OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS

Capital Raises

Capital Raises Summary

Each week, Viridian publishes insights and analysis on completed capital raise transactions in the prior week, focusing on all equity and debt deals. Our analysis includes:

  • Summary
  • Outlook
  • Best & Worst Perfromers

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YTD Analysis

Cannabis capital raises are off to a multi-year low. Only $5.9M has closed through the first two weeks of the year compared to $117.6M last year:

  • No U.S. issues have closed YTD.
  • No debt issues were closed this week.
  • Public companies have raised 56.7% of total capital YTD.

Market Commentary and Outlook

OUTLOOK

Significant Trends for 2023

  • Commodification-based wholesale pricing declines will continue. Prices have firmed somewhat in California in the last month, as harvest volumes are down due to cultivators leaving the market. Damaging storms will likely result in additional supply curtailment and temporary maintenance of higher pricing. Make no mistake, though; it is no accident that the same price dynamics have played out in California, Oregon, Washington, Colorado, Massachusetts, and Michigan. It is what happens in every agricultural commodity market where supply is unconstrained. The fact that cannabis is primarily a commodity should be apparent by now. Despite relentless urging by the industry to focus on things like terpenes and secondary cannabinoid profiles, cannabis users continue to buy the highest potency for the buck.
  • The wholesale pricing collapse lays bare the fallacy that branding will support pricing, which is unlikely to be the case until brands can be marketed seamlessly across state lines and advertised. And this will not be the case in 2023 or even 2024.
  • Recent progress on inflation is good news for the industry. Inflationary cost increases have exerted strong  downward pressure on margins due to the inability of cannabis companies to raise prices. Next, we will likely have a real test of the industry mantra that cannabis is recession-proof. The last recession, when people were locked in their houses smoking their stimulus payments, was not a fair test. We don’t doubt that cannabis users will continue to maintain a relatively steady usage level, but to what degree will they trade down to the lowest-priced products vs. premium brands? And to what degree will a pressured consumer revert to purchasing weed in the “legacy” market?
  • We expect little progress in 2023 on federal legalization, descheduling/rescheduling, 280e, or banking reform. While we have been humbled by our lack of ability to handicap action or inaction in Washington, we believe the key takeaway from the 2022 midterms is that cannabis is not a powerful enough issue to sway votes. No legislator fears losing his seat because of inaction on cannabis; accordingly, attention will turn to other matters. We hope we are wrong on the upside this time.
  • The cannabis capital markets are off to the slowest start since before 2018. Since we began tracking the industry in 2014, we have never seen a year where no U.S. closed deals in the first two weeks of the year.
  • The recent announcement by Lowell Farms (LOWL: CSE) that the company has hired a banker to study “strategic alternatives,” including acquisitions, divestitures, financings, or restructuring, is the equivalent of the old Sherlock Holmes line that “the game is afoot.” 2023 will be a banner year in rescue financing, distressed M&A, and restructuring both in Canada and the U.S. One of the largest MSOs recently told us that they expected most of their M&A activity to be purchasing distressed assets.
  • As painful as it is likely to be, we believe this period of belt-tightening and consolidation will result in a healthier industry better positioned to face the challenges of legalization when and if it arrives. In 2023, good equity analysis means solid credit analysis, as many companies will not survive the upcoming period.

This Week Sector Focus

The U.S. Cultivation & Retail sector capital raises are down 71.6% YTD, but equity capital raised is down approximately 96.3%:

  • Debt financing is down 50.6% YTD but accounts for about 94.0% of all capital raised; private companies raised 8.7% of it.
  • 89.3% of total capital raises YTD were completed by public companies compared to 88.4% in 2021.
  • In 2022, there have been no equity deals above $25M.

Capital Raises vs Stock Prices

Best and Worst Stock Performers

YTD Returns by Public Company Category

  • Returns continue to be positive across all public company categories YTD. Tier one U.S. MSOS underperformed this week and slid five places into the worst performer category. Ironically given the macroeconomic factors, Tier three U.S. companies have been the best performers. Some of the last year’s most beaten-up stocks, including MedMen (MMNFF: OTC), TPCO (GRAMF: OTC), Red White & Bloom (RWBYF: OTC), and Unrivaled Brands (UNRV: OTC), are all up over 65% YTD.

 

Best and Worst Performers of the last week and YTD

  • A curious grouping of companies appeared on top of the leader list this week: MedMen ( MMEN: CSE), Greenlane (GNLN: Nasdaq), HEXO (HEXO: Nasdaq), and Lowell Farms (LOWL: CSE) were all up between 19% (LOWL) and 41% (MMEN). All four have one thing in common; their debt is more than three times their market cap, a level we generally associate with stress/distress.
  • The largest losers included Nova Cannabis (NOVC: CSE), Vibe Growth (VIVE: CSE), and 4Front (FFNT: CSE), down 35%, 18%, and 8%, respectively. We saw no news to account for the declines.

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