Verano’s Long Winter of Discontent

Missing Out on Growth From Minnesota

Verano’s (OTC: VRNOF) stock is flat for the year and is underperforming most cannabis stocks. The question is why?

I think the company is still suffering from the strategic blunder it made in October of 2022 when it terminated its definitive merger with Goodness Growth (OTC: GDNSF).

I wrote about the termination a week after the news broke calling it a mistake on Verano’s part and that I thought Goodness was cheap and the better investment.

Here is what I wrote:

As for Verano, the termination makes no strategic sense. This was an all-stock transaction with minimal cash requirements. It gave them geographic access to key markets such as Minnesota and New York to complete their national footprint with minimal cash needs. And further, because this was structured as an all-stock deal, the price of the deal fell from $413 to $130 million the day the deal was terminated. I can make no sense of it. Why is a company with a $2.4 billion enterprise valuation and over $300 million in EBITDA breaking a deal for a $130 million transaction?

Finally, while Verano will show growth from New Jersey, once it laps those comparisons next year, Verano could show little or no growth for 2023 or 2024. Investors for obvious reasons value growth. Is it possible that without Goodness, Verano could see negative growth next year if the economy is in a recession? I don’t know, but it is worrisome.

And it is for these reasons, I’m raising the white flag on Verano and admitting my mistake. I’ve sold my shares in the company and have re-deployed that capital into Goodness and other undervalued cannabis stocks where there is growth, and the companies that are making strategic decisions that make sense to me.

Since I posted that, Verano is down about 25% and Goodness is flat to up, this despite Goodness having to dilute shareholders and generally struggling to turn things around when it was left for dead at the altar. (Please note that these stocks can be illiquid and do not trade rationally, so I may be overstating the importance of the market performance since 2022. Also, let me give a big shout-out to CEO Josh Rosen and his team for navigating a very difficult time for Goodness as well.)

Just as I wrote, Verano has started to report negative revenue growth which investors generally do not like, even if you announce share buybacks like the company just did this past week.

Meanwhile, Minnesota is now about nine months from launching adult use and there are only two medical operators in the state: Green Thumb (OTC: GTBIF) and Goodness, and most importantly they are the only two companies that will be grandfathered in to be allowed to be vertically integrated.

Capital is still very tight in cannabis. This makes it harder to fund capital projects like cultivation needed to fully supply the Minnesota market. Combine that with Minnesota licensees only now getting started with the process of being licensed and those companies are only able to choose one segment of the market (cultivation, processing or retail) and you have a recipe for an undersupplied market.

A simple analysis shows that on a per capita basis Minnesota should be a $1 to $2 billion revenue state market. If Goodness captures 10% of the market, that is $100-$200 million in revenue, and with their lean cost structure, the company could generate 40-50% EBITDA margins. That is potentially $40 to $100 million in EBITDA that just Minnesota should kick off for Goodness. Right now, Goodness’ fully diluted market cap is a little over $110 million.

Maybe this is why, when Goodness wanted to secure an excellent store location, they decided to move quickly and issue $700k in equity. And who was the buyer? Their lender, Chicago Atlantic (NASDAQ: REFI), bought the shares, despite the stock being up almost 5 times from the bottom. Let me tell you that when your lender is buying equity in your company, that is one hell of a good sign.

While Goodness is executing an impressive turnaround with explosive growth ahead, Verano remains stuck in the doldrums. But beyond the regret of not getting Minnesota, Verano now has another potentially larger problem, the litigation it is stuck in with Goodness for the termination of the merger agreement. I’m not a lawyer, but I have consulted with a few and what I have learned is that it is quite difficult to terminate definitive merger agreements and just walk away. You need good reasons, like outright fraud. Unfortunately for Verano that does not appear to be the case here.

Goodness Growth believes that Verano may be liable for $860 million in damages, which is a quite large number.

But while it is impossible to know if Goodness will win or what the final amount may be if Goodness wins, the more material problem is that large number will now serve as a big deterrent to any acquirer, bank, lender, investment bank or institutional investor who might want to invest or lend to Verano. With the trial slated to start in 2026, this means that Verano may have limited external financial flexibility until the trial is over.

Verano could do a few different things. The company could move to settle for some much smaller amount like $20-$25 million and regain the financial flexibility the company may need. Another alternative is that Verano could try to finish the acquisition they started and simply buy Goodness. They would get instant growth for 2025 and eliminate a significant litigation overhang.

Through my funds, I own Goodness Growth and through TOKE*, I own a small amount of Verano, because despite my belief that the company made a strategic mistake, the stock is cheap. I would love to own more of Verano, but Verano remains stuck in seemingly perpetual winter. Let’s hope the company course corrects to happier times.

*Reminder that I am the new research consultant to TOKE, which is a cannabis ETF managed by Cambria.