We didn’t have to wait long for Sundial ($SNDL) to make a move using its’ piggybank. This morning, they announced a ‘strategic investment’ in Indiva ($NDVA), a manufacturer of edibles that by many measures, was heading for a wall.
$NDVA has never caught TheCannalysts attention – at least from an investment perspective. The last 2 sets of financials have included a ‘Going Concern’ note, which, are somewhat prevalent around companies in the legal cannabis sector. The note’s presence on a financial statement boils down to: “they aren’t going to survive without getting more money, and even if they do, who knows?”
Given $NDVA had $400k of cash against current liabilities of $15MM, well, that’s an issue. As is having OPEX 4x greater than gross margin. They’d already scuttled a planned expansion of their extraction into ethanol (they have some distillation capacity in place) due to no cash and little demonstrated ability to increase sales.
Indeed, cash pressures had led them into a supine position….regarding a creditor telling $NDVA what they were going to do with receivables. From $NDVA’s latest financials:
The ‘11%’ above prime for an interest rate is chuckle worthy. $NDVA refers to this arrangement as a ‘payable factoring’ – which is cute. I read it as the creditor is already factoring receivables. With this arrangement, they extend that to directing proceeds towards debt extinguishment. In colloquial terms: a death spiral.
Doing a full Structure on $NDVA would be meaningless. Their only traction is in brands they don’t own (they license Bhang) which crimps margins. Tolling services are also meaningless at $109k. Expanding competition, particularly in the small confection segment, will be challenging to induce sales increases. Yet $SNDL already knew that before doing with this. Why do I say that?
$SNDL’s current CEO is Zach George, sports a surname I know well. I performed some of the asset identification and business valuation during the combination of Suncor and Petro-Canada back when the deal was struck, and was at a Town Hall or two hosted by Rick. In the oilpatch, he was a real legend. Quaint that Suncor’s move is still referred to as a ‘merger’. I guess there’s still politeness paid in that phrase rather than ‘takeout’ (note for example…..the continued use of the word ‘merger’ in recent discourse around Aphria ($APHA)/Tilray ($TLRY)) <I could tell Petro-Canada stories for days….walking into that shop was like walking into the Cretaceous>
Given Zach’s history, it explains much in $SNDL’s pivot from producer to hedge fund. And a quick look at $NDVA’s composition reveals familial connections too.
$NDVA CEO Niel Marotta’s son John is the CEO of Marotta Investments Limited. John’s a director of $NDVA as well as running a truck repair shop with 25 employees. Both Niel and John (via the investment company) hold about 8MM shares in $NDVA each (about 10% in total, another 2% or so in options). $SNDL’s ‘strategic investment’ <chortle> at their price will give them about 19% ownership of $NDVA, and piggybacks hard off of the ‘WSB/little guy’ effect $SNDL’s been no doubt thrilled about (Niel’s previous life was as…you guessed it….a fund manager).
Zach George’s involvement explains that move on Zenabis ($ZENA). That he walked away unscathed and empty-handed is telling. ‘Unscathed’ in that he was kept whole by a ‘white knight’ who decided to effectively bail out $ZENA from its’ own doings (we learned this morning that $ZENA’s white knight was Hexo ($HEXO). Spending overpriced paper for sales…go figure. $ZENA backers are getting about 13% of the combined entity, which shows that even with takeouts, if you’re standing on a mutt, it’s not gonna change into a swan just because someone wants to buy it).
Zach’s empty hands – especially as a LP turned hedge-fund – couldn’t last for long. One needs to make sizzling sounds if they’re going to pretend there’s a BBQ going on.
As it happens, $NDVA – a failing, top heavy manufacturer of other people’s brands and a mess of factoring and leverage – has had life breathed into its’ prospects. At least in the market’s eyes:
Depressingly, I see no fundamental change in any fundamental that can be spoken of. At best, $NDVA’s shown it’s sold $8MM of product in 2020 and generated $300k in gross margin during that time. Its’ flagship ‘brand’ – Bhang – under a JV created in early 2018 was collapsed during their ‘credit event’ in July of 2020. Now, $NDVA simply pays royalties for the privilege of putting out the name, and Bhang’s free to shop themselves around.
