March 16, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Transactional Activity: There were four fewer transactions and an $81.5 million lower volume this week than the prior week. Compared to last year’s same week, eleven fewer transactions closed with a $542.5 million lower volume. The average deal size was $9.4 million this week vs. $40.8 million in the same week last year.
The war in Ukraine, inflation/interest rate worries, and the virtual free fall of cannabis equities, have brought cannabis equity raises to a standstill. The $.35M in equity issues this week was significantly below the $38M average YTD, sharply down from the $298M weekly average registered for this time last year.
Total capital raises for the first nine weeks of 2022 total $732M, down 78% from last year’s figure of $3.3B. Reduced equity issuance (down 86% y/o/y in the U.S. and 97% in Canada) was partially compensated for by solid debt issuance (up 313% y/o/y in the U.S. but down 97% in Canada. As the graph below shows, capital raises for the first ten weeks of 2022 were dominated by U.S. activity. The $54M raised by European companies YTD is the highest international raise since 2019.
Speculation: The economic calculus is becoming ever more complicated as COVID has reared its ugly head again, just to make things more interesting. This week, China shut down several key manufacturing cities due to renewed COVID outbreaks. Hong Kong has been faring poorly for weeks on the same front. And Germany has announced an upswing in cases.
The combined effects of renewed COVID, sharply higher inflation, worsened supply shocks, and war are mind-boggling and may have counterintuitive impacts on markets and cannabis.
The market rallied today perversely. The convoluted reasoning went something like this. Chinese shutdowns and induced greater supply shocks will slow the Chinese and world economies to the point that the energy crises may not be as bad as we thought. So oil prices dropped, and the markets rallied. Got it?
We remain convinced that the FED will eventually have to bite the bullet and slam harder on the breaks lest it allows accelerating inflation. And history is pretty clear that the recession risks go up markedly when that happens.
Will that help or hurt cannabis consumption? We haven’t had a fair test yet. Last time around, job losses and economic weakness were buffered by trillions of stimulus spending, and we don’t think there’s money in the coffers for another round of that. So which will win out, the need to tighten our belts or relieve our stress?
Meanwhile, we keep coming back to the stocks being stupidly cheap but getting cheaper. And the one thing that scares us is the line attributed to Keynes, “the market can stay irrational longer than you can stay solvent.” Still, it’s hard to imagine a better opportunity for those who can think long-term.
We don’t see Washington getting its act together before the midterms, so we are looking for the impact of state openings like New Jersey to keep pumping the cannabis cash registers until it’s just impossible to ignore. A few major consolidating M&A deals may help as well. Let us know what you think.
Equity prices were down 4.2% for the week, as measured by the MSOS ETF. The ETF is now down 27.2% for the year. The MSOS is now at its lowest point since the ETF was issued in September 2020.
The biggest winners and losers: Planet 13 tumbled nearly 24% on disappointing results from their California market entry. We believe the move downward is overdone and continue to be positive on the name.
Acreage was the week’s big winner, with a 24% gain for the week. The company generally undershot analyst expectations in its earnings release this week, but that news was overshadowed by expectations for a faster than expected rollout of the New Jersey market. Acreage is heavily levered towards adult usage legislation/rollouts in key Northeast markets, including New York, New Jersey, Connecticut, and Pennsylvania.
Greenlane was down 10.7% for the week after announcing a host of cost-cutting measures Thursday, which included job cuts, facility reductions, sale of non-core assets, a sale-leaseback on its head office, and the pursuit of an asset-based loan. The cuts are expected to save around $8M per year, and the overall program aims to increase liquidity by over $30M
This Week’s Only Equity Raise: On March 8, 2022, Canadian based infused products company Pure Extracts Technologies (CSE: PULL)(OTC: PRXTF) announced the closing of a US$.35 million private placement of special warrants.
The economics of the warrant issue is essentially identical to the issuance of the underlying Units that the warrants will automatically convert into on the earlier of 4 months or a prospectus qualifying the distribution of the units.
Each unit consists of one share (at US$.06/sh) and one warrant (strike price at $.12 per share for 100% premium.
Proceeds will fund the company’s Michigan extraction facility’s build-out and general working capital.
The issue implies a $6.4M market cap, an EV of $5.8M, and an EV/annualized revenue of 9.4x, a significant premium to the 3.4x median we measure for the 22 Canadian Infused Products companies in the Viridian Value Tracker database.
Pure Extracts has reduced its negative operating cash flow in the last three quarters but will have to overcome its negative gross margins to achieve cash flow self-sufficiency.
Public Company Listings: Only one of the three companies that raised capital this week was public. The company Pure Extracts trades on the CSE and the OTC.
Equity vs. Debt Cap Raises: Equity accounted for one of the three capital raises and 1.2% of the proceeds.
Debt accounted for 58% of trailing 4-week capital raises. With cannabis prices at or near all-time lows, we expect debt to remain front and center in capital raises.
The Largest Debt Deal: On March 8, 2022, Royal Emerald Pharmaceuticals (private), a company that is working on research and production of federally compliant THC and CBD based medicine and first responders, closed a $16.975M real estate debt financing with Pelorus Equity Group for the purchase of a new facility in Desert Hot Springs, CA. The site was formerly a Kmart retail location and will be heavily renovated to turn it into a 94,000 sq ft cannabis cultivation and research facility.
