Canopy focuses on asset-light strategy with Jetty deal 

Canopy Growth Corp.’s latest acquisition may offer a clue on how the cannabis company plans to make a splash in the U.S. 

 Canopy announced Wednesday it struck an agreement to buy Jetty Extracts, a California-based cannabis extraction and vape producer, in an option deal that would net the firm a 75 per cent stake for US$69 million that would be triggered when the U.S. legalizes cannabis. 

 While Canopy has outlined its U.S. strategy with a series of other optionality deals, including with Wana Brands and Acreage Holdings Inc., it’s looking to continue adding more businesses that meet its brand-focused strategy.

 Canopy’s Chief Executive Officer David Klein told BNN Bloomberg that the company’s plan will be as asset-light as possible. 

“In the U.S., our intent is to be as asset light as we can be,” Klein said. “In Canada, I think about it more from a cash standpoint because I already built out the facilities. We can argue that they shouldn't have been built out … but the fact of the matter is, we have the capability. So, we're not going to dispose of the capabilities and go asset light in Canada unless we're going come out to be cash positive.” 

However, it remains to be seen whether Canopy’s U.S. strategy will be a success. Despite committing billions of dollars to its U.S. strategy, it won’t generate any revenue on its income statement until the U.S. passes a law that legalizes cannabis, or as noted in Canopy’s press release, “earlier at Canopy Growth's election.” And as it stands, it’s unclear whether that triggering event will happen at all this year, or in the near future.

Klein isn’t offering any thoughts on when that will happen, but notes that the U.S. companies it has ties with offer an “underappreciated upside and valuation for Canopy.” 

It’s something that analysts have frequently pointed out in terms of Canada’s cannabis operators’ chances of making it big south of the border. There’s also some concern that Canopy may have overpaid for Jetty, with Stifel Analyst Andrew Carter noting it is paying four times the cannabis vape maker’s enterprise value amid a “difficult industry backdrop.” Jetty generated about US$41 million in sales over the past year, Carter added. 

“Canopy is building a U.S. ecosystem in advance of federal permissibility, but the company is embracing this strategy of options to acquire brands with decreasing room for error with Canopy in a net debt position,” Carter said. 

Klein dismissed those concerns, highlighting that Jetty is already profitable, is one of California’s top 10 cannabis brands, and is a brand that can easily be migrated north to Canada. 

“We think that's the kind of brand that we wanted a portfolio,” he said. 

TOP NEWS OF THE WEEK 

Sundial, Auxly Q1 losses lead Canadian cannabis quarterly results

A pair of big Canadian cannabis players reported first quarter results this past week. Sundial kicked things off with first-quarter revenue of $17.6 million, an increase of about 75 per cent from the same period a year earlier, while reporting an adjusted EBITDA loss of $700,000 that was attributed to central bank interest rate changes and fair value adjustments from its SunStream joint venture. Sundial closed its deal with Alcanna in the quarter, giving it control of 354 liquor and cannabis retail locations across the country. Meanwhile, Auxly Cannabis said its first quarter revenue more than doubled to $22.6 million, but it still booked a $5.6 million EBTIDA loss. On a net basis, Auxly posted a $39.8 million loss after it recorded an impairment of $25.7 million attributed to the closure of two of its production facilities. 

U.S. operator results show ongoing slide in quarterly sales

Meanwhile, south of the border, several major U.S. cannabis operators also reported first quarter results. Cresco said its first quarter sales slipped by two per cent from the prior quarter to US$214 million as wholesale revenue plunged amid a deflationary pricing backdrop. The company booked a US$23.7 million net loss in the quarter, edging slightly lower than the same three-month-period a year earlier. Columbia Care, which is set to be acquired by Cresco later this year, said its first-quarter sales also slipped by about 12 per cent to US$123 million. The company attributed the decline to “a number of macro-economic headwinds”, but was up 43 per cent from a year earlier. Columbia’s adjusted EBITDA more than tripled to US$16.8 million but the company still booked a net loss of US$27.9 million. Planet 13 Holdings, home of the largest cannabis dispensary in Las Vegas, said its first quarter revenue rose eight per cent from a year earlier to US$25.7 million, but fell by 14 per cent. 

U.S. lawmaker believes pro-cannabis legislation could be passed under COMPETES Act

One of the leading lawmakers behind U.S. legalization believes elements of the SAFE Banking Act included in another bill may be the best chance to maintain some positive legislative momentum, and can be passed in a matter of months if not weeks, reports Leafly. Oregon Democratic Congressman Earl Blumenauer said that the COMPETES Act of 2022, an omnibus bill that includes parts of the SAFE Banking Act that would help federally-regulated banks engage with cannabis companies, could be passed into law if the pro-marijuana pieces pass committee review. “There is a strong base of support for keeping [cannabis banking reform] in the bill,” Blumenauer said during a press conference.  

Israeli company exports hemp seeds to U.S. medical market

As Israeli company shipped cannabis seeds to the U.S., a first for the country, according to the Jerusalem Post. BetterSeeds shipped hemp seeds to U.S. farmers in an "experimental and initial" shipment, the country's Ministry of Agriculture said in a statement. Cannabis exports have been allowed in Israel since last August, but only for medical purposes. Prohibition Partners, an industry analysis firm, estimated Israel’s medical cannabis market is valued at around $264 million last year.

ANALYST NOTE

Weighing in on Sundial’s Q1 results

A trio of analysts lowered the price targets on Sundial Growers following the company’s first-quarter results, but at lease one gave some kudos for its ambitious vision in the North American cannabis sector.

BMO Capital Markets Analyst Tamy Chen reduced her 12-month price target on Sundial’s shares to 50 U.S. cents from a prior forecast of 70 U.S. cents, while maintaining a market perform recommendation as the company’s income from its investment arm and production may come in softer than previously anticipated. Sundial’s SunStream joint venture that helps provide capital to cannabis operators in both the U.S. and Canada will be volatile on a quarterly basis, and the company’s remaining $361 million in cash appears to be earmarked for other firms that have invested in like Valens and Village Farms International.

Meanwhile, Canaccord Genuity’s Shaan Mir also has a 50 U.S. cents price target on Sundial (down from 60 U.S. cents) after highlighting the company’s decline in cannabis sales under its in-house brands. Sales of Sundial-produced cannabis fell 31 per cent from the prior quarter to $8.8 million and should remain under pressure as the company pivots away from discounted offerings, Mir said.

Cantor Fitzgerald’s Pablo Zuanic also trimmed his target on Sundial to 48 U.S. cents (from 97 U.S. cents) but maintained his neutral recommendation on its shares. He did note that Sundial’s “jigsaw puzzle” of portfolio companies – ranging from retail, production, investment and liquor – may be coming into place and added that investors may want to keep their eye on this one. Sundial’s management is eager to generate profits and isn’t too concerned about market share gains, and its expanded retail network could be the path it needs to get there. “We think it would be a mistake to dismiss Sundial as ‘too small’ in cannabis, given the management vision and cash balances. We stay tuned,” Zuanic said.

 

CANNABIS SPOT PRICE

$5.14 per gram 

 -- This week's price is down 1.2 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$1,812 per pound at current exchange rates.


WEEKLY BUZZ

US$41 million 

 -- The amount of sales Jetty Extracts made in the past year, according to Stifel Analyst Andrew Carter, citing Headset data. Canopy Growth purchased a pair of call options to acquire the company for at least US$69 million.