$NDVA has recently initiated a JV with BC Craft Supply Co., (a peer of Shelter Brands) to supply biomass for an artisanal line of dope. It’s only recently begun, but I would hope that BC Craft has done a credit check. Sleeving craft is going to add cost, and given the financial state of $NDVA…………if this presents the kind of folks they’ll have to deal with to get market access, I don’t view it as a positive for the prospects of smaller producers.
Indeed, $NDVA touts that the ‘strategic investment’ will allow them to buy automation that’ll bring margin. Sigh.
Originally announced as ‘non-dilutive financing’, a relatively complex deal with Dycar a year ago adds another stressor on $NDVA’s balance sheet. Mentions of Dycar – located in Cranbrook, BC – are relatively scarce. It appears that Dycar provided financing to $NDVA to acquire equipment and molds to produce product on behalf of Dycar. That agreement, detailed in Note 15 of $NDVA’s financials, reveals about $150k in sales thus far, at a 0% margin. Guaranteed repayment terms are set off against anticipated cashflows, and this deal looks like a real mutt for $NDVA. Probably fuelled by the absence of capital available early last year (and desperation), Dycar locked the deal down in guaranteed payments and sales (and the highly likely) retention of the molds <GoBlue can probably chime in about this sort of asset ;)>. As it is, $NDVA cried uncle in the last financials relating to the agreement that they’d made just 5 months earlier, as one (or both) of the parties appear to have grossly underestimated $NDVA’s & Dycar’s ability to actually sell anything. An onerous contract provision is referred to in $NDVA’s financials (from IAS 37, ‘onerous’ ‘is meant to be undertaken at the first indication that the company expects a loss from the contract’:
So. $SNDL’s move into acquisition – and getting 19% of $NDVA – now sees about 45% of $NDVA being owned by 4 stakeholders – $SNDL, the 2 Marotta’s, and another $NDVA director (I think that private placement of last June was the moment that saved $NDVA, and also marked the moment it became in ‘play’). It lays out return to a founder level IPO capital structure, and ensures upside will accrue primarily to the benefit of the folks making the sales pitches.
On balance – and for the legal cannabis sector – I think all of it sucks. It marks a return to using froth in sector interest to to raise cash; it marks a broadening disconnect from fundamental asset valuation (in the short term); it highlights an ostensible (re)entry of hedge funds; and will increase volatility in equity prices.
It’s levering off of the idiocy and greed of the WSB effect (nee gamblers) – which now has the full and complete attention of the money folks, who, will be taking their money from them like picking fruit from a tree.
Informed trading has the prospects of doing well in this environment. With a decent sized book, a Bloomberg terminal, a coder to design some automation around positions each morning, and updating them during the day…..this type of environ is what professional traders live for. Not the shmoes who’ve made some cash and fancy themselves one. I’ve seen many blowhards get taken out during the second run of the CDN sector, and too many other now seeing their zombies come back to life, and believing that they were the ‘smart ones’, just simply that their ‘timing was off’.
No, I mean actual professional traders. They’re gonna light the hicks up like a medicine show rolling through a wild west town.
For the average-joe retail investor, it’s the inverse. It’s a musical-chair game of when the music will stop…with hedge-funds and trade desks controlling the record player. Depending on your view, you might like this current scene. And you already know that fundamentals have little to do with the frenzy that’s going on. It will likely escalate in the near-term. The X-factor in this is those WSB sorts (the gamblers), which, will magnify everything. Taking a guess, the gamblers will get rubbed out faster than most.
Interesting times to be sure, but there’s going to be little rationality until it all shakes out and thousands more bag-holders are created. I also suspect that the Marotta’s and Zach George’s of the world will make out just fine.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in any of the companies mentioned.