Acreage's New CEO, CFO Discuss The Cannabis MSO's Future, Restructuring The Canopy Deal

By Javier Hasse and Natan Ponieman.

Last month, Kevin Murphy resigned as CEO of Acreage Holdings ACRG ACRGF. Director Bill Van Faasen took over as interim CEO.

This change in management was made to coincide with the restructuring of Acreage’s deal with Canopy Growth CGC, which mandated that the Canadian LP would purchase Acreage as soon as cannabis is legalized in the U.S. on a federal level.

In his first interview as new CEO, Van Faasen — together with CFO Glen Leibowitz — discussed with Benzinga the company's plans for the future.

Why Did Murphy Step Down?

“As is typically the case in entrepreneurial companies, they eventually grow to a scale that they require a different set of skills — less entrepreneurial and more operational,” Van Faasen told Benzinga.

Murphy continues to act as chairman of the board.

Van Faasen praised Murphy’s vision and entrepreneurship, as well as his capacity to grow the company to the leading place it occupies today.

Murphy intended to step down ever since Acreage went public in 2018. The board decided on the timing.

Prior to joining Acreage, Van Faasen served as CEO of The Blue Cross Blue Shield of Massachusetts.

“I always thought that my skills were in general management and that they were pretty transferable,” he said. 

A Reset On The Canopy/Acreage Agreement

One year ago, 99% of Canopy investors voted to approve the company’s conditional acquisition of Acreage for $3.4 billion. The deal will only be executed should the U.S. legalize marijuana on a federal level.

Following a steep decline in cannabis stock valuations, the deal was restructured to better fit current market conditions. After a four-month negotiation, the parties agreed on a new deal that better reflects today’s market.

Canopy will now pay Acreage shareholders $37.5 million up-front for the alteration of the deal, in the form of new fixed shares. A $100 million loan is also included in the package, which aims to further consolidate Canopy’s presence in the U.S. market.

Under the original deal, Acreage had the authority to issue upwards of 40 million shares that would be non-dilutive to Acreage shareholders, but would be dilutive to Canopy shareholders, because they would ultimately convert into Canopy's shares.

"Consequently, as part of the deal, [Canopy shareholders] had the right to approve any additional financing," Van Faasen explained.

Considering the current market no longer supports the original deal, shareholders decided to refresh it, seeking to create a new set of upsides.

“We went into about a four-month process of working with [Canopy CEO] David Klein and his team to talk about the industry, what it looks like going forward, what a more informed and updated relationship would look like," said Van Faasen. "It did result in a change in the exchange ratio. But we're excited. We feel that this reset deal refreshes the wonderful promise that existed from the get-go.”

Projected Near-Term Growth

The decline in capital availability that the industry went through in 2019 forced Acreage to rethink part of its large-scale plan.

The Canopy deal continues to guarantee a feasible exit strategy for the medium to long-term, but Acreage is still focused on achieving profitability in the short-term.

The company expects to become EBITDA positive this year, and cash flow positive in 2021.

“With capital being at such a premium, you really have to make some decisions around investments that we had made when there was a lot of capital available,” said Leibowitz.

For this reason, Acreage decided to focus on key operations in states that are either currently cash flow positive, or that they anticipate will have free cash flowing in the very short-term.

“One of the really critical exercises we're going through right now is to take a look at our asset footprint, determine which states are sources of capital and what states are uses of capital,” added Van Faasen. “If we're in the state, we're using capital, and it doesn't have any prospects of changing in the near term, then we have to ask: is that is that the best use of the capital?"

New England and the mid-Atlantic are the regions where Acreage places most of its bets.

The company recently acquired a fully-operational license in New Jersey, where adult-use is expected to be legalized in the November ballot.

“Then what we see happening is a domino effect whereby if New Jersey does that conversion to adult use, you would probably see New York following it, then Connecticut and then ultimately Pennsylvania,” Leibowitz added.

Leibowitz expects to see a recreational roll-out in New Jersey by early 2022.

Illinois is also a strong source of revenue for Acreage, as well as Ohio, where the company has partnered with a license holder.

As far as international expansion goes, there are currently no plans.

“We're not considering any expansion outside of the United States, and in fact, if anything, in the near term, again, driven by the desire to get to EBITDA positive and cash flow positive, and begin generating our own capital, we're not even focused on the United States," Van Faasen said. "We're focused on discrete regions within the United States."

Acreage's goal is to fulfill operating objectives and generate its own capital.

"When all of that occurs and we have excess capital on the balance sheet, we'll begin to talk about what we do to deploy it," Van Faasen added. "But until then, we're very tightly focused.”