a new blank-check company, Collective Growth Corp., to target acquisitions in the industrial hemp industry.

This marks at least the 10th cannabis-focused special purpose acquisition corporation (SPAC), by our count, as shown in the table below (with links to their prospectuses).

Cannabis Special Purpose Acquisition Corporations
Name Ticker Exchange
Merida Merger Corp. I MCMJ Nasdaq
Greenrose Acquisition Corp. GNRSU Nasdaq
Stable Road Acquisition Corp. SRACU Nasdaq
Silver Spike Acquisition Corp. SSPKU Nasdaq
Tuscan Holdings Corp. II THCA Nasdaq
Tuscan Holdings Corp. THCB Nasdaq
New Providence Acquisition Corp. NPAUU Nasdaq
Act II Global Acquisition Corp. ACTT Nasdaq
Subversive Real Estate Acquisition REIT SVX.UT-NEOE NEO
Collective Growth Corp. CGROU Nasdaq

Collective Growth plans to raise $150 million (or $172.5 million via the over-allotment) through the sale of 15 million units at $10.00, consisting of one share and 0.5 warrants striking at $11.50. That would give the company $145 million in cash after fees and a public currency to purchase a hemp company.

Linton told Hemp Industry Daily that the firm would look for “U.S.-based decortication and processing facilities” to “develop a supply chain that uses the entirety of the plant for high value.”

Linton also said the SPAC would execute rapidly in the next “weeks and months,” even though the prospectus stipulates that the SPAC has 24 months to deploy capital.

As we said at our December Investor Intelligence conference, the management team is the one of the most important factors for investors to analyze to understand their interests and incentives.

Regarding experience, Whaling provides hemp operational expertise while Linton and Saunders’ experience is primarily in acquisitions and financing.

At first glance, the only connection we see is the raw plant itself.

Canopy operates in a vertically integrated branded consumer product and retail operation regulated by Canada, while this SPAC is looking to acquire and operate an agricultural equipment and processing company serving industrial customers in a market regulated by the United States.

Regarding incentives, Linton is already chair of Vireo Health International, and his Vireo warrants are all underwater given the company’s current stock price of $0.71 (compared to 10 million warrants at $1.02).

Page 111 of the Collective Growth prospectus shows his and other executives’ fiduciary duties to other entities. These other duties and any potential conflicts will have to be managed with fiduciary duty to Collective Growth shareholders.

Caltabiano quits Cresco – perhaps for greater opportunities in MJ startups? 

Cresco Labs President and founder Joe Caltabiano resigned Monday, effective immediately, with his duties to be shouldered by CEO Charlie Bachtell and the rest of the management team.

Caltabiano will remain on the board, however.

It seems that Cresco was somewhat unprepared for Caltabiano’s resignation, considering he put out his own news release ahead of the company’s official announcement Tuesday.

It is rarely a good sign when a founder and president resigns from a public company with no specific new opportunity and no replacement or transition plan in place – and, indeed, Cresco’s stock dropped 13% for the week since the announcement.

But we think this points to two larger trends:

  • The normalization of larger public companies as executives shift to managers from entrepreneurs.
  • The greater financial opportunity in the private market and startups amid the dislocation of the capital markets.

These moves by entrepreneurial founders make sense given the contrast between the strength of the underlying cannabis sector and the capital dislocation in both the public and private cannabis markets as well as the entry of more traditional capital and managers from traditional CPG backgrounds.

In an interview with Marijuana Business Daily, Caltabiano essentially said he sees more opportunity in smaller, private plant-touching operators for his entrepreneurial skill set than running a public company.

“I will look for opportunities that are plant touching,” he said. “You’ll see me involved in more of a startup or companies that don’t have as solid of footing as Cresco.

“I’ll help with their strategic vision and a capital plan and help them achieve their success.”

This follows Andy Williams’ departure from Medicine Man to focus on “cannabis medical and genetic research along with pursuing new opportunities in the cannabis industry” after investor Justin Dye was appointed CEO.

Williams’ severance agreement filed with the SEC stated that he and the company had “desire to mutually agree to terminate Employee’s employment” and “service on the board of directors,” with a separation date of Feb. 3, 2020, and execution of Feb. 25, 2020.

It also follows a decision by new Canopy CEO David Klein – a former CFO for Constellation Brands – to undo 58% of the capacity built by Linton, the company’s former co-CEO.

Using the internet analogy we mentioned at our December conference, we suspect the future Googles and Facebooks of cannabis are small or do not yet exist.

Other companies will survive but falter, such as Yahoo, while others will follow Global Crossing into bankruptcy – and yes, there are probably a couple of successful giants that survive and thrive despite volatile stock prices such as Amazon.

We are only about six months into the cannabis bear market; remember that the Nasdaq index peaked in March 2000 and bottomed in October 2002, the iPod was released in October 2001, Global Crossing went bankrupt in January 2002, Facebook was founded in February 2004, and Google went public in August 2004 after three years of profitability and six since its founding.

Tilray earnings miss, goals appear difficult to execute

Tilray’s fourth-quarter 2019 results significantly missed consensus revenue and EBITDA estimates and included a large write-down in its CBD business.

Management is targeting EBITDA positive in the fourth quarter of 2020. Given current margins and operating expense structure, we think it’s going to be a very difficult goal to reach.

There are several trends the company will have to reverse in order to hit that goal, including:

  • Expanding gross margins significantly (management estimates 2%-3% per quarter).
  • Reversing the trend of falling average price per gram on cannabis.
  • Massively reducing operating expenditures.

The company also took a $112 million write-down related to its CBD distribution partnership with Authentic Brands Group.

Management also mentioned they will delay investment in Manitoba Harvest, which sells CBD products in the United States and Canada, until the U.S. Food and Drug Administration further clarifies rules for CBD in consumer goods.

During Tilray’s earnings conference call, CFO Mark Castaneda issued long-term guidance for anticipated gross margin opportunities in the 50% range, adjusted EBITDA margins of 25%-30% and positive cash flow in 2021.

Currently, there is a single consensus estimate at Cantor Fitzgerald calling for 50% gross margins and 25% EBITDA margins in 2023.

As we have said numerous times, it is very difficult to significantly grow revenue while making deep, structural spending cuts.

Time will tell if Tilray can do it.

Organigram audit committee chair becomes CFO & CFO becomes chief strategy officer

Organigram appointed Derrick West, chair of its audit committee, to the post of chief financial officer and moved current CFO Paolo De Luca into a new role as chief strategy officer.

It is curious that the chair of the audit committee is now the CFO and even more odd that the investor-relations function will continue to report to De Luca and not the new CFO, as is typical for public companies.

Investors typically ask the CFO about the historical reported financials and the assumptions underlying any future guidance – which fall under the purview of the CFO, not the executive in charge of growth and acquisitions.

As the head of the audit committee for the past two years until his resignation to become CFO, West should already be well-versed in the existing reported financials as well.

Cronos might have booked bulk resin sales inappropriately 

Cronos filed an incomplete 10K because of a continuing review of “several bulk resin purchases and sales of products through the wholesale channel and the appropriateness of the recognition of revenue from those transactions.”

This situation sounds if Cronos is still referencing the May 2019 take-or-pay agreement with MediPharm for CA$30 million of resin through November 2021, mentioned on page 8 of the incomplete 10K.

Cronos already delayed its 4Q19 reporting date, and now we know why: Basically, past reported revenue might have to be changed.

Craig Behnke can be reached at [email protected].

Mike Regan can be reached at [email protected].