FOR THE INVESTOR
WHAT'S HAPPENING IN CBD BEAUTY, BUSINESS & INVESTING
FINANCIALNEWSMEDIA.com NEWS COMMENTARY
Major retailers are just beginning to embrace CBD thanks to sizable consumer demand. To date, Neiman Marcus, Sephora, Vitamin Shoppe, Kroger, Barney’s DSW, CVS, and Walgreen’s have all jumped at the opportunity. American Eagle just became the latest retailer to sell CBD, too. In fact, it just struck a deal with Green Growth Brands to sell CBD products in more than 500 stores and online, with sales expected to begin by October 2019. All of that is opening a wide range of opportunity for companies including The Yield Growth Corp. (OTCQB: BOSQF) (CSE: BOSS), HEXO Corporation (NYSE: HEXO) (TSX: HEXO), Cronos Group Inc. (NASDAQ: CRON), Aleafia Health (OTCQX: ALEAF) (TSX-V: ALEF), and The Supreme Cannabis Company Inc. (OTCQX:SPRWF) (TSX:FIRE).
The Yield Growth Corp. (CSE:BOSS)
(OTCQB:BOSQF) The Yield Growth Corp. announced that it has entered into a letter of intent to license the worldwide rights for 8 cannabis product topical formulas to Antler Retail Inc. Antler’s California subsidiary previously acquired licenses for 56 product formulas for the California market from Yield Growth. After developing testing and packaging plans with Yield Growth, Antler now wishes to expand its license for 8 of the products for the territory of the world. The fee of $800K payable to Yield Growth will provide worldwide licensing rights to the following men’s products developed by Yield Growth: hair pomade, beard oil, shaving cream, deodorant and 4 essential oil colognes. Yield Growth anticipates it will generate additional revenues through the license as the LOI contemplates that Yield Growth will provide packaging, marketing, manufacturing and distribution services to Antler for the men’s line. The LOI contemplate that the license fee may be paid in stock but other fees are to be paid in cash on a monthly basis. Antler is a related party to Yield Growth, as Krystal Pineo and Penny Green are both directors and significant shareholders of Yield Growth and Antler. The LOI anticipated that a definitive agreement will be entered into within 3 weeks and closing of the transaction will occur by August 31, 2019. FOR MORE INFORMATION ON BOSS/BOSQF, PLEASE VISIT: https://yieldgrowth.com/
Other cannabis-related developments from around the markets include:
HEXO Corporation (NYSE:HEXO)(TSX:HEXO) has received a medical cannabis installation license. The license, issued by the Greek government, will allow HEXO MED to establish cultivation, processing and manufacturing facilities in the region of Thessaly, Greece. With HEXO Corp’s experience in the industry, HEXO MED is poised to become a leader in the European cannabis landscape. “This is a major step for HEXO as we continue to execute towards becoming a top three global cannabis company,” said Sebastien St-Louis, HEXO Corp CEO and co-founder. “Receiving licensing in Greece will allow us to bring know-how and brands powered by HEXO to the European market. The new facility will also drive value for current and future Fortune 500 partners by giving them access to licensed infrastructure internationally with the vision of capturing first-mover advantage in the burgeoning European cannabis market.”
Cronos Group Inc. (NASDAQ:CRON) just announced it entered into an agreement to acquire an 84,000 square foot GMP compliant fermentation and manufacturing facility in Winnipeg, Canada from Apotex Fermentation Inc. The state-of-the-art facility, which will operate as “Cronos Fermentation”, includes fully equipped laboratories covering microbiology, organic and analytical chemistry, quality control and method development as well as two large scale microbial fermentation production areas with combined production capacity of 102,000L, three downstream processing plants, and bulk product and packaging capabilities. “This acquisition will provide the fermentation and manufacturing capabilities we need to capitalize on the work underway with Ginkgo once the milestones under that partnership are achieved,” said Mike Gorenstein, CEO of Cronos Group. “Together with Ginkgo, we are bringing innovation and the power of biological manufacturing to the cannabis industry, aiming to allow for cannabinoid production at large scale and with greater efficiency than is currently possible with traditional cultivation and extraction. We continue to be very excited about the opportunities ahead.”
