Viridian Capital Advisors Archives - Green Market Report

Debra BorchardtJune 24, 2022
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Cannabis deal tracker Viridian Capital Advisors is looking at the second half of the year to see what’s in store for the industry. Director of Equity Research Jonathan DeCourcey wrote, “The outlook is bearish for investor returns in the near term as the key catalyst on everyone’s mind, federal legislation, is unlikely to come, and thus valuations will remain depressed for the remainder of the year with further stock declines likely in connection with broader market weakness.” With that said, DeCourcey thinks investors will have to wait until next year for a return to a positive market in the sector. For now, though he has come up with five predictions for cannabis for the back half of 2022. 

Viridian’s Five Predictions are as follows:

  • Federal legislation won’t happen
  • Stock prices will remain depressed
  • Companies may beat earnings estimates
  • California consolidation will continue
  • Smaller companies will outperform larger ones

Despite hopes for a banking bill, it is unlikely that anything will happen in 2022. DeCourcey wrote, “There is insufficient bi-partisan support for Chuck Schumer’s full legislative proposal to pass (requiring 10 Republican votes and full Democrat support) and, as we have said before, the timing is too tight for a stand-alone SAFE Act to be possible this year given the Democrats will first await the Schumer proposal to make the rounds.” Schumer’s proposal is expected to come in August, but that doesn’t give it much time before the midterm elections. 

New legislation could have been the catalyst to jump-start stock valuations. Take that off the table and there isn’t anything really big to move the needle. The overall broader market has been beset with recession fears and interest rate hikes. That also doesn’t help stock prices. However, depressed stock prices could combine next year with strong company earnings and that could lead to a recovery, but those hopes are pushed into 2023. 

Companies struggled with revenues and earnings at the beginning of 2022. Lingering Covid issues, wholesale price declines, and integration issues for newly combined companies caused some strong headwinds. DeCourcey thinks that these challenges are winding down, but cautions that there could be lingering inflation pressures. Still, expectations have been reset and if the New York market actually opens in 2023 then next year could see some strong growth. Plus, companies are going to be able to start reporting New Jersey sales figures, which are looking very good. Those New Jersey numbers could spark some earnings beats and that would be welcome news. 

“The proposed elimination of the California cultivation tax, which we expect to take effect next month, is a game-changer for California cannabis companies reducing the cost of production on outdoor growers by as much as 50%,” said the report. DeCourcey thinks the additional cash will lead to more transactions and motivation for M&A. The improving tax situation could also entice larger MSO’s to come to the market. “For investors, we expect the easier operating conditions and looming consolidation will result in outperforming returns for California-centric stocks in the second half and into next year.”

Finally, the report noted that scale does not necessarily equate to winning. Large companies get the attention, but the smaller and mid-size companies could have better growth potential with the likelihood of getting acquired. Smaller company stocks also outperformed the larger ones by declining by a smaller percentage. Dropping 47% on average versus 55% declines for larger companies. “Our top picks for 2H investment fall within the category of smaller and medium-sized companies. These names include Ascend (OTC: AAWH), AYR Wellness (OTC: AYRWF), Cansortium (CNTMF), Lowell Farms (LOWLF) and Schwazze.”


Debra BorchardtOctober 15, 2021
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Viridian Capital Advisors analyst Jonathan DeCourcey is looking into his cannabis crystal ball and says skip 2022 – it’s 2023 that should be the focus for investors. He points out that 2023 will be the first full year with adult-use cannabis sales in the key markets of Connecticut, New Jersey, and New York. He wrote,

Based on 2023 expectations, top operators are likely to look much cheaper overall than they do today.

The analyst said that the cannabis market’s current bear market is unwarranted and presents buying opportunities. While company estimates for 2022 have been increasing, he says the real story will be what happens in 2023. He wrote, “As we look to 2023, the opportunity becomes even more favorable. Even omitting the share gains for large public players (both through execution and consolidation) and conservatively growing estimated 2022 revenues by the roughly 20% growth rate for broader US cannabis sales in 2023 and leaving adjusted EBITDA margin levels unchanged from 2022 estimates, US cannabis companies will be trading at a roughly 50% discount to the one year forward projections of this winter with 2023 multiples (’23EV/Sales at 2.1x and EV/EBITDA at 6.3x). These valuations levels are incommensurate with the high growth nature of US cannabis and look inexpensive even relative to slower growth more mature industries.”

