Aug 20, 2021
Cannabis Canada Weekly: Hexo eyes California cannabis market for upcoming investment
Shares of HEXO plunge nearly 30% after public offering news
Hexo eyes California cannabis market for upcoming investment: CEO
Hexo Corp. plans to enter the U.S. cannabis market through an investment in a California-based company that leverages the Canadian company's manufacturing prowess, the company's chief executive said Friday.
The company created a special purpose vehicle to invest in the U.S. market while remaining onside with regulatory requirements from the Toronto Stock Exchange and New York Stock Exchange that forbid Canadian cannabis companies from operating in the U.S., which still deems marijuana to be federally illegal, Hexo CEO Sebastien St-Louis said in an interview.
"The structure we're looking at is an option structure by which post- [U.S] legalisation, Hexo would own 80 per cent of all the California assets," St-Louis said. "It's simply time to get into the market and bring the technology we've developed in Canada to the rest of the world and what better place to start than California."
St-Louis' comments come as Hexo's TSX-listed shares fell more than 25 per cent on Friday following an announcement that it raised US$140 million through a public stock offering. The funds are earmarked to help pay for its acquisition of Canadian cannabis operator Redecan Pharm and its U.S. venture.
While St-Louis didn't identify which company Hexo was looking to invest in, he said he will bring the same technology the company uses to manufacture its pre-roll and hash cannabis products to California, rather than investing directly in a U.S. multi-state operator.
"When Hexo becomes their partner and their supplier, we will be able to supply them product below their current cost of goods while still making a very interesting margin for Hexo," he said.
Hexo's U.S. strategy appears to differ from what other Canadian cannabis firms are planning to do in the U.S. once politicians fully legalize marijuana. Earlier this week, Tilray Inc. said it was investing in beleaguered cannabis retailer MedMen Enterprises Inc., while Canopy Growth Corp. and Cronos Group Inc. both have struck option deals to acquire large equity stakes in U.S. multi-state operators.
THIS WEEK'S TOP STORIES
Canadian pot sales hit $318M in June, up 1.7% from prior month: StatsCan
Canadians bought $318.7 million worth of cannabis in June, touching a new monthly record, according to retail sales figures from Statistics Canada. The agency also says Canada's legal recreational pot industry now operates at an annual run rate of about $3.82 billion. Cannabis retail sales rose by 1.7 per cent in June from April, up 58 per cent on an annual basis and an increase of 5.1 per cent pace on a per-day basis. Ontario continued to drive cannabis industry sales with $120.1 million of legal marijuana sold in June, up about eight per cent from the prior month. Alberta, British Columbia and Quebec all reported sales declines in the month.
Tilray makes U.S. cannabis move with MedMen investment
Tilray announced one key plank of its U.S. cannabis strategy after disclosing it joined a group of investors that bought US$165 million worth of U.S. pot retailer MedMen Enterprise's convertible debt. Upon U.S. legalization, Tilray will be able to convert that debt to about 21 per cent of MedMen's equity, and signalled it would be interested in acquiring the entire company when it can do so. Tilray CEO Irwin Simon told BNN Bloomberg that he feels he scooped up an "iconic brand" at a "really good price" and plans to potentially expand the MedMen brand to Canada and to alcohol products. MedMen operates 25 cannabis retail locations with another 21 additional retail licences across the U.S. in six states.
Pot drinks momentum continues with new Cann director appointment, Ayr purchase of Cultivauna for US$20M
Cannabis-infused beverage companies were in the spotlight last week after celebrity-backed Cann said it added actress Rosario Dawson to its board. Cann counts Goop’s Gwyneth Paltrow, Australian model Ruby Rose, actor and songwriter Darren Criss, and former professional basketball player Baron Davis as some of its investors. Dawson is currently in a relationship with U.S. Senator Cory Booker, who is currently aiding Majority Leader Chuck Schumer on drafting a broad-ranging cannabis reform bill. Separately, U.S. multi-state operator Ayr Wellness is buying pot drink maker Cultivauna for US$20 million in a cash-and-stock deal with an additional US$40 million if certain revenue targets are met.
