Making Sense Of Acreage Holdings Shares

Acreage Holdings, Inc.  (OTCQX: ACRHF, ACRDF) announced that both its new Class D “floating” shares (OTCQX: ACRDF) and Class E “fixed” shares (OTCQX: ACRHF) will commence trading on the OTCQX Best Market on October 7, 2020, and graduating from Pink Sheet status. For shareholders, it’s the latest step in the tangled relationship between Canopy Growth (NYSE: CGC) and Acreage.

Acreage Holdings has never followed a simple path for its shareholders. The company’s initial stock ACRG.U was confusing in that it was traded on the Canadian exchanges but using American currency – hence the .U in the symbol. Most cannabis companies just had dual listings with Canadian stock using the Canadian currency and an American listing using U.S. currency. Then the company agreed to a most unusual deal with Canopy Growth, where Canopy would buy Acreage when the U.S. federally legalized cannabis – called the “triggering event.” That deal was recently amended and resulted in the creation of two new share classes.

OTC Share History

In the original deal, Canopy would buy all of Acreage. In the new deal, Canopy decided it didn’t want to be locked into a fixed deal. Canopy will buy only 70% of Acreage at a fixed price, but the remaining 30% will float with the market. The idea behind the floating shares was that the Canopy shareholders should be able to participate in any upside in the stock, should that happen. Canopy is not committed to buying the 30% of the company. It has the option to buy these shares if the triggering event happens or they decide to waive that condition.

The original symbol for Acreage on the OTC Markets Group was ACGRF. There are now two new symbols ACRHF, which are the fixed shares and ACRDF, which are the floating shares.

ACRGF  Old symbol. Delisted. No longer trading

ACRHF  Fixed shares. 70% of Acreage that Canopy is obligated to buy at .30xx

ACRDF  Floating shares. 30% of Acreage that Canopy has the option to buy at 30-day VWAP (volume-weighted average price) or $6.41, which is higher.

Which Is Better?

Shareholders understandably can’t figure out which one is better. For now, it looks like retail investors prefer the fixed share class. They know that Canopy will buy these shares. The floaters are only an option to buy. Canopy could change its mind and not buy the other 30% rendering these shares mush less valuable..

Analysts, though, have been using the floating shares for their basis of valuation. So, when an investor reads an analyst report, it is based on the floaters, not the fixed shares. This is a rare disconnect for investors. The company is the same so that analysis is intact, however, any figures related to the market price will be referencing the floating shares – not the fixed shares.

New Loan

In the midst of all these changes, Acreage also managed to close a financing transaction with an institutional lender for $33 million and used a portion of the proceeds to retire its short-term $11 million secured convertible note. The loan is unsecured, matures in three years, and bears a 7.5% annual interest rate.

“Access to low-cost capital, even in a very challenging capital market environment for cannabis, has always been a core part of our strategy,” said Bill Van Faasen, Interim CEO of Acreage. “The retirement of the potentially dilutive, short-term convertible debt, and the additional cash infusion bolsters our balance sheet enabling us to continue to deliver on our shareholder commitments to accelerate our path to profitability.”

Viridian Advisors wrote in its weekly tracker, “We believe that some other loan feature is likely to have been involved because we find it difficult to believe that investors would have loaned money to Acreage on an unsecured basis at 7.5%. The Viridian Credit Tracker ranks Acreage #10 out of the 14 U.S. Cultivation & Retail sector companies with market caps over $100 million. The company ranks at the bottom in both profitability and liquidity and #9 on our leverage ranking. Acreage’s last debt raise in June was done at an effective cost of over 50% and, although recent news regarding the distribution of Canopy beverages is undoubtedly credit-positive for Acreage, it’s still quite a stretch to get to 7.5%. So, it seems likely that there are some convertibility/warrants, a significant OID, a large premium due at maturity, or some other investor-friendly features that were not disclosed in the press release.”

 

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


8 comments

  • Avatar
    Rick Keiner

    October 7, 2020 at 2:58 pm

    Rendering the shares worthless? Why would they ever buy if they were worthless? That’s certainly not true. Should CGC decide not to purchase the Floating shares, the shares would continue to trade based on acreage, which would then have the full backing of CGC. Acreage would still exist, but CGC would be 70% owner. I’m mildly confident that they will buy the shares because the stock price would skyrocket once acreage has CGC’s low cost of capital bankrolling their expansion in the US. Better to buy it at $6.40 then $12.40, right?

    Reply

    • Debra Borchardt
      Debra Borchardt

      October 7, 2020 at 6:27 pm

      You are correct. I’m going to fix that. Not really worthless, but not very valuable.

      Reply

      • Avatar
        Rick Keiner

        October 8, 2020 at 4:39 pm

        Debra, if CGC decides not to acquire the remaining shares, then they will have to report their earnings separately every quarter. CGC will obviously be trying to make Acreage extremely successful, as that is where their US sales and profits will occur. 70% of profits will flow through to CGC, while 30% of value will flow to these floating shareholders. It is possible that the Floating shares are worth even more than the minimum $6.40, even if they aren’t purchased.

        For this reason, I don’t see any rationale for CGC to not buy all outstanding shares of Acreage, upon a triggering event.

        The only reason I could see for them not purchasing the shares, would be if Acreage somehow becomes insolvent before the triggering event.

        Willing to hear reasons why I am wrong, but I certainly can’t see the shares not being valuable.

        Reply

        • Debra Borchardt
          Debra Borchardt

          October 9, 2020 at 7:53 am

          I would agree that it makes sense for Canopy to execute the option. The context of the paragraph is that retail traders are opting for the sure thing versus the option and their reason is fear of Canopy changing its mind. I think that’s valid because as soon as Linton was removed the idea of buying Acreage cooled with the interim CEO. The current CEO is on board, but what if that changes again? The triggering event could be years away and so much could happen during that time frame.

          Reply

  • Avatar
    Bob

    October 24, 2020 at 11:12 am

    Currently, on the Canadian side, the shares are ACRG.A.U and ACRG.B.U and neither one can be bought or sold at all. Does that make sense or is something waiting to settle? I thought they would settle and be tradeable, but it’s been about 15 days now… Thoughts?

    Reply

    • Debra Borchardt
      Debra Borchardt

      October 26, 2020 at 9:00 am

      I was not aware that anything was holding up the trading. The company does have an IR contact. I would suggest you ask them directly.

      Reply

  • Avatar
    Mark

    November 1, 2020 at 8:31 pm

    When is the merger supposed to happen and what percentage does it happen?

    Reply

    • Debra Borchardt
      Debra Borchardt

      November 2, 2020 at 8:14 am

      The merger is triggered by the U.S. federally legalizing cannabis. There are now 2 options on the %.

      Reply

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