In his opinion, many of the companies considered to be the top operators for 2023 are not necessarily the biggest by market cap or the most expensive today. His big list of companies that he believes look even better when considering the 2023 numbers are Ascend Wellness, Ayr Strategies, Body & Mind, Cansortium, Columbia Care, Glass House, Goodness Growth, Jushi, TerrAscend, and Tilt Holdings. The two companies DeCourcey specifically highlighted in his report that was published on October 15, was 4FrontVentures (OTC: FFNTF) and Planet 13 (OTC: PLNHF).

4Front

Viridian has a Buy rating on 4Front and a $2 target price. The analyst noted that the 2022 estimates only represent about 40% of the company’s long-term plans. 4Front recently broke ground on a cultivation and production facility in Illinois called “Big Daddy.” The first phase of this project will be a 250,000 square foot cultivation facility that will open in early 2023 giving the company 65,000 square feet of cultivation versus its current 9,000 sq. ft. today. This expansion will allow 4Front to sell more house brands at its own locations, plus open itself up to wholesale business. The company has said that the initial buildout will allow it to produce $100 million of sellable product.

In addition to Illinois, the Massachusetts operations are expanded by a recent acquisition of  New England Cannabis Corporation. 4Front said that NECC is expected to be significantly accretive to its EBITDA expectations for 2022 and will immediately scale 4Front’s presence as a dominant wholesaler and producer in the state. The acquisition is said to more than double 4Front’s total flower canopy in Massachusetts to over 30,000 sq. ft, with further expansion potential for up to an additional 10,000 sq. ft. of canopy, and will approximately triple 4Front’s kitchen, processing, and distribution space.

4Front also has an outstanding license application in New Jersey, which could also present a big opportunity. DeCourcey also pointed out that 4Front could end up being a potential takeover target by a larger MSO.

Planet 13

Planet 13 was truly beaten up by the pandemic. As a dispensary superstore that thrived on tourist traffic, the lockdown was especially difficult. Fast forward to today and Vegas is coming back. The MJ Biz conference next week is sure to bring lots of attention to the flagship store in Las Vegas and could be a short-term catalyst for the stock. Beyond that, the company has also opened a superstore in California.

Yet the analyst stated that right now, Planet 13 appears expensive as it has an EV/EBITDA multiple of 13.8x or a roughly 81% premium to the broader peer group. Still, he doesn’t think the 2022 outlook tells the whole story for the retailer. Looking even further out to 2023 results, Planet 13 has plans to open another store in Chicago now that it has a license through a joint venture and it acquired a Harvest license in Florida.

“We anticipate additional expansion even beyond those two initiatives coming given the company’s well-capitalized balance sheet and management’s stated initiative of having at least eight Superstore locations open within the next five years,” wrote the analyst. He suggested Planet 13 could potentially buy smaller assets that could be built out and more stores in tourist-friendly cities. He also thinks Planet 13 could be a target for a larger MSO to acquire.

 


StaffSeptember 27, 2021
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Cannabis companies are continuing to make money moves in this capital hungry industry. This week is kicking off with two companies making announcements.

RWB

Red White & Bloom Brands Inc. (CSE: RWB and OTC: RWBYF)reported that it has completed a refinancing of an aggregate principal amount of $18.6 million debentures (plus accrued interest to September 1, 2021) previously issued to an arm’s-length investor . The Prior Debentures were replaced with a new debenture in the principal amount of $19.3million. The New Debenture is unsecured, bears interest at the rate of 10% per annum, which accrues and is payable on the maturity date of January 21, 2023. The New Debenture is payable in full on a change of control.

Audacious

Australis Capital Inc., operating as Audacious (CSE: AUSA) (OTC: AUSAF)  announced that it has retained DelMorgan & Co., an internationally recognized investment banking firm, to assist it with its $15 million capital raise.

