Debra Borchardt
In consumer-related industries, companies often have debt instruments that get graded by companies like Moody’s or Standard & Poors. That hasn’t been the case for cannabis, but Viridian Capital Advisors recently set about the task of measuring various cannabis company credit scores.
The Viridian Credit Tracker said it utilizes 11 different bespoke credit ratios to evaluate four aspects of credit quality:
- Liquidity
- Leverage
- Profitability
- Size
The company said it looks at the extreme quartiles of its ratios to identify credit stresses.
Despite the extreme capital stress in the overall industry right now, Viridian wrote, “Remarkably, the median free cash flow adjusted current ratio for the group is 1.07x, indicating that more than half of the group should be able to get through the next year without significant financing needs.”
Top Five
According to Viridian’s Credit Tracker, the top five rated company, in order, are:
- Green Thumb Industries
- Planet 13 Holdings
- MariMed
- Vext Science
- Trulieve Cannabis
Viridian stated that MariMed (OTC: MRMD) and Vext Science (OTC: VEXTF) pushed previous stalwarts Verano (OTC: VRNOF) and Curaleaf (OTC: CURLF) out of the top 5 to No. 6 and No. 7, respectively.
Company executives were keen to highlight their balance sheet strength in recent earning calls.
For example, GTI CFO Matt Faulkner said, “We ended the first quarter of the strong balance sheet, including cash of $185.4 million and working capital of $170.7 million, compared to $149.2 million a year ago. At quarter end, we had $277.8 million in debt with the majority being the $250 million of senior notes at 7% due in April of 2025.”
Planet 13’s profitability score wasn’t as strong as the others in the top five, yet it was number one for liquidity ranking. The company had a cash balance of $42.7 million and no debt at the end of March 2023.
MariMed continues to impress its peers in the industry as the company keeps getting stronger. “We continue to execute on our plan to improve efficiencies, and we were pleased to report a sequential improvement in our non-GAAP gross margins of 100 basis points and a 58% increase in our adjusted EBITDA. Our balance sheet remains conservatively leveraged and our ability to generate positive cash flows from operations remains a core strength of the company,” CFO Susan Villare said in MariMed’s recent earnings announcement.
Vext Science is quite small when compared to other players on the list, include Trulieve, which hit the list below Vext. During the company’s latest earnings call, Vext CFO Stephan Bankosz noted that the company expects “improvement in cash flow moving forward as the Ohio operations continue to come online and are consolidated and we see the working capital normalize.”
In addition to the Ohio changes, Vext has no significant capital expenditures planned for 2023. Vext ended its latest quarter on March 31 with $3.4 million, which it says is “adequate to execute our business plans.”
Liquidity Issues
Those positive thoughts, however, were tempered by the reality of liquidity challenges, with the lower quartile suggesting that more than a quarter of the companies tracked by Viridian are experiencing significant liquidity issues.
The firm believes that the options for these companies are painful:
- Sell at low valuations
- Issue dilutive equity
- Take on more debt, often with strong equity kickers
“On the leverage front, the median total liabilities to market cap is now 3.28x, and the median debt/market cap (not shown) is about 2.6x,” the credit tracker report noted. “Our analysis has shown that 3.0x is difficult to sustain in a 280E environment, so we are not yet there as a group. However, the upper quartile is over this level at a debt/market cap of 3.43x.”
