This Popular Cannabis Company Moves Closer to Financial Trouble - New Cannabis Ventures

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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,

Canopy Growth, one of the most popular cannabis companies with investors, is down 23.1% in February. This is the worst performance among the 25 stocks in the New Cannabis Ventures Global Cannabis Stock Index. With the pullback, the stock is up 0.9% year-to-date, which is worse than the 3.8% index return.

Most of the February decline took place when the company reported its fiscal Q3 on February 9th, with the stock falling 17.9%. In fact, the stock closed Friday at $2.33, 3.6% higher than where it closed then. The stock continues to trade higher than its multi-year closing low of $2.09 set 12/27. It fell 7.2% this week, which was more than the index, but we were surprised it didn’t fall more. The company reported on Tuesday morning a convertible note financing that we find ominous. Many investors seemed to miss the most important aspect, the toxicity of the structure. The conversion price is 92.5% of the three-day volume-weighted average price of the Common Shares ending on the trading day prior to conversion, which is much worse than a fixed price.

The press release didn’t discuss an important aspect, but an SEC filing revealed that the company sold $100 million of 5-year debt for $95 million and could issue 98.93 million shares. This works out to a price of $1.01 for the buyer, Verition Canada Master Fund! If Canopy Growth ends up issuing shares to redeem the convertible, it could be effectively selling stock at $0.96.

We aren’t entirely surprised by the deterioration of Canopy Growth’s debt financing. The debt has been rising, and the cash has been falling. The company continues to burn a lot of cash in its operations. Canopy Growth’s move from a fixed-price convertible to a variable one could weigh on the stock. I shared a one-year target of $1.36 at Seeking Alpha in late January. The target was based on an enterprise value to projected FY25 (March 2025) sales multiple of 2. The projected 2025 sales dropped from C$619 million to C$509 million, an 18% decline. The expected adjusted EBITDA worsened as well, falling from -C$84 million to -C$115 million. The target at 2X EV/projected revenue would now be C$0.59.

Investors should not have been excited by the low interest-rate on the debt at 5% and should have been concerned about the toxicity of the structure. We see several Canadian LPs that look a lot better financially and operationally than Canopy Growth that are trading cheaper, and they are down a lot in 2023. Investors should choose these LPs over Canopy Growth in our view.

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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

Exclusive

Greenlane Holdings’ new CEO Craig Snyder took the helm at the beginning of the year and recently sat down with New Cannabis Ventures to discuss his top goals: help the company reach profitability by Q4 of this year, prioritize innovation via the launch of new products, and enhance its ecommerce capabilities. Snyder took the helm from Nick Kovacevich, who transitioned to the chief corporate development officer role. Greenlane’s owned brands include EYCE, DaVinci, Higher Standards and Groove, which is the newest brand launched last year. Greenlane has plans to launch 20 new products across its brand portfolio.

Canadian cannabis retail sales shot up 13.8% to a record C$425 million in December over November sales and were up 20.2% from a year ago, according to Statistics Canada. More stores and falling flower prices are being attributed to the bump. In Ontario, sales rose 15.1% from November and were up 35% from a year ago. Alberta, sales increased 11.1% from November and were up 12% from a year ago. Quebec was up 12.7% from November and down 2% from a year ago, while British Columbia was up 13.3% from November and grew 21% from a year ago.

Earnings

Turning Point Brands said Q4 sales for its Zig-Zag product increased 0.9% to $46.4 million. For the full year, net sales of Zig-Zag products increased 7.9% to $190.4 million. “The Zig-Zag segment grew during the quarter despite the impact of a previously disclosed pull-forward in the prior quarter, benefitting from continued market share gains and the contribution from a full quarter of CLIPPER lighters,” said President and CEO Graham Purdy.

Capital Raise

Canopy Growth Corporation announced the sale of up to $150 million of convertible notes to an institutional investor. The initial purchase was for $100 million, with the remaining $50 million to be purchased if certain conditions outlined in the indenture are satisfied or waived. The company intends to use the proceeds for working capital and general corporate purposes. “Building on other recent actions taken to enhance cash flow, this attractive capital immediately adds to Canopy Growth’s cash on hand and provides additional flexibility to continue advancing strategic priorities,” said CFO Judy Hong.

Mergers

The Parent Company announced plans to merge with California cannabis company Gold Flora in an all-stock merger. Once the deal is completed, The Parent Company shareholders will own approximately 49%, and Gold Flora shareholders will own approximately 51% of the outstanding common equity of the combined company on a pro forma basis. “Together, we will have the strategic platform comprised of scale, cultivation capabilities, and brand portfolio to execute on our mission to create unique and culturally relevant products,” said The Parent Company’s CEO and Chairman Troy Datcher. The new parent company will operate as Gold Flora Corporation and is expected to remain a reporting issuer in Canada on the NEO Exchange Inc.

Settlements

RIV Capital has entered into a settlement agreement that has resulted in JW Asset Management, LLC consenting to the dismissal of its application related to the company’s acquisition of Etain, LLC and Etain IP, LLC. Under the terms of the agreement, RIV Capital repurchased for cancellation all of its Class A common shares currently owned or controlled by JWAM and its affiliates for $19,625,000. RIV Capital also reimbursed $375,000 in legal expenses incurred by JWAM as part of its application and related matters. “Now that these claims have been resolved, we can focus on continuing to operationalize New York, in addition to exploring a range of opportunities inside and outside of New York as we seek to build our platform going forward,” said Director, President and CEO Mark Sims The company also announced that The Hawthorne Collective, Inc. has advised it that the litigation between The Hawthorne Collective, JWAM, Jason Wild and certain related parties of JWAM has been settled.

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Sincerely,

Alan & Joel

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Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email