Terry BoothAUSA CEO, said, “DelMorgan is a highly regarded name with broad access to institutional investors active in the cannabis industry, our target audience for this raise. The funds will largely go to initiatives that we believe will enable us further to accelerate growth. We have a number of potential transactions and partnerships on our radar screen. These funds will help to capitalize on these opportunities and take AUSA to the next level. We look forward to working with the DelMorgan team on this fund raise and potentially other initiatives.”

Industry Capital

According to Viridian Capital as of the week ending September 17, the total capital raised year-to-date in 2021 of $9.36B is now approximately $1.1B lower than the same period in 2019 (the previous peak year); however, U.S. capital raises are far more robust. “U.S. equity raises are up by $448M (12%), and U.S. debt raises are up by $748M (76%) compared to 2019. Canadian raises are off sharply, with equity raises down 49% and debt down 12%,” said Viridian.

On September 15, 2021, Glass House Brands Inc. (NEO: GLAS.A.U)(OTCQX: GLASF) closed its acquisition of a 5.5 million square foot greenhouse facility in Southern California. That deal was valued at $233 million or $158 million without earnouts. It was comprised of $93 million upfront cash, $65 million in stock (6.5 million shares valued at $10/ share), $75 million in earn-outs (based on performance for the 12 months commencing 30 months after CAPEX is completed at the facility). The upfront cash consideration was reduced from $118 million to $93 million, preserving an additional $25 million in funds for buildout.

On September 17, 2021, Halo Collective Inc.  (NEO: HALO)(OTCQB: HCANF) closed an at-the-market offering raising approximately $15.6M between May 4, 2021, and September 17, 2021.


StaffAugust 3, 2021
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Viridian Capital Advisors pointed out this week that while cannabis SPACs have finished approximately $5 billion of qualifying transactions, there is still plenty of money that remains to be invested. Viridian said it expects the second wave to be equally significant with approximately $5.9B of deals announced or projected.

Chart provided by Viridian Capital Advisors

The company said in a recent note, “Nine SPAC mergers have been completed totaling $5.4B in merger value from $1.8B in IPO proceeds, 2 SPAC mergers are pending totaling $2.1B in merger value from only $270 M in IPO proceeds, and 7 SPACs are searching for a target after raising $1.2B from IPOs. Five of the seven SPACs searching for mergers in the cannabis industry have raised $853 million in IPO proceeds this year, much more than the $397 million raised through traditional IPOs year-to-date.” This confirms that the trend of using SPACs for capital raising in cannabis continues to be popular.

Of course, the drawback of SPACs is that the clock begins ticking creating stress to find an appropriate target. Viridian noted that two of the seven SPACs that are searching for companies are running out of time. Tuscan Holdings Corp II has obtained an extension until September 30, 2021 and Merida Merger Corp I has only until November 2021 to complete a merger.

Viridian pointed out that in addition to the time constraints, larger US-listed SPACS are limited to non-plant touching deals which shrinks the pool of options. “This has led 5 SPACs that started out searching for cannabis targets, to complete a merger in a different industry like Collective Growth Corp’s merger with an automotive company, and Tuscan Holdings Corp. I’s acquisition of a EV battery company.”

Premiums Paid

The lack of options for cannabis SPACs has led to premiums being paid for the few companies that fit the deal parameters. Viridian wrote, “One example is the Silver Spike Acquisition Corp purchase of cannabis software company Weedmaps for 6.8x 2021 projected revenue, while it’s closest public comp traded at 3.9x. Similarly, Mercer Park bought cultivation & retail company Glass House Group for 5.6x 2021 revenues and 28.8x EBITDA compared to peers at  3.94x  and 15.7x, respectively. One counterexample is the Subversive Capital Acquisition Corp. purchase of Caliva and Left Coast Ventures valuing the entities at 1.8x 2021 revenue and 18.1x EBITDA compared to peers at 4.4x and 19.3x respectively.”

Last month, cannabis SPAC Clover Leaf Capital (Nasdaq: CLOEU) closed its IPO raising $138 million.  Clover Leaf is listing on Nasdaq and focuses on Cultivation Technology, Processing Technology, Testing Technology, and Consumer Goods Technology investments. “The deal is a new twist on SPAC structure; most SPACS have included warrants for between ¼ and one share in their units,” said Viridian. The company also suggested that it is likely that Clover will need to bundle more than one acquisition in its de spacing transaction.


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