Viridian Cannabis Deal Tracker - Week Ending September 10th, 2021
Transactional Activity: There were six fewer transactions and a $629.8 million lower volume this week than in the prior week. Compared to last year's same week, an equal number of transactions closed with a $2.5 million higher volume. The average deal size was $1.3 million this week vs. $2.1 million in the same week last year.
Only 3.8M in equity raises closed this week, significantly below the YTD weekly average of $165M.
Cannabis stocks were sharply lower for the week, with the AdvisorShares Pure US Cannabis ETF down 9.54%.
Big gainers and losers for the week included:
Total capital raised YTD in 2021 of $9.33B is now approximately $.86B lower than the same period in 2019 (the previous peak year); however, US capital raises are far more robust. US equity raises are up by $537M (15%), and US debt raises are up by $748M (77%) compared to 2019. Canadian raises are off sharply, with equity raises down 50% and debt down 4%.
Largest Equity Raise: On September 7, 2021, IGNITE International Brands. (CSE: BILZ)(OTCQX: BILZF), a consumer goods company operating in several product categories, including CBD products, nicotine, and synthetic nicotine vape products, and a THC line, announced the closing of a private placement for gross proceeds of $2.26 million.
Two million shares were sold at $1.13 per share, a 21.5% discount to pre-announcement price levels. Although this is a significant discount, the stock performed quite strongly and closed up 43% for the week.
Brisa Max Holdings VI LLC. was the sole investor in the transaction.
The deal implies a $351.96M enterprise value and an EV/2021 annualized revenue multiple of 9.0x.
The June 2021 quarter was the strongest in the company's history. Sales of $9.8M were up from $2.9M in the previous quarter, and EBITDA of $227K was the first positive EBITDA in the company.
Public Company Listings: All three of the companies that raised capital this week were public. All three trade in Canada on the CSE in the US on the OTC.
Equity vs. Debt Cap Raises: Equity accounted for all three of the raises and 7.2% of capital raised.
Largest Debt Raise: There were no debt raises closed this week.
Most interesting Debt Related Transaction of the Week:
On September 13, 2021, Plus Products Inc. filed for protection from creditors under the Companies' Creditors Arrangement Act ("CCAA") (Canadian Bankruptcy protection).
The filing caps a long-running battle to maintain liquidity despite the increasing difficulty in accessing capital markets. One of the issues is that the company never managed to obtain EBITDA positive status.
Plus Products enjoyed several advantages early on:
They were one of the early entrants into the California edibles market and, in the first quarter of 2019, had 3 of the top 10 selling SKU's of any branded product category, including flower, vapes, gummies, etc. (according to BDS).
Plus management, led by Jake Heimark, was well respected, and the company had a tightly controlled strategy of proving itself in California before venturing into other geographies.
Their "asset-light" strategy appeared to be the prudent way to approach a rapidly evolving market.
What went wrong?
Competition eroded the Plus position in the California market. Headset now lists Wyld and KIVA as the top two edibles brands in CA.
The increasing competition revealed the weakness of the small independent brand selling through independent distributors business model. California distributors focus on having a broad menu of offerings with which to achieve high dispensary penetration rates. The dispensaries are primarily left to choose their items without much sales effort by the distributors. Small independents have difficulty "pushing" products onto the shelves.
COVID changed cannabis usage patterns. One of the benefits of edibles, particularly gummies, is the discreteness of their use. Customers can easily pop a gummy and go to a Bruins game, whereas they can't easily smoke a pre-roll at the arena. When the pandemic kept more people at home, it shifted consumption to flower, which benefits from the immediacy of effect and lower cost.
The combination of the higher competition, difficulty with distribution, and COVID impacts substantially explain the 46% decline in sales from March '20 through March '21 shown in the orange line in the graph above.
The convertible notes and warrants financing structure used by Plus (and many other early market participants) had a relatively low conversion premium of 16% and was considered a delayed equity issuance. However, the cannabis stock crash of 2020 reduced the Plus stock price to under C$1.00 and never recovered to close to the C$6.50 conversion price. From early 2020 onward, the convert represented a ticking time bomb. The issue was also thinly distributed, giving the largest investor Gotham Green increased power over the company.
