It was a week of alternative financing and increasing competition in CBD.
Columbia Care buys The Green Solution in Colorado
Columbia Care will acquire The Green Solution in Colorado. The cashless acquisition lets New York-based Columbia Care buy some EBITDA and possibly free up cash flow in Colorado with equity and debt assumption to fund EBITDA losses in other markets.
It’s a trend we expect to continue as more companies notice the open doors to the state.
Linton joins Vireo Health, gets 9% share today and 12% at 6X
Bruce Linton is now the executive chair of Vireo Health (CSE: VREO), a multistate operator with a pharmaceutical brand and strategy, where he will focus on providing financing and acquisition-strategy expertise.
In his new role, Linton, a former co-CEO of Canopy Growth, is heavily incentivized – to the tune of 15 million warrants – to get the stock up a lot in the next five years.
While the higher strikes at 4X-6X the current stock price make for some splashy targets, the vast majority of the wealth creation is driven by the at-the-money warrants he is receiving.
Specifically, Linton will receive 10 million warrants striking at $1.02, 2.5 million warrants striking at $3.81 (+274%) and another 2.5 million warrants striking at $5.86 (+475%) over the next two years. At $3.80, his warrant package is worth $28 million, composed entirely of the warrants striking at $1.02. If the stock goes to $10, the warrants will be worth $116 million in total, 78% of which is still the $1.02 at-the-money warrants.
Linton will own 8.5% of the company (on 116.8 million pro forma at-the-money-shares) for joining and not destroying value, 10% of the company from $3.81-$5.86 (on 120.4-122.0 million shares) and 12% above $5.86 (which would increase the count to 124.5 million).
Of course, this is before any equity-linked deals that Linton creates.
Given Linton’s history at Canopy (and the big investment by Constellation during his tenure), we look forward to watching Vireo’s path going forward.
Merida Merger SPAC raises $120 million, upsized from $100 million
As the cannabis sector struggles to fund itself, there is now $120 million of cash and a new public currency looking to provide capital to a $300 million-$500 million cannabis (or related) company in Merida Merger Corp I.
Merida Capital Partners created the SPAC (aka a blank-check company) to acquire a stake in a larger company (ideally $300 million-$500 million) in the cannabis space, which will effectively take the acquired company public through a negotiated transaction.
The firm said it will consider both plant-touching and non-plant-touching companies, though acquiring a plant-touching firm would require it to delist from the Nasdaq unless laws change prior to close.
In speaking with Merida’s principals, this is not a replacement for the firm’s private funds but enables them to make a bigger investment in a larger company.
The deal was upsized from $100 million, which shows there is demand for cannabis investments that can pass the due diligence criteria of Merida.
The potential concern, however, is that Merida Capital uses this vehicle to buy one of its own portfolio companies to avoid the IPO route to public trading. (Though we don’t consider this likely given the target size compared to the private investments.)
What barriers to entry? CV Sciences crushed on excessive competition in CBD distribution
CV Sciences shares collapsed 27% as “excessive competition” drove a 7% decline in revenue and an enormous 32% miss versus expectations for its third quarter. Guidance for the full-year revenue implies a 19% decline in sales in the fourth quarter at the midpoint.
This highlights the need for a strong barrier to entry for any product and shows that neither a brand nor a first-mover advantage are a real barrier in a rapidly changing industry.
The company’s 10Q filing noted that the increased market competition started “in the beginning of the third quarter.” Management blamed pricing and volume pressure, especially in the natural channel.
Third-quarter sales per store were $1,818, down from $3,100 in the second quarter and from $5,100 for the same period last year. The midpoint of the guidance implies another 12% sequential decline to $1,600 per store in the fourth quarter.
Only losing shelf space could drive such a decline in a growing market, and with sequential incremental margin on the sales decline of 83%, it implies a combination of both price and volume pressure.
CV Sciences makes it sound as if the increased competition is from a thousand small competitors, but as an early mover, it was CV’s share to lose in the first place.
The key questions: Did other incumbents face more competition starting in September, and is there a particular gainer of shelf space?
Charlotte’s Web Holdings, which will report third-quarter results on Nov. 13, has noted in past filings and news releases that it is gaining shelf space, including distribution at natural retailer Vitamin Shoppe in September.
Green Growth Brand’s CBD strategy is more focused on selling its own Seventh Sense brand in its own kiosks.
KushCo lowers CBD barriers to entry with new hemp and CBD brokerage operation
KushCo Holdings (OTC: KSHB) announced the creation of a new business distributing and brokering hemp and CBD transactions from seed to sale. This development further lowers the barriers to entry for would-be CBD competitors by providing easier, lower-cost access to supply and distribution of CBD products.
The company also gave guidance of $230 million-$250 million in sales for the year ending August 2020, including $25 million from the hemp trading and CBD initiatives.
This implies that core revenue guidance is $205 million-225 million, slightly ahead of the midpoint of $215 million and consensus expectations of $211 million. KushCo generated $3 million in revenue in a test rollout of the hemp trading services in the quarter ended August, so the $25 million hemp trade target for fiscal 2020 assumes the run rate doubles.
CDC identifies vitamin E acetate in all vape crisis samples
KushCo also noted on its call that it expects vape sales to drop 20%-25% in the quarter ended November, as distributors and retailers shift to a just-in-time strategy on vape products given the uncertainty in regulations.
The company expects vape sales to rebound in the quarter ending February 2020 to levels seen before the vape crisis began.
On Friday, the Centers For Disease Control and Prevention (CDC) announced that it identified vitamin E acetate in all 29 samples taken from people with the vape-related lung illnesses.
While the CDC noted this is not enough to conclusively note the substance as the cause, the agency’s disclosure confirms earlier suspicions of vitamin E acetate added to illicit products as the culprit.
Identifying the culprit will help accelerate consumer safety marketing and allow the legal vape market to regain consumers who shifted to flower and those who might be purchasing from the illicit market.