Aleafia Health’s (TSX-V:ALEF)(OTCQX:ALEAF) wholly-owned subsidiary, Aleafia Farms Inc., secured a License Amendment under Health Canada’s Cannabis Regulations authorizing cannabis cultivation for the entirety of the Company’s Port Perry Outdoor Grow facility. The License immediately increases the Company’s licensed and operational outdoor cultivation area from 292,000 sq. ft. to over 1.1 million sq. ft. As previously announced on June 10, 2019, Aleafia Farms received approval for cultivation in Zone 1 of the Outdoor Grow facility, and days later completed the planting of Canada’s first legal, large-scale outdoor crop. The License now adds Zones 2, 3 and 4 which encompasses the full 1.1 million sq. ft. cultivation area. The License is effective as of July 12, 2019 and expires on October 13, 2020. The Company expects to commence planting the newly licensed area on July 15, 2019, using approximately 7,000 cannabis plants currently growing in pots in Zone 1. The Outdoor Grow operation will be overseen by Aleafia Health’s proven, experienced cultivation team, which together have led the build-out and operations of seven cannabis cultivation facilities. “The immediate four-fold increase in Aleafia Health’s licensed and operational cultivation area is our most significant milestone to date,” said Aleafia Health Chairman Julian Fantino. “We will continue to lead the way in low-cost production. This exponentially increases our total cultivation footprint while securing and increasing product supply for medical cannabis patients.”
The Supreme Cannabis Company Inc. (TSX:FIRE)(OTQXC:SPRWF) announced the launch of Supreme Heights, an investment platform based in London, UK focused on opportunities in the UK and Europe’s CBD health and wellness space. Supreme Heights intends to make strategic investments in and provide support services to differentiated high-growth health and wellness businesses with focused brands and premium CBD offerings. Supreme Cannabis has launched Supreme Heights as a separate entity that will solely address opportunities in the UK and Europe’s CBD health and wellness market. Supreme Heights will benefit from Supreme Cannabis’ regulatory, product commercialization, supply chain, marketing and capital markets expertise and corporate support services. Supreme Cannabis’ management team has immense experience supporting health and wellness companies operating in Canada and international markets. Supreme Heights will draw on the Company’s experience launching premium brands.
“The rapidly evolving CBD markets in the UK and Europe present compelling investment opportunities given the promising environments for new health and wellness companies to establish differentiated brands and capture meaningful market share. Supreme Heights is positioned to quickly act on attractive opportunities and establish an early mover advantage in the space,” said Navdeep Dhaliwal, CEO of Supreme Cannabis. “Supreme Heights will benefit from our experience launching some of the most premium cannabis brands in Canada and from the strong leadership and the deep industry connections of our UK partners. We look forward to driving value for Supreme Cannabis shareholders through this investment platform.
Source: PALM BEACH, Florida, July 25, 2019 /PRNewswire
DISCLAIMER: FN Media Group LLC (FNM), which owns and operates Financialnewsmedia.com and MarketNewsUpdates.com, is a third- party publisher and news dissemination service provider, which disseminates electronic information through multiple online media channels. FNM is NOT affiliated in any manner with any company mentioned herein. FNM and its affiliated companies are a news dissemination solutions provider and are NOT a registered broker/dealer/analyst/adviser, holds no investment licenses and may NOT sell, offer to sell or offer to buy any security. FNM’s market updates, news alerts and corporate profiles are NOT a solicitation or recommendation to buy, sell or hold securities. The material in this release is intended to be strictly informational and is NEVER to be construed or interpreted as research material. All readers are strongly urged to perform research and due diligence on their own and consult a licensed financial professional before considering any level of investing in stocks. All material included herein is republished content and details which were previously disseminated by the companies mentioned in this release. FNM is not liable for any investment decisions by its readers or subscribers. Investors are cautioned that they may lose all or a portion of their investment when investing in stocks. For current services performed FNM expects to be compensated twenty-five hundred dollars for news coverage of the current press release issued by The Yield Growth Corp. by a non-affiliated third party. FNM HOLDS NO SHARES OF ANY COMPANY NAMED IN THIS RELEASE.
This release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E the Securities Exchange Act of 1934, as amended and such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. “Forward-looking statements” describe future expectations, plans, results, or strategies and are generally preceded by words such as “may”, “future”, “plan” or “planned”, “will” or “should”, “expected,” “anticipates”, “draft”, “eventually” or “projected”. You are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors, and other risks identified in a company’s annual report on Form 10-K or 10-KSB and other filings made by such company with the Securities and Exchange Commission. You should consider these factors in evaluating the forward-looking statements included herein, and not place undue reliance on such statements. The forward-looking statements in this release are made as of the date hereof and FNM undertakes no obligation to update such statements.
