KushCo and Planet 13 miss, Harvest dodges a bullet, Constellation remains bullish & more

KushCo notes recent turn in vape trends as 1Q20 sales disappoint

KushCo’s fiscal sales of $35.0 million for its first quarter (ended November 2019) fell short of consensus estimates of $41.1 million. The quarter-over-quarter decline of 16% was greater than expected, though the company noted that the impact of the vape crisis seems to be passing.

“Though still early, it appears that the vape market is turning the corner, and we expect vape sales to rebound significantly in the second half,” CEO Nick Kovacevich said on the company’s conference call.

He attributes the expectations to:

  • A decline in new illnesses and deaths.
  • Concrete findings from the Centers for Disease Control and Prevention and health officials narrowing the potential root causes.
  • The conversion of users from the black market to the legal market as consumers become more aware of the differences in quality and safety between legal sources and illegal sources.
  • Operators upgrading their supply chain.

KushCo’s EBITDA loss of $6.8 million was slightly worse than consensus, but it shows excellent cost containment given the $6 million miss on revenue. Included in this containment is a savings of $4.3 million per year through layoffs of 53 employees, which equates to an average fully loaded cost of $81,000 per employee.

The company reiterated its full-year target for $230 million-$250 million in revenue, which makes sense given the aforementioned situation and that the company still has nine months to make up the difference.

However, the guidance still implies roughly a doubling of the quarterly revenue run rate this year to $65 million-$72 million. The guidance also assumes $25 million from the new hemp trading business, which was $3.3 million in the F1Q20.

The company also noted that it has the capital to get through fiscal 2020 end August with the $14.7 million in cash at November 2019, its credit line tied to inventory with Monroe Capital, and its assumption of adjusted EBITDA profitability in the second half of the fiscal year.

Planet 13 preannounces revenue miss, shows acceleration in December

Planet 13 (OTC: PLNHF), which operates a single large “experience” store in Las Vegas (see our preliminary analysis here), preannounced revenue for 2019 of $63 million. This implies 93% growth in the fourth quarter to $16.0 million, a 10% miss compared with consensus expectations of $17.7 million.

The current experience store opened in November 2018, so the 297% year-over-year growth for October 2019 is not a same-store comparison.

For the current store, the November and December sales increased 50% year-over-year with 45% coming in November and 56% in December. This acceleration needs to continue for Planet 13 to hit the consensus expectations for revenue growth of 58.6% to $21.9 million in 1Q20.

Planet 13 did not give specific guidance for 2020 results but talked about gaining share in Nevada via wholesale and opening a store outside Nevada.

The store served 695,000 customers and hosted “over 1 million visitors,” implying 30% of visitors walk out without buying anything – which represents a revenue-growth opportunity.

Harvest Health swapping Have a Heart for Falcon and a net increase in 16 million shares

Arizona-based Harvest Health & Recreation is trying to swap a problematic deal – and avoid a potential lawsuit – for another deal that gives it access to California, which we covered much more in-depth here.

Harvest sued Falcon International to exit a deal originally announced in February 2019 and repriced on June 7, 2019. But the court complaint indicates this is much more than merely a price renegotiation.

Harvest also disclosed it is in discussions to acquire Interurban, owner of Have a Heart, which has dispensaries in California, Iowa and Washington state, and the CannaMLS listing service. This would give Harvest access to the California market and allow the company to replace some of the revenue it lost by not closing the Falcon deal.

Assuming the termination of Falcon (-34 million) and execution of Interurban (+50 million), the moves add a net 16 million incremental shares to Harvest’s share count.

Constellation says Canopy will get cash only from warrants; CEO targets creating shareholder value 

Alcohol giant Constellation Brands will not provide any more cash to Canada’s Canopy Growth beyond exercising in-the-money warrants immediately before expiration. That was a key takeaway from Constellation’s latest earnings conference call.

Constellation (NYSE: STZ) has 18.9 million warrants with a strike of CA$12.98 ($9.97) that expire in May 2020, which. given Canopy’s current price of about CA$27, are currently well in the money.

Unless Canopy’s (TSX: WEED) stock price drops 50% before May, it seems likely that Constellation will exercise those warrants and Canopy will have another $189 million in cash.

Our Investor Intelligence comp tables’ shares and cash balance have already adjusted for this transaction since it includes in-the-money warrants.

