Which Cannabis Companies Are Best Positioned In The Capital Constrained Market?

The chart shows the Tax Adjusted Debt to Market Capitalization of the twenty-four U.S. Cultivation & Retail sector companies in the Viridian Credit Tracker database with market caps above $20M. We have excluded Bright Green (BGXX: Nasdaq) because its pre-revenue, start-up nature renders it less comparable to the other companies.

The press has reported cannabis companies utilizing unpaid taxes as a source of capital. However, the unrecognized ”debt” is insignificant for most companies on the chart. We would expect any company, cannabis or not, to have significant accrued tax liabilities on its balance sheet. We would assume that these liabilities would grow over time.

Our benchmark for appropriate accrued tax liabilities is one quarter’s worth of tax expense. Accordingly, we calculated the difference between accrued tax liabilities and the most recent quarter’s current tax expense and added this amount to the debt. Only three companies were significantly impacted: Verano CSE by $85M, MedMen CSE by $69M, and 4Front CSE by $22M.

Debt / Market Cap is the best one-number indicator of credit quality. Drawing on our High-Yield and Distressed Debt background, we have found that when this statistic rises significantly above 3x, it strongly indicates elevated credit risk. Similarly, we believe that numbers under 1x generally represent reasonable (although not investment grade) credit quality.

The three highest-risk credits on the chart not only have debt/ market cap significantly over 4x, but they also have significant upcoming debt maturities. MedMen CSE hired ATB to explore restructuring options centering around its assets in Arizona, Illinois, and Nevada. Red White & Bloom CSE managed to push maturities on over C$100M of debt from 2023 to 2024 and settled an additional $10.5M of debt with common stock but has not made significant strides in actually reducing leverage. AYR (AYR.A) has extreme market leverage and significant maturities in 2024. However, we believe some combination of asset sales and refinancing is still likely. Adjusted Debt represents 5x projected 2023 EBITDA, which we do not find that extreme.

Tilt Holdings NEO was a bit more successful in pushing out around $45M of maturities to 2026 & 2027, paying down $10M through operating cash and refinancing another $15M through a sales leaseback (which we still count as debt). Together these moves significantly destressed the company’s balance sheet.

Jushi OTC has around $80M of debt maturing in 2024 and several unexpected cash flow issues. The company has Illinois dispensaries near the Missouri border that are losing sales to the lower-priced competition, and Its significant Virginia assets were built for the prospect of a new rec market that is now indefinitely delayed.

The companies on the right side of the chart are in an enviable position. Their low leverage makes the potential acquirers of distressed assets in a target-rich environment. Moreover, additional financial flexibility is a valuable asset in the constrained capital markets facing the industry.

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.