NAVIGATING THE STORM: VERANO FACES HIGH-STAKES LAWSUIT FROM GOODNESS GROWTH
Adding VRNOF to the SHORT Bias List
We have added Verano to the SHORT bias list as the company faces several significant risks from the potential summary judgment filed by Goodness Growth. Verano has one of the more robust margin profiles of the MSOs, but it is also a model of inefficiency with the third-lowest EBIT margin of the Big 8. The balance sheet is highly leveraged, and with the potential pending summary judgment looming against the company, here are some of the most significant potential risks that we see:
- Financial damages: If Goodness Growth succeeds in its claims, Verano could be ordered to pay substantial damages. This could include compensatory damages for the loss of the expected benefits from the original agreement and additional damages for any bad faith conduct or special damages incurred by Goodness Growth.
- Reputational damage: A high-profile lawsuit can harm Verano's reputation, especially if the court finds that the company acted in bad faith or misconduct. This could lead to losing trust among investors, partners, and customers, potentially impacting future business opportunities.
- Legal costs: Defending against a lawsuit can be expensive, even if Verano ultimately prevails. The company may need to allocate significant resources to legal fees and related expenses, which could impact its financial performance.
- Distraction from core business: Dealing with a lawsuit can be time-consuming and may divert management's attention away from running the company's core business operations. This could lead to reduced efficiency and missed opportunities.
- Uncertainty and investor concerns: The ongoing litigation may create uncertainty around Verano's future financial obligations and potential liabilities. This uncertainty could cause concern among investors and potentially impact the company's stock price or ability to raise capital.
NAVIGATING CHALLENGES AND SEIZING OPPORTUNITIES: A DEEP DIVE INTO GOODNESS GROWTH HOLDINGS' STRATEGIC MOVES AND FUTURE PROSPECTS
We are hosting a summary of a LONG BIAS GDNSF Black Book on Tuesday, April 23rd, on our initial view of Goodness Growth (formally Viero) with several themes that justify optimism about the company's future. In the short term, some events can significantly alter the future of the company:
Call Details:
Tuesday, April, 23rd @ 2PM EST
Cannabis Subscribers, CLICK HERE for event details (includes video and materials link)
Consumables Pro Subscribers CLICK HERE for event details (includes video only)
Strategic Divestitures and Focus on Core Markets
Following the failed Verano Acquisition, the company has been forced to make strategic decisions to divest non-core assets, such as its New York operations, which is expected to streamline its focus and resources on more profitable and promising markets. This refocusing allows Goodness Growth to allocate resources more efficiently, potentially leading to better financial health and operational efficiencies. One of the final steps of the restructuring is securing an agreement with Ace Ventures for the New York divestiture; the company is simplifying its business model and setting up a strategic collaboration with Ace that could yield future profits through a share of net profits agreement. Upon closing, this deal also significantly improves the balance sheet by getting out of an expensive lease.
Operational Improvements and Market Expansion
In 2H23, Goodness Growth has demonstrated significant operational improvements, such as enhanced harvest yields and product quality, mainly through their collaboration with Grown Rogue. These improvements are critical in an industry that values product consistency and quality. Additionally, the anticipated opening of the adult-use cannabis market in Minnesota in 2025 presents a substantial growth opportunity. The company's strong management team, existing infrastructure, and market knowledge position it well to capitalize on this new market segment, potentially significantly increasing its revenue and market share.
Legal and Regulatory Advancements
The company is actively engaged in a legal battle regarding the wrongful termination of a merger agreement with Verano. A favorable outcome from this litigation could lead to substantial damages awarded to Goodness Growth, which would provide a significant financial boost. Moreover, the company's proactive stance on regulatory compliance and its strategic adjustments in response to evolving cannabis laws (as seen with their tax position changes and preparation for adult-use sales in Minnesota) demonstrates its commitment to maintaining a strong compliance posture.
Changes To The Balance Sheet
The company has been actively managing its balance sheet through strategic divestitures and focusing on core markets. On the recent earnings call, management discussed adjustments to their tax position, expecting to file for tax refunds for 2020 through 2023 based on a belief supported by third-party legal opinions that Section 280E does not apply to their operations. This change reflects an income tax receivable of $12.3 million on their balance sheet, with an uncertain tax position liability of $22.3 million, representing a cautious approach to potential IRS challenges. The company indicated ongoing discussions with Chicago Atlantic (also a large GDNSF shareholder through a convert), their secured lender, to secure an extension of their credit agreement. This extension is crucial to meeting covenants and managing liquidity effectively. The extension is expected to be finalized in April and will include ongoing commitments to divest the New York operations promptly.
Oregon's New Cannabis Licensing Law: A small benefit for Established Brands like GRSUF
Oregon's recently enacted HB 4121 is set to reshape the state's cannabis industry by limiting the number of available licenses based on population; for established brands like Grown Rogue, this new law presents a unique opportunity to solidify their market position and plan for long-term success. Under HB 4121, the production and retail licenses will be limited to one per 7,500 residents over 21. In comparison, processor and wholesale licenses will be capped at one per 12,500 residents. This effectively creates an indefinite moratorium on new licenses, preventing the already saturated market from becoming even more crowded. With the threat of new competitors significantly reduced and the prospect of further license reduction, companies can now focus on strategic planning, brand development, and customer retention without the constant fear of market dilution.
Moreover, the moratorium may increase the value of existing licenses. License holders now have the option to sell their licenses if they choose to close their businesses, creating a new asset class within the industry. This could lead to market consolidation, with more prominent, more established brands like Grown Rogue acquiring smaller competitors or expanding their operations by purchasing additional licenses, especially if they see interstate commerce on the horizon. However, while HB 4121 is a crucial step in stabilizing Oregon's cannabis market, there is still work to be done. As Mike Getlin, chair of the Cannabis Industry Association of Oregon, points out, the state has a long way to go to regain its status as a national leader in the industry.
For Grown Rogue and other Oregon-based cannabis companies, the new licensing law represents a significant opportunity to strengthen their market position and plan for a more stable future. By capitalizing on the moratorium's benefits and continuing to innovate and adapt to the evolving industry landscape, Grown Rogue is well-positioned to emerge as a leader in Oregon's cannabis market.
