Capital markets closed: Who’s next after TGOD and MMEN?

This week, The Green Organic Dutchman (TSX: TGOD) announced it is having difficulty funding its expansion plans (and, thus, its revenue and EBITDA estimates) via commercial banks and equipment leasing, and the Canadian company said it “may revise the construction schedule” if it is “unable to obtain sufficient financing on reasonable terms, within the required time frame.”

The stock closed down 17% after the announcement.

This followed the termination of MedMen Enterprise’s (CSE: MMENacquisition of PharmaCann, which was also blamed on the Los Angeles-based company’s inability to get funding for expansion plans – leading to a 19% drop in stock price.

And just a week ago, New York-based iAnthus Capital Holdings (CSE: IAN) announced it has raised $20 million with a commitment for another $80 million to fully fund its growth plans.

But if you read between the lines, the additional $80 million is far from guaranteed; it is really an option held by Gotham Green Partners (GGP) to buy more convertible notes at the same terms if the New York-based private equity group wants, and there is reference to raising another $13.5 million from GGP and others. IAnthus is down 15% since that announcement.

And then there’s KushCo Holdings (OTC: KSHB), which was forced to issue increasingly dilutive equity amid the U.S. vape crisis (as detailed in our report on the health epidemic), which sent the California company’s stock down 25% before the offering and even farther afterward.

What do these have in common? Business plans that assumed additional capital raises.

Capital markets are closed to cannabis

We’ve already touched on the overall takeaway from this in previous stories, and we discussed it in September at our MJBizConINT’L preconference in Toronto: Equity capital markets are closing for cannabis after the dramatic declines in stock prices.

A canary in the coal mine in late August was Oakland, California-based Harborside (CSE: HBOR), which smartly walked away from an acquisition to focus its resources and cash on its own operations, guide to break-even EBITDA and buy back its own stock.

By our math, the vertically integrated companies on our comp table are down an average of 68% from their 52-week highs. After a dramatic 72% run to a high on April 30, an index of those stocks is now down 47% and sits down 9% YTD.

There are very real business implications to all of this:

  1. Companies that are not profitable will have increasing trouble raising capital.
  2. Companies that need cash to fund capital expenditures and operating losses to build out their infrastructure to support their business model are going to face increasingly expensive capital – if they can get it at all.
  3. Any revenue and EBITDA estimates that rely on such build-outs are at risk of being cut.
  4. Companies with debt due in the next year or so will face additional trouble refinancing it.
  5. Alternative sources of nonequity funding will be explored. We have seen increasing uses of sale-leasebacks on real estate assets, and if there is positive stable EBITDA, there is the potential for debt financing. But keep in mind that The Green Organic Dutchman called out such nonequity financing as disappearing, too.

This affects private companies as well, as private equity investors ultimately realize their return by either selling to the public markets or strategic buyers, which are both more reticent with stock market declines, or just harvesting and levering the cash flow – and free cash generation has proved to be rare in cannabis.

For investors with capital to deploy, there is an opportunity to provide funding at better terms to companies that need it, but beware of companies that rely on more than your capital to fully execute their business plans.

Who’s next?

The companies that will not be fine are those that do not have enough cash on the balance sheet to fund their cash losses and capital expenditure plans. Such companies likely see their expansion plans shrink, estimates get cut and funding costs and dilution rise.

And for those with debt, the worst-case scenario is the equity gets wiped out, either through extreme dilution or as the debt replaces equity in bankruptcy. (Note that the federal illegality of cannabis in the United States forces liquidation versus an orderly recapitalization in bankruptcy.)

Below, we outline 30 cannabis companies to show which might be at risk of having to alter future expansion or investing plans, or to raise very expensive and dilutive capital.

We base our assessment by looking at FactSet consensus estimates for the next fiscal year for operating cash flow (OCF) and capital expenditures (Cap Ex), also taking into account debt payable in calendar 2020 and comparing that to cash on the balance sheet as of the company’s most recent reported quarter. All figures are converted to U.S. dollars.

We believe companies with less than 1½ years of cash on hand to fund current operations and capital expenditures are at elevated risk on several fronts because they might:

  • Have to raise capital at very dilutive terms.
  • Need to reduce investment or expansion plans to conserve cash.
  • Have to significantly reduce operating expenses to conserve cash.
  • See their consensus estimates reduced based on any combination of above factors.

For example, MedMen consensus estimates call for next-fiscal-year operating cash flow of negative $121 million with capital expenditures of $55 million and $94 million of debt due in calendar 2020. In effect, the company needs a total of $271 million to operate though its next fiscal year.

MedMen reported only $35 million of cash on the balance sheet in its most recent quarter.

The Green Organic Dutchman listed $94 million on its balance sheet as of June 30, yet on Oct. 9 it reported only about $44 million – meaning it burned through about $50 million in the past quarter, bringing its cash coverage to only 0.5 years. No wonder it is having trouble finding funding.

Conversely there are a handful of companies that have enough cash to fund the expansion plans expected by the market multiple times over, insulating the operations from the whims of the financial markets.

You can download the sortable spreadsheet here.


Ticker Company OCF    FY2 CE Est. + Cap Ex FY2 CE Est. + Debt Due in 2020 = Cash Required  ÷ Cash on Bal. Sheet: Last Qtr = Years of Cash Coverage
MMNFF MedMen Enterprises Class B (121) (55) (94) (271) 35 0.1
ACRGF Acreage Holdings (86) (85) (171) 85 0.5
TRST-CA CannTrust Holdings (24) (18) (7) (50) 32 0.6
ELLXF Elixinol Global (6) (2) (7) 5 0.7
YCBD cbdMD (13) (1) (14) 14 1.0
TGODF The Green Organic Dutchman Holdings (38) (56) (95) 94 1.0
ACB Aurora Cannabis 28 (142) (162) (276) 277 1.0
KHRN-CA Khiron Life Sciences Corp. (20) (9) (30) 43 1.4
TLRY Tilray (83) (60) (143) 221 1.5
CARA Cara Therapeutics (72) (1) (73) 116 1.6
NCNA NuCana plc Sponsored ADR (43) (43) 83 1.9
HEXO HEXO Corp. (2) (62) (64) 140 2.2
FIRE-CA Supreme Cannabis Company 7 (23) (15) 42 2.7
OGI Organigram Holdings 27 (43) (1) (17) 65 3.8
CURLF Curaleaf Holdings 69 (85) (16) 107 6.5
CCHWF Columbia Care 14 (31) (16) 125 7.6
WEED-CA Canopy Growth Corp. (31) (277) (307) 2,419 7.9
CRON Cronos Group (37) (46) (83) 1,779 21.5
GTBIF Green Thumb Industries 79 (71) 8 136  Self- funding
HRVSF Harvest Health & Recreation 194 (71) 123 98  Self-funding
CRLBF-US Cresco Labs 102 (48) 54 69  Self-funding
APHA Aphria 101 (41) (0) 59 422  Self-funding
TCNNF Trulieve Cannabis Corp. 93 (30) (14) 49 54  Self-funding
CWEB-CA Charlotte’s Web Holdings 75 (18) 58 51  Self-funding
LABS-CA MediPharm Labs Corp. 29 (13) 16 6  Self-funding
VGW-CA Valens GroWorks Corp. 41 (11) 30 48  Self Funding
VFF Village Farms International 37 (6) 31 12  Self-funding
GRWG GrowGeneration Corp. 11 (5) (1) 6 18  Self-funding
ITHUF iAnthus Capital Holdings 36 7 44 31  Self-funding
WMD-CA WeedMD 27 27 12  Self-funding