The other Constellation warrants – 88.5 million at CA$50.40, 38.5 million at CA$76.68 and 12.8 million at a future volume-weighted average price (presumably higher than CA$76.68) – expire in 2026, so Canopy will not get much cash from these any time soon.

However, if you are modeling Canopy and arrive at an equity valuation above those strikes (87% and 184% higher than today) you should include them in your share count.

The comments by David Klein, the new CEO of Canopy and former CFO of Constellation, support our previous thesis that he will bring greater sophistication and a focus on shareholder-value creation at Canopy.

“I remain bullish about Constellation’s prospects and believe the company has the right strategy in place to produce top-tier performance for many years to come,” Klein said.

Constellation, the largest single stakeholder, has warrants that strike at roughly double the current stock price, so Klein has his work cut out for him.

New $200 million SPAC looking to become a REIT

There is almost a new publicly traded REIT.

New York-based Subversive Real Estate Acquisition is a special purpose acquisition company (SPAC) that trades on the Canadian NEO exchange under SVX.UT. A SPAC is essentially a “blank check” company. 

It joins public cannabis REIT Innovative Industrial Properties (NYSE: IIPR) and large private REITs Green Acreage and Treehouse, which all will have more competition for real estate deals.

If your real estate-laden cannabis company needs capital, Subversive has $200 million to deploy to “real estate assets in the cannabis industry and/or those closely associated with the cannabis industry” via a qualifying transaction to shift to a REIT from a SPAC within the next 12 months.

Until it does a qualifying transaction, the units are just $200 million looking for real estate assets.

Most SPACs let a single private company go public without a normal roadshow and offering, while most REITs invest in multiple properties. So we wonder whether this SPAC will purchase an existing real estate portfolio or build a portfolio in a few large transactions.

Goldenseed Reg A ‘offering’ more of a customer loyalty program with equity

Goldenseed launched a Reg A offering, but in our view, it is more of a brand-building customer loyalty program that has an equity component.

The move raises cash, but we would not consider it truly comparable to investing in public stocks or in private equity where you have more data and influence on the company.

As noted in our sister publication, Marijuana Business Daily, we view this as a very interesting marketing campaign: This alternative source of financing can give a branded consumer product with a fervent customer base – such as many cannabis companies – the opportunity to develop a deeper connection with its customers while also raising cash.

If you are running or investing in a private, branded consumer company, this could be an interesting marketing strategy and a source (but not the only source) of cash.

We were surprised to see a brewery in Scotland, Brew Dog, use the Reg A offering to raise nearly $100 million globally and $10 million in the United States over about a decade. The buy-in is as low as 25 pounds, and you get 5% off beer and other perks, so it pays for itself after 500 pounds worth of beer purchases.

Participants in Goldenseed’s offering should not view this as an “investment” in a company; rather, it’s more like supporting (almost donating to) a cause you care about and basically buying perks such as tickets to a big party, tours of the farm and discounts on merchandise.

Per the offering documents (and EDGAR presentation, with different links for each page), the company will have about 28.6 million shares outstanding.

Analytically, we would not use the sale of perks at $100-$500 that also include shares of $10 each to arrive at a total valuation of $286 million for a company with no revenue and $1.8 million of assets before the offering.

As shown on page 49 of the offering document, the tangible book value of the existing shareholders is $0.04, the weighted average cost per share is $0.11 and the cash contribution per share is $2.09, while the public will be buying at $10 per share.

But if you believe in the company’s organic cannabis vision and think that $100-$250 per person is worth it for the perks – and I think many people might – with the long-term remote possibility that you might get some of your money back, then this is an interesting opportunity.

15 cannabis companies ICR – a continuation of industry normalization

As shown in our latest Catalyst Calendar, there are 15 cannabis companies presenting at the ICR Conference next week.

This is a large annual consumer conference, where many public and private retailers, consumer goods and restaurants present – and many public ones preannounce holiday sales results and trends.

The number of cannabis companies at a traditional consumer conference is yet another data point in the trend of industry normalization.

As we noted at our conference, investors will increasingly compare cannabis companies to traditional consumer businesses.

The cannabis companies that can communicate their narrative, margins, returns and strategy like other publicly traded consumer businesses do will have a wider investor base and a lower cost of capital.

Mike Regan can be reached at [email protected].