Long time cannabis industry investor Viridian Capital Advisors has recently issued a report that suggests looking at cannabis companies that may have a big debt bill coming due and insufficient cash to pay them. Viridian feels these companies have discounted valuations that present an investment opportunity.
While there has been a lot of capital flowing into the cannabis industry, most of it is going towards large companies. For example, last week North American cannabis operator TerrAscend Corp. (TRSSF) closed on a previously announced non-brokered private placement raising gross proceeds of C$224 million with 80% coming from four large U.S. institutional investors. There was also the Canadian cannabis company Aurora Cannabis (ACB) who closed on its previously announced public offering deal for total gross proceeds of $137 million. Still, these headlines generate interest in the smaller companies.
Jonathan DeCourcey, Director of Equity Research at Viridian wrote, "We expect companies with looming debts are more capable today to push off maturity dates (by incentivizing investors) or raise the requisite capital to pay off maturing debt than they had previously." He highlighted three companies that have big debt bills coming due and discounted valuations as opportunities even if the companies have to engage in dilutive financing deals. The companies were Cansortium (CNTMF) , KushCo Holdings (KSHB) , and Plus Products (PLPRF) .
Cansortium is a Florida-based company that also has business in Michigan and Pennsylvania. Viridian points out the company has $30 million in debt coming due in May and roughly $4 million in cash as of the third quarter in 2020. DeCourcey wrote, "If Cansortium issues $30 million in equity (or a convertible debt with equity conversion at the current price) to cover outstanding debts, the stock would still appear undervalued relative to the peer group." He went on to say that such an offering would value the company with an EBITDA of 9.4x, which is lower than the 13.5x multiple of other operators in the space with a market cap of less than $1 billion and 10.5x companies with a market cap of less than $500 million.
Cannabis packaging company KushCo made a bold move last year as it decided to walk away from small companies who might not be able to pay their bills and focus on the big companies who could. Revenue fell in the short term and then the company was beset with pandemic challenges like delays at ports that held up inventory deliveries. Still, it looks like the company is turning a corner and business is getting stronger. Viridian noted that KushCo has $18 million in debt coming due in April and only $6 million in cash. KushCo addressed the issue and said it would be refinancing the debt.
DeCourcey believes that if KushCo can refinance its debt, it would be valued with an EBITDA of 8.7x, while similar operators are valued at 10.5x. He also thinks that if KushCo is able to uplist to the Nasdaq it would be a significant catalyst. "We note that KushCo could also find itself a takeout candidate for a SPAC with a looming liquidation deadline and interest in non-plant touching operators," he wrote.
Plus Products is known for its gummy products that are big sellers in the California market. The company recently got some star power with an endorsement from John Legend for the CBD products. Viridian points out that Plus has an $18 million convertible unsecured debt maturing at the end of February and $13 million in cash. "If Plus issues equity -- or convertible debt with equity conversion at the current price -- to cover the outstanding debt, the stock would still appear fairly valued given the company's positive fundamentals," DeCourcey wrote. He also thinks SPAC's may be interested in such a branded play as the company trades at a discount to its peers.
Most cannabis companies have been able to renegotiate the terms of their debts with lenders. It seems likely these companies will be successful with this as well. As most cannabis company stocks have risen in valuation over the past six months, it's worth looking at those that haven't. Each of the companies highlighted by Viridian are strong in their own right and led by very capable CEO's. There is certainly some merit to looking at these names as opportunities.