Business
Analysis: Cannabis MSOs could borrow nearly $2 billion – if they want to
The nation’s largest marijuana multistate operators collectively could tap into nearly $2 billion worth of debt – should any want to borrow money to expand capacity, make acquisitions or buy back stock.
This finding underscores our previous assertion that the major MSOs are in reasonably good shape to withstand the current tumultuous economic environment – one where rising inflation and interest rates are fanning fears that the economy might be headed toward a recession.
Stock prices, meanwhile, have swooned, making it more difficult for cannabis companies to issue shares to raise money.
The lower stock prices, however, make it more attractive for the MSOs to buy back their own shares if they have available funding from other sources, such as debt financing.
Let’s dig into the numbers.
Strong cash positions
In the case of the big MSOs, their cash positions are strong. And they are expected to be free cash-flow positive in 2023.
Our conservative calculations indicate that the group of 12 companies shown in the chart above have an aggregate of about $1.9 billion of untapped debt capacity.
We wanted to take an extra conservative view of the MSOs’ ability to raise additional funding through debt financing in our analysis here.
We looked at the 12 MSOs with more than $300 million in market capitalization.
We calculated the incremental, or additional, debt capacity of each company based on consensus analyst estimates of EBITDA, tax expenses and capital spending.
We calculated the free cash flow available to pay interest expense on debt from these.
We then took this free cash flow and divided it by a desired interest-coverage ratio to calculate the amount of interest expense that each company could pay.
The interest-coverage ratio determines how easily a company can pay interest on its outstanding debt.
We used two times coverage for this exercise, recognizing that this is conservative for an industry such as cannabis, which is growing and relatively recession-resistant.
We then took this interest expense and divided it by an estimate of a reasonable interest rate for this group of companies.
We used 12% as a conservative number, recognizing that a number of the companies on our list borrowed at less than 10% rates in 2021.
Untapped debt capacity
The resulting figures gave us the total debt that we believe the company’s cash flow would currently justify – in other words, that $1.9 billion of untapped debt capacity.
Finally, from this number, we subtracted each company’s net debt (debt minus cash) to arrive at the additional debt capacity for each company.
The chart above shows the results of this exercise.
Note that the incremental debt for several companies, including Jushi Holdings (CSE: JUSH), 4Front Holdings (CSE: FFNT) and Ascend Wellness (CSE: AAWH) is negative, mainly because these companies have recently had extensive capital spending projects that will come online at the end of 2023 and in 2024.
As these projects come closer to fruition and are incorporated into analyst estimates, we expect the calculated debt capacity of these firms to expand.
On the other side of the spectrum, Planet 13 Holdings (CSE: PLTH), Green Thumb Industries (CSE: GTII), Ayr Wellness (CSE: AYR.A) and Verano Holdings (CSE: VRNO) each appear to have more than $150 million of additional debt capacity.
The chart takes this analysis one step further.
Suppose a company has additional debt capacity based on its cash flow and its stock is trading below intrinsic value.
In that case, it is natural to consider the possibility of a stock buyback.
In addition to incremental debt capacity, the chart shows what percentage of the current market cap of each company could be repurchased using the firm’s additional debt capacity.
Four companies appear to have the ability to buy back more than 10% of their shares: Planet 13, Green Thumb, Ayr and Verano.
Note that, based on these figures, both Ayr and Planet 13 appear to be able to do substantial recapitalization transactions. Investors should note this in their valuation calculations.
In the current unsettled economic environment, however, we don’t expect many of these firms to originate stock-buyback programs.
But at current prices, if you are confident in your cash flows, it certainly has to be tempting.
Source: https://mjbizdaily.com/cannabis-multistate-operators-could-borrow-nearly-2-billion-if-they-want-to/
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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