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Goodness Growth seeks $860 million from Verano in failed marijuana acquisition

By Kate Robertson, Writer


May 29, 2024


Marijuana multistate operator Goodness Growth is seeking $860.9 million in damages from Verano Holdings Corp., alleging breach of contract after the latter terminated its agreement to acquire Goodness Growth Holdings.

Minneapolis-headquartered Goodness Growth filed an application on May 2 with the Supreme Court of British Columbia requesting an expedited summary trial.


Both Goodness Growth and Chicago-based MSO Verano are incorporated in British Columbia and listed on Canadian stock exchanges.

Goodness Growth alleges that it continues to pay a steep cost for the failed all-stock deal initially valued at roughly $413 million after Verano wrongfully terminated the deal.

“Verano’s repudiation of the Arrangement Agreement constitutes an existential threat to Goodness Growth’s ongoing operation,” according to the filing.

“It deprived the company of the access to capital it needed in circumstances where its looming debt facility deadline made it particularly vulnerable.

“That vulnerability persists and increases with each passing day.”

Claim-counterclaim

Verano declined to comment on the ongoing litigation but filed a counterclaim to Goodness Growth’s claim in October 2022.

In its counterclaim, Verano maintained that its acquisition target breached the companies’ “arrangement agreement” by omitting crucial information in company documents, misleading shareholders and refusing to obtain an updated fairness opinion of the terms of the agreement.

“We believe the decision to terminate this arrangement agreement was in the best interest of Verano and our shareholders,” Verano founder and CEO George Archos said in a statement when the agreement was terminated in 2022.

Verano added that Goodness Growth owed a $14.8 million termination fee plus an additional $3 million in transaction expenses.

Goodness Growth CEO Josh Rosen said in an interview with MJBizDaily that he believes Verano had buyer’s remorse when cannabis stock prices plummeted after the companies announced their plans in February 2022.

The claim alleges that Verano manufactured delays, requested unnecessary documentation and built a case arguing that Goodness Growth didn’t fulfill its end of the agreement.

“We’re pretty comfortable we were wronged,” Rosen said.


Goodness Growth ‘still vulnerable,’ CEO says

Rosen told MJBizDaily that he expects some members of the business and investor community to raise their eyebrows at the large sum Goodness Growth is seeking in damages – more than half the value of the original deal.

Rosen and his team hired a third party to assess the harm the terminated agreement has caused, which was evaluated by looking at factors such as:

  • Debt maturities within six months and more than $15 million in capital commitments related to a New York expansion project (that has since been divested).

  • Workforce reductions.

  • Asset sales.

  • Amended credit agreements.

  • An expensive debt capital raise.

  • Solvency risk that made borrowing even more expensive (one interest rate was as high as 18%), challenging growth opportunities.

Now, the company is “perpetually on the edge of or in default of the loan agreement with Chicago Atlantic, facing additional near-term debt maturities,” according to Goodness Growth’s claim.

But Rosen, who transitioned from Goodness Growth’s interim chief executive to CEO in May, said the company won’t go down without a fight.

“We’re still vulnerable, but we’ve gotten ourselves through the worst part,” Rosen said.

“We feel pretty good about where we sit. We feel like we can let this go to term, if it needs to.”

Verano’s total liabilities exceed $1 billion

Rosen, who is also a managing partner at Los Angeles-based venture capital firm Bengal Capital, said he was surprised that few analysts who cover Verano asked for more information from Goodness Growth about the potentially massive liability.

Verano disclosed the ongoing litigation in its quarterly report for the period ending March 30 and updated shareholders on Goodness Growth’s request for an expedited trial and damages.

“The Company can provide no guarantees or assurances that it will prevail or settle this lawsuit or its counterclaim on favorable terms, if at all, and an adverse outcome could have a material adverse effect on its business, results of operations and financial condition,” Verano said in its filing.

Several analysts contacted by MJBizDaily declined to speak on the record about their coverage of Verano, which trades on the Cboe Canada exchange as VRNO and over-the-counter markets as VRNOF, but noted that Verano’s executive team wouldn’t comment on ongoing litigation.

Verano calculated its total liabilities at more than $1 billion.

The company reported having more than $193 million in cash, minus the $50 million it paid toward its senior credit facility in April.

That means even a settlement well below the $860 million Goodness Growth is seeking would be a blow to Verano, according to Howard Penney, a financial analyst who covers restaurants and cannabis for Connecticut-based research firm Hedgeye.

The lawsuit caught Penney’s attention when he was researching Grown Rogue, an Oregon-headquartered cannabis MSO that partnered with Goodness Growth to help it improve its product quality.

Now, Penney is advising Hedgeye readers to go long on Goodness Growth, which trades on the Canadian Securities Exchange as GDNS and OTC markets as GDNSF, citing similar lawsuits pertaining to acquisitions such as Elon Musk’s attempt to terminate his acquisition of Twitter, now known as X, or, closer to home, MedMen Enterprise’s canceled acquisition of PharmaCann.

“Even if it’s $50 million, they can’t really afford that,” Penney said in an interview with MJBizDaily, adding that rescheduling or other federal reform could boost the industry’s access to capital.

 

Meanwhile, Penney said Goodness Growth is well-positioned for Minnesota’s forthcoming adult-use marijuana market, which is poised to launch in 2025.

Legislation for the new market still needs Gov. Tim Walz’s signature, but the initial framework prioritizes social equity licensees and the three current medical marijuana providers, including Goodness Growth.

“Basically, they’re going to be sharing a $500 million market in 2025,” Penney said.

In the meantime, there could be another filing from Verano, a settlement between Verano and Goodness Growth or the issue could go to trial.

“We’re not banking on a summary trial,” Rosen said.

“It’s really hard to predict the outcome of this.

“In this case, we would obviously prefer a shorter timeline, all things equal. But it’s hard to know whether we end up with a summary trial or not.

“If it is a summary trial, we believe it would happen by the fall of this year.”

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