Cannabis Stocks Now Appeal To Value Investors
by Alan Brochstein
2019 has been an extremely disappointing year for investors in cannabis stocks, with the overall market, as measured by the New Cannabis Ventures Global Cannabis Stock Index down 20% after a 55% decline in 2018. The market, which has declined over 71% since early 2018, has moved to three-year lows:
The current environment is challenging, as funding has dried up, a situation I discussed a month ago. Many companies won’t make it or will have to raise capital on extremely unfavorable terms that will substantially dilute shareholders, as they aren’t adequately capitalized. Investors are quickly figuring this out, and the broad selling has certainly hurt the companies with high cash-burns and weak balance sheets the most.
With that said, the aggressive selling over the past seven months has impacted companies that appear to be adequately capitalized as well. The cannabis industry has attracted many growth investors over the past few years, but the steep decline across the board has left some companies that I think should appeal to value investors.
In Canada, there are 51 public companies that grow or process cannabis that own just some of the 245 licenses issued to date by Health Canada. Value investors should relish in the overabundance of names, as it makes thorough diligence of the sector quite challenging. In other words, with so many companies, it’s quite possible investors could make mistakes, creating opportunity for investors who are able to find the proverbial baby in the bathwater.
In the September edition of the monthly 420 Investor Newsletter, I shared this concept with my subscribers, focusing on value metric “price to tangible book value” (P/TB) as a way to assess value. The ratio looks at the market cap of the company in relation to the assets less liabilities. Unlike the traditional price to book value, it removes “goodwill” and “intangibles”, as these soft assets are difficult to assess.
Most investors and research analysts in the space have been focused on metrics that traditionally appeal to growth investors, like price to sales or enterprise value to EBITDA, typically on a forward basis. I don’t think P/TB should ever be used exclusively, but it’s a helpful method of assessing companies, especially from the perspective of downside.
At the time of writing (August 11th), I noted that there were 20 Canadian licensed producers with a P/TB ratio of 3 or lower. Value investors seeking a margin of safety like to see the ratio closer to 1. There were actually 4 at 1.1X or less, but, as I explained in the piece, these can often be value traps. Most of the companies in Canada haven’t yet scaled production and don’t yet have stable revenue streams. With operations typically consuming cash, companies that look “cheap” today may not look so tomorrow as their balance sheet erodes. Be careful blindly buying stocks with low P/TB!
Prices are lower today, and the ratio looks better for many of these companies, but there is also a more cautious outlook. With that in mind, I would suggest that investors try to focus on those companies that have scaled, are adequately capitalized and are not consuming substantial cash to fund operations.
At New Cannabis Ventures, we offer readers a resource to identify which companies are generating substantial revenue, and we also include a metric that we call “adjusted operating profit” to assess the profitability. The number is calculated by taking the reported operating profit and removing any one-time accounting impact from changes in the fair value of biological assets, which is required by IFRS accounting standards but that doesn’t necessarily translate into future profitability.
In Canada, two companies that have substantial revenue with strong growth and that are not drowning in operating losses but that trade at reasonably low P/TB are Organigram and Supreme Cannabis, which trade at 2.3X and 1.5X, respectively. Both companies have debt, but it is due in more than a year. While many smaller companies trade at lower valuations by that metric, none have yet scaled. With that said, a few have very substantial cash resources that will permit them to weather the storm and fund their expansions.
In the U.S., most of the very large operators trade at high P/TB ratios. One exception is Columbia Care, which trades at 2.6X. While it appears to be adequately capitalized for now, its operational losses have been large, making it difficult to assess the risk. In Q2, it lost almost $34 million on sales of $19.3 million. The stock has very poor liquidity, as its primary listing is on the NEO exchange, and a move to the CSE, where almost all of its peers trade, could help address that issue. Another MSO that has a relatively low P/TB is Vireo Health, which trades at 2.8X. The company generated revenue of $7.2 million in Q2 with an adjusted operating loss of $3.1 million, ending the quarter with cash of $30.3 million.
Looking beyond multi-state cannabis operators, Elixinol Global, which has substantial cash but a recent outflow of capital to fund its operations in contrast to its history as well as in comparison to peers, trades at 1.6X tangible book value. An unexpected CEO change, a slowdown in growth and, more recently, a quality control issue have all pushed the stock back to multi-year lows. Liberty Health Sciences, which trades at 2.1X tangible book value, operates solely in Florida and will be reporting financials next week. Hopefully the operating loss has improved as its revenue has increased with additional store openings and the ability to sell flower, a change earlier this year.
While the capital markets aren’t entirely closed to cannabis companies, the ability to raise equity at reasonable prices has greatly diminished. Investors have responded by sending prices to multi-year lows. The broad sell-off has hit all stocks, but some companies have better balance sheets and operating models than others. Using a value investor metric, price to tangible book value, can help identify potential opportunities, but I caution readers to relying solely on this metric. Instead, investors should favor the companies with low valuations for strength of balance sheet and avoid companies with high operating losses, as they will be swimming upstream as the tangible book value erodes.
Disclaimer: I mentioned Liberty Health Sciences, Organigram, Supreme Cannabis and Vireo Health, which are clients of mine at New Cannabis Ventures, where we provide investor dashboards on their behalf. We disclose all public company clients here. I do not own any stocks mentioned in this article, though I may include them in one or more model portfolios at 420 Investor.
SAY HELLO TO THE NEWEST CBD STOCK
by Sean Williams
Oct 4, 2019 at 7:51AM
There are some surprising names that are operating in the CBD space, including the newest entrant, International Flavors & Fragrances (NYSE:IFF). This more than $12 billion large-cap company is best known for providing flavor compounds to the food and beverage industry and scents to the fragrance, household products, and beauty-care industries. Now, it’ll also be known as a CBD stock.
Earlier this week, International Flavors & Fragrances (IFF) and Neptune Wellness entered into a strategic partnership to co-develop hemp-derived CBD products in the United States. Between International Flavors & Fragrances’ formulation expertise and Neptune’s support of consumer packaged-goods companies, this looks like a collaboration that should be beneficial to both parties. Just keep in mind that IFF is generating more than $5 billion in sales per year, so the needle is going to move far less for it than Neptune when all is said and done.
International Flavors & Fragrances isn’t alone when it comes to being an unexpected CBD entrant. A number of retailers, including footwear and accessories retailer Designer Brands, teen retailers Abercrombie & Fitch and American Eagle Outfitters, upscale retailer Neiman Marcus, and numerous grocers, such as Kroger, have all stepped into the CBD arena to some extent.
While it’s important for investors to recognize that there are still kinks to work out in the CBD space, such as with additives to food and beverages, this is nonetheless a high-growth opportunity that non-traditional cannabis players would be wise to take advantage of.
Source: THE MOTLEY FOOL
OPINION: YOUR INVESTING GUIDE TO CANNABIS 2.0
Published: Sept 26, 2019 8:54 a.m. ET
by Michael Brush
The most popular cannabis stocks rallied as much as 20% from washed-out levels that one analyst identified as “capitulation lows” on Aug. 28.
Then the bad news about lung ailments related to vapingturned worse and grabbed more headlines. Cannabis vapes are often implicated. So the ETFMG Alternative Harvest exchange traded fund MJ, -0.21% has fallen even below late-August lows, compared with 4% gains for the S&P 500 SPX, +0.02% since then.
So much for “capitulation lows.”
But the renewed weakness in volatile cannabis stocks means they look attractive again for at least two reasons.
First, very bullish developments for cannabis companies are about to play out in Canada. Dubbed cannabis 2.0, edibles, vapes and drinks will be legal, probably by the end of the year. Companies will start announcing new lines of products as early as October. Canada also is significantly increasing the number of cannabis stores.
Canada is the market that matters for investors, since publicly traded cannabis companies steer clear of the U.S. due to legal restrictions. Expect enthusiasm for cannabis stocks to build between now and early next year, when products hit the shelves in Canada in a big way.
Second, the scary vape news is a positive for companies that want to be big players in cannabis vapes, since consumers will see them as trusted, reliable suppliers. They’re more likely to produce safer vapes, compared with unregulated manufacturers that cut corners. Dodgy additives are probably responsible for the health problems among vapers. As people understand this, the vape cloud over cannabis stocks will dissipate.
Which cannabis companies will get the most lift from cannabis 2.0? Your best bet: Those that have a shot at being the Coca-Cola or Pepsi of cannabis. Branded edibles, vape and drinks command higher profit margins than cannabis bud, a commodity.
“You are going to have a few large brands coming out of this that everyone loves,” says Korey Bauer, portfolio manager of the Cannabis Growth mutual fund CANNX, -0.45%. Just like in the beer and spirits market, there will also be craft and specialty brands, says Motley Fool investment analyst Emily Flippen. “We are still in the early days of what will be a very big industry. Strong brands will define success.”
Cannabis companies with the best shot at developing brands are those partnering with companies that already know about brand development from experience. Here’s a roundup of the top contenders and their key partners, plus some “picks and shovels” companies.
Canopy Growth CGC, +0.24% : The “king” of vapes, drinks and edibles
Key partner: Constellation Brands STZ, +1.42%
Canopy plans a big push into vapes and cannabis drinks with its partner Constellation Brands, which distributes Corona. Canopy says its drinks will offer better dose control and bioavailability. Expect new cannabidiol (CBD) products, too.
Canopy has been developing products for years, but it hasn’t shared many details. That will start to change in October. “We look forward to showing what we’ve been working on,” says interim CEO Mark Zekulin. We may see promotions by Snoop Dogg and Seth Rogen, Canopy partners.
Canopy Growth recently booted out co-CEO Bruce Linton. Bauer thinks Canopy will bring in a CEO with a background in consumer products or pharmaceuticals to help develop branded drinks, edibles and vapes. “I see them as the king of the space,” says Bauer.
Flippen at Motley Fool thinks it’s better to get exposure to Canopy by owning shares in Constellation, which has a 38% stake in Canopy.
Hexo HEXO, +0.24% : Vaginal sprays, THC drinks, and lots of Ph.D.s
Key partner: Moslon Coors Brewing TAP, +1.96%
Hexo isn’t joking around about developing cannabis drinks, edibles and vapes. It has more than 25 chemists and food scientists with Ph.D.s working on it. Hexo plans to ramp that up to 100.
Their task? Develop “quick on and quick off” cannabis products to “enhance experiences” ranging from sports and weight control to sleep and sex.
Hexo offers a cannabis-based “intimate oil” called Fleur de Lune for women meant to be applied to the genital area. It sells a sublingual cannabis peppermint oil spray called Elixir, and a powder to add to drinks or sprinkle on salads called Decarb, which stands for decarboxylated, or dried and activated cannabis powder. It hopes to roll out a sparkling water that acts as a dieting aid by curbing the appetite without making users high.
Hexo wants to dominate the cannabis drink market through a joint venture with Molson Coors called Truss. “The Truss products are phenomenal. They taste great. They work super fast,” says Hexo CEO and co-founder Sebastien St-Louis. ”We think those are going to be a home run.”
He projects that five years from now, low-margin cannabis flower sales will produce 35% of Hexo revenue, down from 84% now. The rest will come from more-profitable cannabis drinks, edibles, vapes, sprays and other derivative products.
Cronos Group CRON, -1.88% : Vapes and hemp-based skin care
Key partner: Altria MO, +0.20%
With a $2.4 billion investment in hand from cigarette maker Altria, Cronos should be a strong contender in vapes. But it’s also getting into a broad array of other consumer products.
Cronos recently bought a company which sells hemp-based skincare and cosmetics products under the Lord Jones brand. They’re sold through Sephora, SoulCycle and other venues. “The beauty area will be a huge segment for a lot of these companies,” says Bauer.
In the second quarter, Cronos hired a chief innovation officer, Todd Abraham, to lead the effort to develop edibles. His background is in food science and product development at Procter & Gamble, Mondelez and Pillsbury.
Cronos already has brands. It sells specialized strains under names like High Expectations for “people who don’t take life too seriously,” and Spinach, a “farm to bowl” variety for “people who are sick of hearing about kale.”
OrganiGram OGI, -2.10% : Fast-acting nano-based cannabis chocolates and drinks
Key partners: Hyasynth Biologicals, PAX Era
Organigram has a “nano” technology that breaks down cannabis for fast-acting chocolate edibles and powders for drink mixes. These products take effect within 10 to 15 minutes, compared to much longer for the typical edible. The company has teamed up with PAX Era, which sells a pen and pod vape. Organigram plans to launch vapes, chocolates, and powder products in early 2020. It’s shopping for a partner in infused beverages.
Organigram has teamed up with Hyasynth Biologicals which says it can produce the active ingredients in cannabis using genetically modified yeast, for a fraction of the cost of growing plants. “There are no guarantees it will work out, but we really like that,” says Bauer.
Aurora Cannabis ACB, +0.11% : Pain relief in martial arts
Key partners: Ultimate Fighting Championship and Pax Labs
Another big cannabis flower provider, Aurora is branching out into vapes and CBD-based pain relief. The company has a partnership with San Francisco-based PAX Labs for vapes and is running studies with a mixed martial arts entertainment company UFC to test whether CBD can treat pain and inflammation.
Microcap speculation is risky. But if you venture down into the land of companies with a stock-market value of $500 million or less, consider these three names:
Auxly Cannabis CBWTF, -1.54% could be a winner given its portfolio of investments in cannabis companies that are developing consumer brands, says Motley Fool’s Flippen.
Consider “picks and shovels” companies with labs that extract active ingredients from cannabis for consumer products. Tim Seymour of Seymour Asset Management, which runs the actively managed Amplify Seymour Cannabis CNBS, -0.68% exchange-traded fund, likes Medipharm Labs MEDIF, +0.86%. Bauer at the Cannabis Growth fund likes Valens Groworks VGWCF, -3.34%.
