David George-Cosh

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TOP NEWS OF THE WEEK

Hexo takes $690 loss in Q2 after incurring steep impairment charge

Hexo booked a massive $690-million loss in its second quarter, while its revenue rose 61 per cent to almost $53 million from a year earlier, according to a company release. Hexo said the losses were mainly due to a $616-million impairment write-down, more than half of which came from goodwill. The company also reported an adjusted EBITDA loss of $5.6 million, just $1 million better than what analysts were expecting, while missing revenue expectations of about $58 million. The company remains as a going concern risk which is dependent on if it’s able to close its debt deal with Tilray Brands or find other sources of financing. Canaccord Genuity Analyst Matt Bottomley said in a note to clients that the company’s sales growth was “modest” and appears that its Redecan and 48North subsidiaries lost market share in the quarter.

Canadian pot sales slip 2.1% in January

Canadians bought $347 million worth of cannabis in January, starting the year on a down note as recreational sales fell by 2.1 per cent on a month-to-month basis, according to Statistics Canada. Retail sales typically decline in January due to a boost in holiday-related spending during December, and cannabis wasn’t the exception for that trend. Interestingly, StatsCan revised downward its December sales figure to $354.8 million from a prior reading of $382.4 million. While StatsCan often revises the prior month’s sales figures, the near-$30 million difference is unusually high compared to prior revisions. Nearly every province reported a sales decline except for Ontario, which reported a 7.6 per cent jump in January to $137 million. On an annualized basis, Canada's legal recreational pot market operates at an annual run rate of about $4.17 billion.

Canopy Growth reportedly fined nearly $500k over excise licence violation

Canopy Growth was fined nearly $500,000 by the Canada Revenue Agency in 2020 after it was found to be growing cannabis on an outdoor farm before obtaining the necessary licences to do so, the National Post reports. The Post said the farm began cultivating cannabis in 2019 to meet significant consumer demand following the advent of legalization a year prior, without obtaining a necessary excise-related licence. In a court document that the Post obtained, Canopy argued that the value of its 2019 cannabis crop was determined to be nil, given that it destroyed all the grown biomass and no product was manufactured from its outdoor production. Both the CRA and Canopy Growth declined to comment on the case, the Post said, but noted that Canopy did confirm it paid the fine in full to avoid further penalties associated with a late payment.

Curaleaf appoints interim CFO, leaving CEO to clarify move

Curaleaf has a new chief financial officer, the company reported in a late Monday press release. The company said that Neil Davidson, who served as CFO for Curaleaf in 2019 and is currently the company’s chief operating officer, will take on the role on an interim basis. The company’s current CFO Rankan Kalia is leaving Curaleaf to “pursue other career opportunities.” Curaleaf CEO Boris Jordan took to Twitter to further clarify the executive moves, tweeting that Kalia was lured back to the tech sector where he’s getting paid “three times” the salary that a typical CEO in the cannabis sector makes. “Simple as that,” he said.

CannTrust exits creditor protection, aims to change name

CannTrust is out of creditor protection and is looking to rename itself as it forges on to a new chapter, the Canadian Press reports. CannTrust, which notoriously was at the focal point of an illicit cannabis scandal in 2019 that led to the ouster of top executives and directors, received an additional $17 million in financing from a group of investors led by Marshall Fields International, a subsidiary of Netherlands-based Kenzoll. That investor group owns a 90 per cent stake in CannTrust, which is split between direct equity ownership and a secured credit facility. As a result, CannTrust has now emerged from court-supervised proceedings under the Companies’ Creditors Arrangement Act.

QUARTERLY RESULTS WRAP

Here's a summary of some of the cannabis industry companies that reported quarterly results this week:

• TerrAscend: Fourth quarter revenue flat at US$49.2 million, US$11.9 million in adjusted EBITDA, compared to a US$9.0 million gain a year earlier.  (Release) 
• Ayr Wellness: Fourth quarter revenue up 133.9 per cent to US$11.8 million, US$26.1 million in adjusted EBITDA, compared to a US$18.6 million gain a year earlier.  (Release) 
• High Tide: First quarter revenue up 88 per cent to $72.2 million, $2.9 million in adjusted EBITDA, compared to a $4.6 million gain a year earlier.  (Release) 
• Body and Mind: Second quarter revenue up 27 per cent to US$8.1 million, US$400,000 in an adjusted EBITDA loss.  (Release) 
• iAnthus: Fourth quarter revenue up 4 per cent to US$47.7 million, US$8.2 million in adjusted EBITDA, compared to a US$5.2 million gain a year earlier.  (Release) 

ANALYST NOTE

ATB Capital Markets on M&A delays

With many Canadian cannabis companies continuously reporting losses, many analysts speculated that the industry would be in the throes of significant consolidation amongst bigger and smaller players alike. However, aside from some high-profile deals such as Canopy Growth snapping up Supreme Cannabis or Hexo tying up with Redecan, that M&A frenzy has turned out to be a bit of a whimper.

ATB Capital Markets Analyst Frederico Gomes notes that trend is likely due to the fact that significant amounts of capital have been injected into the Canadian cannabis industry, reducing the need for further consolidation at this time. Gomes said that over the past six months, about $131 million in debt, $46 million in equity and $30 million of hybrid financing have been deployed in the sector.  

Going forward, with valuations so low and high sector volatility abound, Gomes doesn’t see equity financing raises being popular among investors but that debt should be a key capital inflow. “As LPs struggle to reach profitability, we believe that capital will become scarcer, accelerating attrition (players leaving the industry) and driving consolidation in the sector,” Gomes said. He adds that investors should focus on cannabis companies that have a strong balance sheet, a lean cost structure, and can win market share. He highlights Organigram with a sector perform rating and a $3-per-share target price and High Tide (outperform, $13.25 price target) as two examples of cannabis companies with robust capital positions.

CANNABIS SPOT PRICE

$5.17 per gram

-- This week's price is down 0.4 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$1,845 per pound at current exchange rates.

WEEKLY BUZZ

3.4%

- The annual increase in fees for cannabis licence and permit applications, according to Health Canada.  A Health Canada spokesperson told BNN Bloomberg that the fees are adjusted annually by the percentage change over 12 months for Canadian CPI figures.