Hexo shares decline after disclosing US$140M public offering
Shares of Hexo plunged on Friday after the company announced it raised US$140 million through a public offering of its shares. The company said it will use the proceeds from its stock sale to help finance its acquisition of Redecan and other U.S.-based ventures. Hexo's underwriters - Alliance Global Partners and Cantor Fitzgerald Canada - both agreed to buy 47.4 million units priced at US$2.95 each that are comprised of one common share of the company and one-half of a warrant that can be exercisable to acquire further equity in Hexo over a five year period at a US$3.45 strike price. Hexo shares closed down more than 25 per cent on Friday following the announcement.
Quarterly Results Wrap: RIV Capital, Auxly Cannabis, TerrAscend
Here's a summary of some of the cannabis industry companies that reported quarterly results this week:
- MediPharm Labs: Second quarter revenue down 63 per cent to $5.1 million, $3.7 million in an adjusted EBITDA loss, compared to a $2.1 million loss a year earlier. (Release)
- Delta 9 Cannabis: Second quarter revenue up 29 per cent to $16.8 million, $1.2 million in adjusted EBITDA, compared to a $50,000 gain a year earlier. (Release)
- RIV Capital: First quarter operating income down 83 per cent to $439,000, $30.4 million in a net loss, compared to a $3.4 million loss a year earlier. (Release)
- Auxly Cannabis: Second quarter revenue up 204 per cent to $20.8 million, $3.3 million in an adjusted EBITDA loss, compared to a $10.5 million loss a year earlier. (Release)
- The Parent Company: Second quarter revenue up sequentially 18.9 per cent to US$54.2 million, US$10.4 million in an adjusted EBITDA loss. (Release) The company also announced it appointed former Clorox executive Troy Datcher as its new CEO, the first Black CEO to run a major U.S. pot company.
- 4Front Ventures: Second quarter revenue up 113 per cent to US$27.1 million, US$7.5 million in adjusted EBITDA, compared to a US$436,000 loss a year earlier. (Release)
- Ayr Wellness: Second quarter revenue up 222 per cent to US$91.3 million, US$27.4 million in adjusted EBITDA, compared to a US$8.4 million gain a year earlier. (Release)
- TerrAscend: Second quarter revenue up 72 per cent to US$58.7 million, US$24.3 million in adjusted EBITDA, compared to a US$8.4 million gain a year earlier. (Release)
- Rubicon Organics: Second quarter revenue up 363 per cent to $4.6 million, $3.4 million in an adjusted EBITDA loss, compared to a $2.5 million loss a year earlier. (Release)
ANALYST NOTE OF THE WEEK - Raymond James on Decibel Cannabis
Raymond James Analysts Rahul Sarugaser and Michael Freeman initiated coverage on Decibel Cannabis Company with a 12-month target price of $1 and an "outperform" rating. Sarugaser and Freeman state that Decibel has quickly emerged as one of Canada's top 10 licensed producers with industry data showing it controls roughly three per cent market share with an emphasis on craft cannabis and premium product offerings under the Qwest and General Admission brands. That's good enough to be the ninth-biggest cannabis producer in Canada. The analysts note that premium craft cannabis is among the fastest-growing segments in the Canadian market, which has been in high demand for M&A-hungry players like Canopy Growth and Organigram in recent months. More importantly, Raymond James notes that Decibel is winning market share "profitably" and counts three consecutive quarters of positive adjusted EBITDA, placing it in a rarefied space in the Canadian marketplace. "Decibel's marriage of ultra-premium priced, microgrow-quality cannabis, strong-selling mid-market offerings, deep roots in cannabis culture (Canada and U.S.), and national-scale production and distribution is what makes this company so notable in our eyes," Sarugaser and Freeman wrote.
For more information on Decibel, click here.
CANNABIS SPOT PRICE: $5.22 per gram -- This week's price is down 1.7 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$1,871 per pound at current exchange rates.
- The number of Americans who have tried cannabis, according to Gallup polling data. That's a record high and up from four per cent
over 50 years ago and 40 per cent in 2015.