You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Friends,
In early July, we broke away from our long history of not liking Canopy Growth’s stock as it was crashing to a multi-year low on the upcoming convertible note conversion. We published that it “finally looks better to us.” We argued that the situation suggested that shorts should cover, and they were rewarded if they purchased after the article. When we wrote it, we had no position yet at our premium cannabis stock subscription service, 420 Investor, but we did purchase some shares in the model portfolios subsequently and sold them profitably.
When we wrote in early July, the stock had already declined from $3.50 to $2.81 and was down a lot more year-to-date than the New Cannabis Ventures Global Cannabis Stock Index at -67.8% vs. -54.7%. As of this Friday, Canopy Growth closed at $3.15, which is up from our article four months ago despite the cannabis market declining further.
Volatile Trading
Early in the month, Canopy Growth bounced on the Biden comments, but it quickly crumbled and came close to the July lows. This week, the stock rallied 31.8%, and it is now up 15.4% in October, which is ahead of the 11.5% return for the Global Cannabis Stock Index, which gained 2.8% this week.
Canopy Gets More Complex
On Tuesday morning, the company surprised the industry with its plans to create Canopy USA, which will close the pending acquisitions of Acreage Holdings, Jetty Extracts and Wana Brands if shareholders approve the creation, in January, and the deals won’t close immediately. In fact, a deck released by Canopy Growth suggested that the last acquisition, Acreage, may not close until early 2024. The other two are projected to close by late 2023.
We think that investors and analysts initially liked what they heard, with the company saying that it expected to stay on the NASDAQ with the new structure. Additionally, the company pitched that Constellation will be converting C$100 million of debt into exchangeable shares. The expected revenue of the post-closing company will be almost 50% from the U.S.
Unwarranted Excitement
This news ultimately doesn’t excite us! It turns out that the company may not be able to keep its NASDAQ listing and report American revenue on a pro forma basis. We don’t expect that Canopy Growth will proceed if this turns out to be the case. Further, it is subject to shareholder approval, which is in more than two months, and the closing of the deals, which is over the next year or so. So, the time between today and when revenue and profits get reported is very long.
Canopy Growth has been historically innovative and is being so again, but we expect that others will follow quickly if Canopy Growth succeeds in being able to close these three acquisitions. For the company, it reduces the risk of losing money it has already paid for these acquisitions, but we don’t think that any of these assets will change the game in the United States.
A Switcheroo
What bothers us the most here is that we had been expecting that Constellation might buy Canopy Growth, but this appears to be not happening in the near-term. We had been excited by the convertible debt conversion to equity during the summer, and the recent exit by Canopy Growth of the Canadian retail dispensary operations added to the likelihood in our view. Now, though, the company is converting its equity into exchangeable shares, which means that it will be giving up seats on the Board of Directors.
Potential Winners
While we aren’t sure that Canopy Growth will be able to finalize this plan, we think that it will be very positive for the multi-state operators in the United States if so. These companies, all of which have more cannabis revenue than Canopy Growth with large adjusted EBITDA instead of losses, would be likely to create structures that allow them to uplist if Canopy Growth is able to maintain its NASDAQ listing.
Further, we think that if Canopy succeeds, other Canadian Licensed Producers will get more active in the U.S., buying potentially private or smaller publicly traded MSOs. While we owned Canopy Growth briefly at 420 Investor after that piece we wrote in early July, we own none now and find much better options elsewhere.
Conclusion
While investors sure seemed to like this news, we don’t view this innovation as likely to help Canopy Growth or change things for the company at all. Additionally, we find that its higher in price today than in July, while most cannabis stocks are lower since then. If Canopy pursues this strategy, it lowers the likelihood of a takeover by its strategic investor, Constellation Brands. At the same time, we expect that if Canopy Growth is successful in this new structure, many other MSOs will copy them and get listed on the NASDAQ. To us, the American cannabis operators look a lot more attractive as investments.
Cresco Labs – Building Distinct Brands That Scale
Cresco Labs, a vertically integrated multi-state operator and the number one U.S. wholesaler of branded cannabis products, will report financial results for the third quarter ended September 30th, 2022 on Tuesday, November 15th, 2022 before the market opens. The company will host at 8:30 AM ET a conference call and webcast to discuss its financial results and provide investors with key business highlights. Cresco Labs Q3 revenue is expected to be $214 million with adjusted EBITDA of $49 million.
Get up to speed by visiting the Cresco Labs Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
Exclusives
Like most cannabis companies today, CEA Industries is facing a challenging economic environment. To navigate those challenges, the controlled environment agriculture company is broadening its product line and looking to serve both the cannabis and traditional agriculture industries. In an exclusive interview, Chairman and CEO Tony McDonald acknowledged the challenges that the company and its competitors face, but said he remains bullish on the long-term opportunities for controlled environment agriculture.
Cannabis stocks are about to kick off the earning season and New Cannabis Ventures will be tracking revenue and continually updating the Public Cannabis Company Revenue and Income Tracker based on new financial filings so that readers can stay up to date. The tracker includes a junior and senior list of public companies based on quarterly revenue. Currently, 30 companies that file in U.S. dollars qualify and eight that file in Canadian dollars are qualifying for the senior lists, a total of still 38. The junior list now includes 11 companies reporting in U.S. dollars and six in Canadian dollars. Combined, the Public Cannabis Company Revenue & Income Tracker now includes 55 companies.
SEC Enforcement
Cronos Group and its former chief commercial officer William Hilson have been charged with accounting fraud. The Securities and Exchange Commission said that in three separate quarters between 2019 and 2021, the company submitted financial statements that contained accounting errors related to, among other things, revenue recognition and goodwill impairment. Cronos self-reported the errors, cooperated with the investigation and took steps to remedy the situation. The parties settled the case and Hilson agreed to a three-year officer and director bar and agreed to be suspended from appearing and practicing before the SEC for at least three years. He also agreed to pay approximately $54,000 (USD) to the Ontario Securities Commission.
Earnings
Turning Point Brands Zig-Zag sales rose 13% sequentially to $52.1 million for the third quarter. “New product offerings such as our paper cones and Zig-Zag’s fast growing alternative channel business continue to drive growth and market outperformance within our U.S. papers business,” said President and CEO Graham Purdy. The company also adjusted its outlook and now expects Zig-Zag Products sales of $186 to $191 million, compared to previous outlook of $193 to $200 million.
Financing
Verano has refinanced a $350 million credit facility, extending the maturity with a four-year term. The refinanced facility provides the company with flexibility to secure additional future indebtedness of up to $270 million. “Since Verano’s inception, we have taken a conservative approach to our balance sheet, including avoiding sale leasebacks, which has allowed us to leverage our real estate to bring down our blended cost of debt. This refinancing enables us to continue a selective approach to further strategic opportunities as we position our company for the future,” said Chairman, CRO and Founder George Archos.
Ancillary company Greenlane Holdings priced a $7.5 million public offering of 8.33 million units at a price of $0.90 per unit, with each unit consisting of one share of stock and two warrants also at $0.90, well below the all-time low closing price of $1.22 on Thursday. The offering is expected to close on or about Nov, 1. The company intends to use the net proceeds for general corporate purposes, which may include, without limitation, servicing debt obligations under promissory notes issued in conjunction with business acquisitions, working capital, product development and capital expenditures.
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Sincerely,
Alan & Joel