What steps did the company take to right the ship?
The company announced with their 3rd quarter 2020 earnings release that they were moving to self-distribution. Although arguably the right move to take control of the marketing of their product, the disruption of the changeover had other negative impacts on sales. The positives did start to register in Q2:21 with a 90% sequential gain in sales to a new record of $4.8M. Plus also benefitted from a reduction in COVID-related restrictions.
In February 2021, Plus reached an agreement (at the last possible moment) to extend the maturities of the convertible notes from February 28, 2021, to February 28, 2024, staving off an immediate liquidity crises. The modification was quite costly, however. The rate was increased from 8% to 12%, and 25% of the bonds were given a one-month opportunity to convert at $.95 (below market). The remainder of the bonds were made non-convertible. The company also issued $499 of warrants per bond as a fee, with each warrant convertible at $1.10.
What could they have done differently?
The company should have been more aggressive at fixing the liquidity much earlier. Faced with similar dilemmas, several other companies, including Cansortium and Kush, managed to finance their way out of the problem. Possibly the "asset-light" nature of the Plus balance sheet was an inhibiting factor. The company only has about $2.0M of net PPE on its June 2021 balance sheet, rendering it unable to offer significant collateral to secure refinancing.
The company should have "read the room" better regarding its strategic position as a small independent brand lacking scale, cultivation, or access to shelf space. Lowell Brands saw and sold itself to Indus Holdings to gain scale and lower costs. Sublime Brands saw the advantage of access to Harborside's dispensaries and cultivation capacity. We don't know how early or hard Plus pushed for a sale of the company, but our feeling is that they may have stuck with the idea of going it alone just a bit too long.
In a rapidly evolving market like California cannabis, an early mover advantage doesn't buy you that much. "Fast followers" with better execution or more resources often win out.
Brands are the mantra of the industry, but we are still early in development. Most small independent brands cannot command shelf space at retail or the scale efficiencies to drive profitability. Consolidation appears inexorable.
Liquidity issues rarely resolve themselves, and aggressive early action, although painful, is the best strategy. Cannabis companies have learned to raise capital when it is available rather than when it is desirable.
Cap Raises by Sector: Four of this week's capital raises came from Cultivation & Retail, two from Biotech/Pharma, and one each from Infused Products & Extracts, Software, and MIsc. Ancillary.
Mergers & Acquisitions
Transactional Activity: Two M&A transactions were completed this week, compared to five in the prior-year period. We have tracked 229 transactions YTD in 2021, compared to 60 in the same period last year. Public companies were the buyers in 85% of 2021 deals YTD compared to 90% in 2020.
There have been 158 US targeted M&A transactions YTD with a record $5.8B in total consideration. Both transaction numbers and total consideration exceed the values recorded in each of the last two full years.
Largest M&A Deal of the week: On September 8, 2021, General Cannabis Corp. (OTCQB: CANN) ("Trees"), a company whose strategy is to identify, acquire, and operates licensed cannabis facilities in mature markets, announced the closing of the acquisition of the TREES Englewood Dispensary. General Cannabis will now be doing business as TREES.
The acquisition is part of a $39.5 million deal to acquire a total of 2 retail locations in Colorado and 3 in Oregon.
The total consideration is payable 13% in cash and 87% in stock.
Revenues for the three existing stores were approximately $18 million in 2020. The transaction value represents 2.2x last year's revenue.
TREES expects to close the acquisition of the two dispensaries in Portland, Oregon, soon, and the opening of two new dispensaries in Portland and Oregon.
Aside from assets acquired in the current transaction, TREES owns a 17,000 sq ft light-deprivation greenhouse facility in Boulder, CO.
Public vs. Private: Both of this week's acquisitions were made by public companies.
M&A by Sector: The buyers and sellers in this week's deals were from the following sectors: