David George-Cosh

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U.S. House votes to pass MORE Act despite uncertainty of legalization bill in Senate

The U.S. House of Representatives voted Friday to pass the Marijuana Opportunity Reinvestment and Expungement (MORE) Act for the second time, a 500-page bill that would de-schedule cannabis as a controlled substance, expunge criminal records for people impacted by marijuana-related arrests and introduce new excise taxes that will help fund social justice initiatives. The bill will now head to the Senate for a vote, which is not expected to happen given Senate Majority Leader Chuck Schumer is expected to introduce his own federal legalization bill later this month. Still, the lead-up to the vote fostered renewed interest in the cannabis sector, with trading volumes in U.S. and Canadian companies jumping. However, those stock moves mirrored similar “buy the rumour, sell the news” activity seen in the cannabis space a year ago when pot companies rallied ahead of other legalization bills said to be coming up for a vote. Canopy Growth CEO David Klein appeared on BNN Bloomberg earlier this week and said if the MORE Act is unlikely to be made into law, there’s broader momentum in the U.S. market with incremental reforms, adding he’s confident legalization will happen in the near-term. Meanwhile, Michael Auerbach, founder and CIO of Subversive Capital and an early investor in Tilray, told BNN Bloomberg that “it’s tough to get anything done in Washington” but thinks Schumer’s bill will be comprehensive enough to get support in both chambers of Congress and be signed into law by the Biden Administration.

Sundial Growers closes Alcanna deal, Nova to sell 21 Ontario stores

After several delays, Sundial Growers closed its deal to acquire liquor and cannabis retailer Alcanna for about $320 million in a cash-and-stock deal, the company said on Thursday. With the deal closed, Sundial is now the largest private-sector retailer of cannabis and alcohol in North America, operating over 180 pot stores and 171 liquor shops. It will also own a 63 per cent stake in Nova Cannabis, the operator of the Value Buds retailer and which also sold off 21 of its Ontario stores for $11 million to Spirit Leaf Ontario to abide by provincial rules restricting licensed producers from owning more than 25 per cent of a cannabis retailer. The Alcohol and Gaming Commission of Ontario confirmed that the sale to Spirit Leaf Ontario abided by the regulations and a spokesperson confirmed the agency approved the deal. ATB Capital Markets expects Sundial to remain one of the cannabis industry’s biggest consolidators in the retail space and expects the $25 million in cash flow it gets from its alcohol business to help support any weakness in its cannabis businesses.

Canopy Growth announces new C-level appointments, crafts new strategic advisory team

Canopy Growth announced some new appointments to its C-suite on Thursday, removing the interim tag from Judy Hong’s role of chief financial officer, while naming former George Weston executive Jonathan Di Tosto as the company’s chief operating officer. The company also announced plans to create four strategic roles within senior leadership comprised of former Constellation Brands executives. RBC Capital Markets Analyst Douglas Miehm said in a note the strategic roles will support the advancement of Canopy's U.S. plans and focus on commercial sales, marketing, operations, and other areas. Canopy’s former interim COO Andrew MacCorquodale will also transition to a strategic advisory role, Miehm added.

RIV Capital to buy New York’s Etain for US$247M

RIV Capital (the former Canopy Rivers) has finally decided on its U.S. strategy, announcing Wednesday that it will acquire New York-based retailer and producer Etain for US$247 million in a mix of cash and stock. Etain, one of the few U.S. cannabis businesses that are solely female-owned and operated, operates four dispensaries across New York state in addition to a cultivation facility in Chestertown, N.Y. In addition to the acquisition, RIV Capital announced that former Scotts Miracle-Gro executive Mark Sims will be the company’s new CEO, replacing Narbé Alexandrian who will step down and pursue other opportunities. A subsidiary of Scotts Miracle-Gro will help finance the deal with a US$25 million convertible debt note and an additional US$40 million to help close the deal. Stifel Analyst Andrew Carter said in a note the price tag for Etain is “difficult to justify” given how much capital will be needed to compete in the New York cannabis market. “We believe Scotts Miracle-Gro is investing in a U.S. state cannabis license at peak value with significantly better potential returns, in our view, from other uses of capital including furthering the hydroponics leadership position amid depressed sector valuations and outsized pressure on subscale operators,” Carter said, who maintains a buy rating for Scotts Miracle-Gro.

High Tide buys four cannabis stores to add to national store count

High Tide continues to add cannabis retail stores under its portfolio over the past week. On Friday, the company announced it acquired two Alberta retailers under the Boreal Cannabis Company banner for $2.2 million. It’s part of the retailer’s strategy of expanding its retail footprint through organic growth and accretive acquisitions. The two stores that High Tide purchased generated annualized revenue of $3.9 million and $600,000 in adjusted EBITDA in the three months ended Jan. 31, the company said. Earlier in the week, High Tide announced that it acquired two Bud Heaven stores located in Ontario’s cottage country.

QUARTERLY RESULTS WRAP

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

• MediPharm Labs: Fourth quarter revenue down 5.0 per cent to $5.7 million, $6.6 million in an adjusted EBITDA loss, compared to a $10.6 million loss a year earlier.  (Release) 
• Leafly: Fourth quarter revenue up 30 per cent to US$12.1 million, US$4.1 million in an adjusted EBITDA loss, compared to a US$0.7 million loss a year earlier.  (Release) 
• The Parent Company: Fourth quarter revenue of US$39.6 million, US$27.5 million in an adjusted EBITDA loss, compared to a US$7.9 million loss a year earlier.  (Release) 
• Schwazze: Fourth quarter revenue up 234 per cent to US$26.5 million, US$7.5 million in adjusted EBITDA, compared to a US$3.4 million loss a year earlier.  (Release) 
• Auxly Cannabis Group: Fourth quarter revenue up 60.7 per cent to $29.3 million, $6.0 million in an adjusted EBITDA loss, compared to a $4.6 million loss a year earlier.  (Release) 
• IM Cannabis: Fourth quarter revenue up 309 per cent to $20.0 million, $8.3 million in an adjusted EBITDA loss, compared to a $2.4 million loss a year earlier.  (Release) 
• Delta 9 Cannabis: Fourth quarter revenue up 21 per cent to $17.1 million, $613,562 in adjusted EBITDA, compared to $200,000 a year earlier.  (Release) 
• Greenlane Holdings: Fourth quarter revenue up 54 per cent to US$56.0 million, US$6.6 million in an adjusted EBITDA loss, compared to a US$7.2 million loss a year earlier.  (Release) 
• 4Front Ventures: Fourth quarter revenue up 35 per cent to US$33.8 million, US$13.2 million in adjusted EBITDA, compared to a $8.25 million gain a year earlier.  (Release) 
• Trulieve: Fourth quarter revenue up 81 per cent to US$305.3 million, US$100.9 million in adjusted EBITDA, compared to US$81.4 million a year earlier.  (Release) 
• Planet 13 Holdings: Fourth quarter revenue up 48 per cent to US$29.9 million, US$1.9 million in adjusted EBITDA, compared to a US$400,000 gain a year earlier.  (Release) 

ANALYST NOTE OF THE WEEK

Cantor Fitzgerald, Raymond James on Auxly

Auxly Cannabis reported its fourth-quarter and year-end results earlier this week with a strong jump in quarterly sales but still missing analyst expectations. Cantor Fitzgerald’s Pablo Zuanic lowered his target price on Auxly’s shares to 21 cents Canadian from 49 cents, while maintaining an overweight recommendation amid signs from industry data trackers that the company’s sales could drop 14 per cent sequentially in the first quarter of the year, moreso than the eight per cent industry-wide decline.

Auxly, which has ended the year as one of Canada’s top five cannabis producers, continues to gain market share and leads the industry in the 2.0 category (vapes, concentrates), but Zuanic remains concerned about the company’s cash burn and debt load. He noted that he could re-rate Auxly’s stock if the company maintains or grows its market share position, reduces its cash burn and becomes profitable, which it expects to happen sometime this year.

Meanwhile, Raymond James’ Rahul Sarugaser, who has an outperform recommendation on Auxly, said that the company’s gross margins dipped to 15 per cent in the last quarter of the year, below the 21 per cent it enjoyed throughout 2021. That’s likely due to the company moving more into the dried flower category which Sarugaser notes typically has lower margins than the vapes and edibles products it produces and expects to return to prior levels over the next few quarters. Auxly’s management told Sarugaser that the company expects its gross margins to grow to the 30 per cent level later this year. He added that the company’s $176 million in debt imposes an overhang to its stock.  

CANNABIS SPOT PRICE

$5.15 per gram

This week's price is down 1.3 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$1,870 per pound at current exchange rates.

WEEKLY BUZZ

$11.5 billion

--The amount of economic activity generated by the Canadian cannabis sector in January, according to Statistics Canada’s reading of the country’s gross domestic product.