Royal Emerald is one of the first companies in the nation to receive federal licenses to research, manufacture, import and distribute substances containing THC and CBD.
The company is the first company that can ship its medical cannabis products across state lines and into international jurisdiction.
MERGERS & ACQUISITIONS
Transactional Activity: Three M&A transactions closed this week with a total announced transaction value of $892.5M compared to eleven deals for $97.0M in the prior year. All of this week’s deals were completed by public buyers.
After trailing on volume through last week, the expected M&A surge came through this week with the closing of TerrAscend Gage and an unusual deal by Demand Brands. We continue to expect an uptick in activity based on several significant transactions that have yet to close, including Verano/Goodness Growth. We continue to expect considerable consolidation activity later in the year.
One driver of m&a activity has become less favorable this week. We have reasoned that the valuation gap between the largest MSOs and the sub $300M market cap companies that are the primary targets is a key driver for M&A since a bigger gap makes it easier to have an accretive acquisition. The gap narrowed this week to about three multiple points, the lowest it has been in over a year.
The chart below shows the percentage of stock used in all M&A deals greater than $25M by U.S. Acquirers. Note that the rate of stock used in m&a transactions is increasing despite lower equity prices. The reasons for this increase are bullish for m&a activity going forward: more significant public/public deals, more pressure for smaller companies to become affiliated with larger concerns, and the attractiveness of MSO stocks at their current valuation to potential targets.
Most important M&A Deal of the week: On March 10, 2022, TerrAscend (CSE: TER) (OTCQX: TRSSF) completed its acquisition of Gage Growth (OTCQX: GAEGF).
Gage shareholders received a total of 51.3 million shares of TerrAscend based upon the .3001 exchange ratio.
An additional 25.8 million shares were set aside for potential conversion of former Gage convertible securities.
Gage is now well poised and financed to compete with Skymint for #1 status in Michigan. Both groups are well managed and have statewide distribution strength.
An unusual large deal – But is it really “..one of the Largest Acquisitions in U.S. Cannabis History.”?
On March 7, 2022, Demand Brands (OTC PINK: DMAN) announced that it had closed the acquisition of CF3 SPV I, LLC, a vertically integrated cannabis business, in an all-stock deal that “will be valued between USD 250 to 550 million, subject to an audit being prepared by Stanton Park Advisors LLC.” The press release touts the transaction as “one of the largest acquisitions in U.S. Cannabis history.” CF3 operates in four segments: Cultivation Processing & Nursery, Wholesale Distribution, Brand Management & Management Consulting, and Patented Microbial Nutrients and Crop Protection. Currently, the company has 41,500 lbs of annual production capacity and 236,000 sq ft of greenhouse and outdoor cultivation.
Several things caught our attention regarding this release:
The range of values stated for the convertible preferred distributed to the selling shareholders is quite wide and represents outlier valuation metrics.
CF3 had 2021 revenues of $8M and projects 2022 revenues of $28M according to its investor deck.
The valuations metrics at 8.9x – 19.6x 2022 projected revenues seem somewhat stretched compared to the 1.9x median Enterprise value to annualized 3rd qtr revenues for the 14 U.S. Cultivation & Retail sector companies in the Viridian Value Tracker database with a market cap between $25M and $500M.
The projections in the chart below, taken from the CF3 investor deck on the Demand Brands website, show the upside view. The company is projecting revenues to grow to $226M in 2026, a 2021-2026 CAGR of 95%.
Demand Brands seems an unlikely acquirer of a $250-$550M company.
DMAN’s market cap, according to FactSet, is approximately $6.1M with an enterprise value of $8.5M. The company’s stock trades at roughly $.014 per share.
The company was formerly in the Oil & Gas business but spun out of those interests at the end of 2020 and transformed itself into a vertically integrated cannabis company with the Q2: 21 acquisition of Viridie Research Fund LLC.
DMAN’s third-quarter financial statements reveal that it has rescinded its agreement with Viridie.
DMAN has a $2.4M note on property initially appraised at $6.5M. The note is now in default, and the property is subject to foreclosure.
DMAN had third-quarter revenue of $341K and EBITDA of -$405k
Cash balances as of 9/30/21 were 15,000.
According to the investor deck, the combined company will have capital needs of $25M which may not be easy to raise in the current environment.
Our bottom line on CF3 is that there are a few things we don’t understand about this deal, and calls to both Demand Brands and CF3 for clarification were not returned. We do not have the data to value CF3 adequately, but the proposed $250M- $550M range looks pretty high. Is this really “one of the largest acquisitions in U.S. Cannabis History?” We aren’t entirely convinced.
M&A by Sector: The buyers and sellers in this week’s deals were from the following sectors:
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
Launched in January 2015, and having analyzed more than $60B in deals, the Viridian Cannabis Deal Tracker is a proprietary data service that monitors and analyzes capital raise and M&A activity in the legal cannabis and CBD industries. Each week the Deal Tracker provides proprietary data and market intelligence on transactions, including:
Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors – from Cultivation to Brands to Software)
Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A)
Principals to the Transaction (Issuer/Investor/Lender/Acquirer)
Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
Deals by Location of Issuer/Buyer/Seller ( To Track the Flow of Capital and M&A Deals by State and Country)
Credit Ratings (Leverage and Liquidity Ratios)
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