“These are like refineries in the oil market,” he says.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks.
AURORA CANNABIS: ARE ITS Q4 RESULTS GOOD OR BAD NEWS?
Sushree Mohanty, | Market Realist | Sept. 12, 2019
Aurora Cannabis (ACB) is a prominent player in the cannabis industry. After Canopy Growth reported disastrous results last month and took a piece out of the cannabis sector, investors waited for Aurora Cannabis’s earnings. The company reported its fourth-quarter results on Wednesday after the market closed. Did the company impress investors?
Did Aurora Cannabis deliver as promised?
Aurora Cannabis generated a net revenue increase of 52% to 98.9 million Canadian dollars YoY (year-over-year) in the fourth quarter. The company missed its revenue guidance, which was 100 million–107 million Canadian dollars. The company also missed analysts’ estimate of 108.2 million Canadian dollars.
Aurora Cannabis didn’t deliver most of its promises when it increased the guidance. However, the results weren’t completely bad news.
Notably, the company’s net cannabis revenues were in line with the guidance. The revenues rose 61% sequentially to 94.6 million Canadian dollars. The company expected growth in all of its business segments. Canadian consumer cannabis revenues rose 52% to 44.9 Canadian dollars. Medical cannabis revenues also rose 10% to 29.7 million Canadian dollars. The company’s wholesale revenues were around 20.1 million Canadian dollars.
Aurora Cannabis expected an increase in the cash cost to produce per gram and gross margin. The gross margin on cannabis net revenues rose 3% to 58% sequentially. However, the cash cost to produce per gram fell 20% sequentially to 1.14 Canadian dollars per gram.
What drove the revenues and gross margin?
There was growth in all of the business segments in Aurora Cannabis’s fourth-quarter results. Notably, higher production capacity and supply from Aurora Sky and Aurora River drove the revenues. A decline in the cash cost to produce per gram drove the gross margin. A higher gross margin on bulk sales also drove the gross margin. The cannabis produced in the fourth quarter rose to 29,034 kilograms compared to 15,590 kilograms. Higher production capacity by the Aurora Sky, Aurora River, and Ridge facilities contributed to the increased production.
Did Aurora Cannabis’s profitability increase?
Aurora Cannabis expected to report a positive EBITDA. However, the company reported a negative EBITDA of 11.7 million Canadian dollars. The EBITDA was lower than analysts’ estimate of 19.5 million Canadian dollars and the EBITDA during the same period last year.
We know why a positive EBITDA is important for a company. Most of the cannabis players reported a negative EBITDA in their recent quarter, which implies that their operational costs are higher. The Canadian consumer channel continues to pose a challenge for Aurora Cannabis. The company is working with its regulatory and channel partners to streamline distribution to improve profitability.
Tilray might report a negative EBITDA of $17.5 million in the third quarter, which is lower than its EBITDA in the third quarter of 2018. The company might report a loss of $0.31 per share in the third quarter compared to a loss of $0.20 per share in the third quarter of 2018.
For fiscal 2019, Aurora Cannabis’s revenues rose 349% to 247.9 million Canadian dollars. The gross margin also increased to 55% compared to 65% in 2018.
Talking about the results and outlook, Aurora Cannabis’s CFO, Glen Ibbott, said, “We continue to see strong growth in cannabis revenues in both medical and consumer categories. Our cultivation execution continues to drive production costs lower and improve gross margins. Aurora’s diversified product portfolio remains in demand with patients and consumers alike.”
Aurora Cannabis’s stock performance
Aurora Cannabis has gained 18%, while Aphria and Canopy Growth have gained 10.2% and 16.2% in September. The company closed 3.3% higher yesterday. However, Aurora Cannabis is trading 8.1% down in pre-market trading today.
The Horizons Marijuana Life Sciences ETF (HMMJ) has gained 6.7% in September. HMMJ tracks the North American cannabis industry. Tilray fell in August after its results. However, the company has increased 20% in September.
What’s the next step?
All of the cannabis companies are gearing up for Cannabis 2.0—the second phase of cannabis legalization in Canada. Cannabis 2.0 will legalize edibles, cannabis-infused beverages, extracts, and various other products. To learn more, read Cannabis 2.0 Legalization: Canada Is Ready.
Aurora Cannabis’s management said, “With the Canadian launch of derivative products in the coming months, we have made the necessary investments to ensure readiness and focus on a variety of value-added products. We are very excited to supply an expanded consumer market with premium cannabis and new product forms.”
