It was a week of reckoning for many in the cannabis industry as the coronavirus outbreak has become the straw that broke the cash-challenged camel’s back – or the material adverse change companies are using to change plans made in different times.
The funding environment remains challenged and the operating environment is uncertain, but we believe the long-term thesis for cannabis remains intact.
The challenge is finding operators with the cash to survive the current downturn and deciding how much to pay for them.
On Tuesday, April 7, at 1 p.m. ET/11 a.m. PT, Craig Behnke and I will walk through a framework to guide such decisions, looking at:
- Which companies do (and don’t) have the balance sheet and business plan to survive.
- Where valuations will bottom out based on a quantitative analysis of consumer companies in past financial downturns.
- Comparisons of the opportunity and valuations of Canadian and U.S. operators.
MedMen and Gotham Green Partners pulled guidance, blaming the coronavirus outbreak, and executed an incredibly dilutive repricing of their credit-facility conversion with plans for more dilutive capital. They essentially restructured the company and put creditors in control (as we analyzed in much more detail here), but this is really the culmination of a cash crunch spanning months.
Green Growth Brands announced that its CBD business is in receivership – in other words, a third party will have a fiduciary duty to try to right the ship. Green Growth’s THC businesses are still operating, implying that those operations might be generating cash.
Hexo reported results but will need to raise another CA$23.6 million, as we analyzed in detail here.
Acreage Holdings pulled its guidance for positive EBITDA in the second half of 2020 and abandoned its Deep Roots deal (saving $20 million in cash and 4.1 million shares). We wonder if the market turmoil from the coronavirus pandemic is delaying the additional $65 million in funding planned in its complex February deal.
If Acreage does not raise another $65 million by June 7, it owes $20 million of the $50 million borrowed to the intellectual property lenders.
CannTrust shares halted; cannabis ETF marks it down to zero
CannTrust shares were halted indefinitely, meaning anyone still holding shares cannot liquidate them, and existing lawsuits against the Canadian cannabis company were consolidated into a single class action.
As of April 2, the ETF Managers Group is the largest CannTrust shareholder with 14.3 million shares. The marijuana ETF marked down the value of CannTrust to zero.
CannTrust’s 15 largest shareholders, according to FactSet, are listed below.
|Rank||All Holder Types||%OS||Position (000)||Pos Chg (000) [6M]||Mkt Val (MM)||% Port||Report Date||Source|
|1||ETF Managers Group||10.39||14,703||-4,179||9||0.36||01/31/2020||13G|
|2||Manulife Investment Management||7.17||10,141||-1||7||0.01||12/31/2019||13F Form|
|3||Paul, Eric/CannTrust||6.31||8,932||0||6||100.00||05/14/2019||SEDI Canadian Insiders|
|4||Cannamed Financial Corp.||3.98||5,633||0||4||100.00||05/03/2019||Proxy|
|5||Morgan Stanley Canada||0.73||1,034||-27||1||0.04||12/31/2019||13F Form|
|6||Sanders, Mitchell J||0.49||686||0||0||100.00||05/06/2019||SEDI Canadian Insiders|
|7||York Capital Funding||0.43||612||0||0||100.00||05/14/2019||SEDI Canadian Insiders|
|9||Two Sigma Advisers||0.32||449||449||0||0.00||12/31/2019||13F Form|
|10||Susquehanna Financial Group||0.17||242||229||0||0.00||12/31/2019||13F Form|
|11||Cambria Cannabis ETF||0.16||230||101||0||1.90||03/31/2020||US Fund (N-30D)|
|12||Virtu Financial BD||0.13||188||154||0||0.02||12/31/2019||13F Form|
|13||British Columbia Inv Management Corp.||0.10||146||0||0||0.00||03/31/2019||Non-US portfolio|
|14||iShares S&P/TSX Small Cap Index ETF||0.09||122||2||0||0.16||03/31/2020||Non-US portfolio|
|15||Mar-Risa Holdings||0.08||120||0||0||100.00||05/06/2019||SEDI Canadian Insiders|
|16||Renaissance Technologies||0.08||120||15||0||0.00||12/31/2019||13F Form|
In addition, the New York Stock Exchange began the delisting process for CannTrust this week.
Good News: Medicine Man acquisitions on track, MedPharm deal extended
Colorado-based Medicine Man Technologies reported earnings for the fourth quarter of 2019, with CEO Justin Dye giving his first earnings call as CEO (the transcript is available here).
Unlike many other operators, Dye sounded optimistic despite the coronavirus outbreak when talking about the existing Medicine Man Technologies (the fertilizer and consulting business) and executing on the pending acquisitions – including MedPharm, whose term sheet was extended.
The strongest comment was that Dye expected by the next quarterly report to “have a lot more to say … certainly some acquisitions under our belt.”
FactSet projects MDCL to report its 1Q20 on May 19, 2020 – only about six weeks away – based on the fact that last year’s first-quarter report came May 21, 2019.
As we detailed in our October 2019 Deep Dive, our investment thesis for Medicine Man rests on the company closing 13 acquisitions to expand margins by building a vertically integrated Colorado operator and – once that is handled – repeating the strategy in other states.
The biggest takeaway from the call is that acquisitions remain on track, with Dye noting that the company received “suitability” approval from Colorado’s Marijuana Enforcement Division and that the Mesa Organics/Purplebees acquisition has received state approval and three of the four necessary local approvals.
Once the acquisitions close, the pro forma entity will generate about $34 million of EBITDA at a 20% margin, with potential for expansion to 25%-30%.
We estimate Medicine Man still needs to raise about $126 million in cash to fund the acquisitions, which, given the positive EBITDA, could be financed mostly with debt.
The company ended 2019 with $11.8 million of cash, and given the 4Q19 cash burn of $3.4 million, it has 10 months of cash remaining to close the acquisitions and raise the additional cash to close the acquisitions.
Mike Regan can be reached at [email protected].