Along with Canopy Growth, Tilray, Cronos Group, and other Canadian cannabis companies, Aurora Cannabis plans to expand its edibles business after legalization.
Aurora Cannabis plans to have a strong product lineup ready to launch in December. The company doesn’t expect increased revenues from the edibles business. However, the company is optimistic that the adjusted EBITDA could improve in the future due to higher revenue growth and an improvement in the gross margin. The company also plans to advance its hemp business in the US with the passing of the US Farm Act.
We know how important regulations are for the cannabis industry. I think cannabis players could benefit from federal marijuana legalization. Regulation violations hit the industry hard in the last few months. As a result, presidential candidates are pushing for legalization. Aurora Cannabis mentioned that it’s taking steps to ensure that its expansion in the US market meets state and federal laws. To learn more, read Cannabis: While the US Waits, the World Opens Up.
So far, September has been good for cannabis companies. Markets and analysts were optimistic about Aurora Cannabis’s results. Will the company’s results take a toll on the sector? The company will hold its earnings call today when the market opens.
We’ll provide an in-depth review of Aurora Cannabis’s fourth-quarter results after its earnings call.
DO YOUR RESEARCH BEFORE INVESTING IN CANNABIS COMPANIES
APHRIA’S $70 MILLION CASH WINDFALL IS A PRODUCT OF ITS STILL-UNEXPLAINED PAST
Published: Aug 14, 2019 12:07 p.m. ET
by Max A. Cherney
Aphria says it has no plans to release line-by-line rebuttal of short seller report
A look at cannabis producer Aphria Inc.’s stock since it released its annual report suggests something of a turnaround.
After a surprise profit, Aphria’s APHA, -6.86% APHA, -6.56% U.S.-traded shares rallied 40% in a single day, adding over half a billion in market value to the name. It has since retreated, shedding $200 million in just over a week’s worth of trading.
Aphria appears as if it’s running as it should. The way the freshly installed chief executive tells it, one reason for the company’s success is that its brands are resonating with customers: high potency for a low price gets marijuana into a lot of hands.
“It comes back to being a low-cost producer — from a grow, to a production standpoint,” CEO Irwin Simon told MarketWatch last week. Simon until last year ran Hain Celestial Group Inc. HAIN, -4.49%, a food-oriented consumer packaged goods company which he founded in the 1990s. “You can’t really market your brands here, so how do you get consumers to try them? I want to get the brand in a lot of consumers’ hands.”
Yet Aphria has an ugly history that it has not entirely dispensed with — and will not vanish until October at the earliest. Its C$89 million ($70 million) windfall was a partial result of deal-making designed to enrich insiders at the expense of shareholders on both sides of the border. The new CEO Simon has also asked investors to accept a wildly optimistic projection for Aphria’s ability to sell cannabis. And he has asked investors to take in good faith an adjusted financial figure in lieu of profits that resembles his own history of using adjusted numbers to cut management bonus checks and present results that don’t track with what U.S. regulators demand.
In December, short sellers Hindenburg Research and Quintessential Capital Management made the case that Aphria executives had used a complex set of financial maneuvers to enrich insiders and associates by overpaying for assets held by friendly parties, including a stake in a little-known shell company. Former CEO Vic Neufeld and Co-Founder Cole Cacciavillani stepped down and the company promised an internal investigation by an independent committee and a point-by-point rebuttal of the accusations.
Aphria’s investigation is complete, but the public has not yet seen a rebuttal.
Despite dozens of media reports of the company’s promise, an Aphria spokeswoman denied that the company had promised investors that it would issue a line-by-line rebuttal to the short seller claims. Ex-CEO Neufeld made the promise of a rebuttal and not the company, she said.
As shares were slammed in the wake of the short sellers’ report, a U.S. company that was little more than an idea on a napkin a year ago launched a takeover bid for Aphria. Now known as Green Growth Brands GGBXF, -2.68% GGB, +0.00%that company’s failed bid for Aphria battered the stock price in both directions. Green Growth listed on the Canadian Securities Exchange, buying into the shell company Aphria already owned, which has proven lucrative for Aphria, though it’s more difficult to figure out how it benefits shareholders.
In April, Aphria executives said that in conjunction with terminating the Green Growth takeover, Aphria would receive C$89 million ($70 million) for its shares through an investment vehicle that Aphria has a stake in, a stake that got more valuable after Green Growth made its takeover bid for Aphria. Aphria disclosed receiving the first C$50 million in April and agreed to take C$39 million due in the fall.
But it was hard to tell exactly how that payment contributed because Aphria — like several other Canadian companies and U.S. businesses traded over-the-counter — did not include a full set of quarterly financial tables with its year-end results released earlier this month. The company told MarketWatch that it did not use the cash to juice its fourth-quarter profits, but rather added the payment to the balance sheet and excluded it from the income statement altogether.
Aphria stock is cross-listed on the New York Stock Exchange, which should lead to greater disclosure than over-the-counter peers. One of the reasons for Aphria’s American listing is the obvious hope it can attract the valuable dollars of U.S. retail investors, but also snag the nearly-impossible-to-attract institutional money that has largely stayed away from the cannabis industry.
Tilray Inc. TLRY, -13.26% avoided similar issues for American investors by listing on the Nasdaq, reporting with U.S. accounting standards and accepting Securities and Exchange Commission oversight. Canopy Growth Corp CGC, -7.14%WEED, -7.08% the world’s largest pot company backed by Constellation Brands Inc. STZ, -1.81% seems to understand the importance of bowing to the will of American investors too. In its recent earnings call, former Constellation executive and now Chief Financial Officer Mike Lee, said it would soon report in U.S. generally accepted accounting principles.
Aphria could do the same thing.
The hardest thing to understand about Aphria’s results wasn’t buried in an arcane footnote to the financial statements or obfuscated by holding companies and attorney jargon. It was that executives boasted over the course of the coming fiscal year that the company would collect as much as C$700 million in revenue, half of which would be from cannabis sales.
To accomplish the task may require more than 150% revenue growth from recreational cannabis for four quarters in a row. It’s hard to understand exactly how Aphria plans to do that. Simon acknowledged that the company’s fattest margin producer, top-shelf pot brand Broken Coast, is at capacity, and to add to it would require at least two years of work, according to its regulatory filings.
In the fourth quarter, the company disclosed that it sold C$28.6 million of pot, with about C$18.5 million stemming from adult recreational sales in Canada, or about C$74 million in annualized sales. In the prior quarter, it sold C$7.19 million worth of recreational pot and just over C$10 million in medical sales.
To hit its target Aphria will have to grow recreational revenue by a multiple of four, assuming medical revenue stays relatively flat, and there is little to suggest it will be able to expand quickly enough to make that happen. Macgregor, the Aphria spokeswoman, says that Aphria‘s forecast is tied to the company’s expectations of when Health Canada will license its Aphria Diamond facility’s further expansion plans and its other already licensed expanded facilities.
If Aphria decides to try to buy additional capacity, that would likely be a problem. Though CEO Simon touted the company’s war chest, it could be competing in the acquisition market against the likes of deep-pocketed Altria Group Inc.MO, -1.43% -backed Cronos Group Inc. CRON, -5.01% , CRON, -4.68% Tilray and its IPO war chest, and Canopy Growth, with its $4 billion investment from Corona beer distributor Constellation Brands STZ, -1.81%. It’s hard to see where Aphria could buy more revenue, even from a problematic set of greenhouses that CannTrust Holdings Inc. CTST, -4.26% TRST, -3.72% owns.
While working toward that revenue goal, Aphria could look to coast on its profitable fourth quarter, which some declared the first big pot company since recreational weed sales began in Canada. As Aphria says, its profits aren’t the result of the C$50 million from Green Growth — but the bottom line is obfuscated by a series of adjustments: C$40 million in “nonoperating” gains from changes in value of its convertible debt, foreign exchange and other items.
Aphria also used this carefully selected financial information packaged into familiar jargon — earnings before taxes, interest, depreciation and amortization — to maintain the appearance of profitability. Ebitda is already an adjusted number, so the term “adjusted Ebitda” is an adjustment of an adjusted number. Welcome to pot stocks, enjoy the adjusted Ebitda.
CEO Simon himself is no stranger to inventing new ways to describe profits. While running Hain Celestial, Simon asked investors to monitor “adjusted net income,” removing items that appeared central to his strategy of rolling up niche organic-food businesses. The tactic appears to have obfuscated the company’s profits and issues surrounding the company’s distributor discounts, which came to a head several years ago, forced Hain to delay its financial results (Ultimately the company concluded there was no wrongdoing and the resulting adjustment had no “material” impact on its finances). After an activist investor insisted on board changes, Simon departed the company more than a year later.
Regardless of Simon’s past creative definitions of profit, weed companies such as Aphria have taken to using it as a substitute for standard figures and are expanding its definition to include accounting that goes well beyond what the acronym typically includes. And because it’s not an accounting principle recognized on either side of the border, cannabis companies are free to define it how they please.
Simon says: let there be profit. Maybe so. Until there isn’t.