eResearch | The first established cannabis ETF, Horizons Marijuana Life Sciences ETF (TSX: HMMJ), has fallen almost 80% in share price in the past year due to overinflated expectations for demand coupled with failed executions from both cannabis companies and regulating governments in providing transparency and prudence.
Chart 1: Horizons Marijuana Life Sciences ETF (TSX: HMMJ) vs. S&P 500
As the cannabis industry continues to fall short in meeting expectations, a multitude of negative material events have impacted businesses including: (1) layoffs and facility shut downs, (2) Goodwill write downs and impairments, (3) U.S. stock exchange de-listing, and (4) Cannabis retail store closures.
Lay Offs and Facility Shut Downs
The cannabis industry has been on one of its largest down trends in its history mainly due to a misalignment of supply and demand. The Canadian cannabis market forecasted anywhere from C$5 billion to C$10 billion in sales for last year but due to several factors including inefficient government implementation and overestimations, the industry only recorded C$1.2 billion in sales.
Aggressive supply production for an overestimated market has made it difficult for companies to manage working capital and profitability. In addition, companies invested in developing high-cost indoor greenhouse facilities before federal regulations permitted low-cost outdoor cultivation. The combination of these factors has forced cannabis companies to cut employees, shut down facilities, and stop plans for future facilities.
Below are recent related events:
- Aurora Cannabis (TSX: ACB; NYSE: ACB) lays off 500 full-time employees, which includes 25% corporate roles.
- Aurora Cannabis (TSX: ACB; NYSE: ACB) suspends construction of its 1.6 million square foot production facility.
- Tilray Inc. (NASDAQ: TLRY) cuts 140 employees, reducing 10% of its total staff, primarily in social media and marketing departments.
- Canopy Growth Company (TSX: WEED; NYSE: CGC) announces the halt in planning for its third facility in B.C. as it expects to close two existing B.C. facilities, reducing head count by 500 employees.
- Hexo Corp. (TSX: HEXO; NYSE: HEXO) laid off 200 employees in the latter half of last year.
Goodwill Write-downs and Impairments
Market leaders in the cannabis industry were created through aggressive acquisitions and mergers, but the carrying value of both tangible and intangible assets of these companies have been sitting on balance sheets at valuations made when acquisition multiples were at its peak, resulting in many companies with total net asset values exceeding their market capitalization.
Accounting firms have been lenient with cannabis companies due to the uncertain nature of the new industry, but cannabis companies are now being pushed to take drastic measures to make sure their balance sheet and financials are in accordance to accounting regulations, including companies’ assets being valued at a reasonably justified fair market value.
Below are recent related events:
- Aurora Cannabis (TSX: ACB; NYSE: ACB) announced goodwill write down of ~C$750 million and impairment charges of ~C$200 million.
- Hexo Corp. (TSX: HEXO; NYSE: HEXO) delayed its Q2/2020 financial filings due to certain exceptional circumstances including an expected ~C$270 million write-down.
- Canopy Growth Company (TSX: WEED; NYSE: CGC) currently holds C$1.9 billion in goodwill from numerous acquisitions, with goodwill accounting for 23% of total assets, and is expected to write down between C$700 to C$800 million next quarter.
- iAnthus Capital Holdings (CSE: IAN) has US$440 million in goodwill on its balance sheet, representing 53% of total assets, and is valued higher than its market capitalization.
- Aphria Inc. (TSX: APHA; NYSE: APHA) holds C$669 million of goodwill on its balance sheet, representing 27% of total assets, after already writing down C$50 million last year for its Latin American assets.
U.S. Stock Exchange De-listing
The cannabis industry has been fueled by investment capital to develop new products and build production facilities, therefore several companies have been making an effort to list publicly on U.S. stock exchanges such as the NASDAQ and NYSE to achieve greater investor visibility and heightened Wall Street coverage.
Although listing on the U.S. stock exchanges come with many benefits and advantages, the NASDAQ and NYSE have strict standards, including a minimum share price of US$1 for a period of 30 consecutive days.
The already struggling cannabis industry has been further negatively impacted by the downturn of the global economy due to the recent outbreak of the Covid-19 virus, resulting in several U.S. listed cannabis companies dropping below US$1.00/share early this month.
Below are recent related events:
- Aurora Cannabis (TSX: ACB; NYSE: ACB) stock price dropped below US$1.00 early this month and is currently trading at US$0.69 per share.
- CannTrust Holdings Inc. (TSX: TRST; NYSE: CTST) stock price dropped below US$1.00 early this month and is currently trading at US$0.58 per share.
- Sundial Growers Inc. (NASDAQ: SNDL) stock price dropped below US$1.00 early this month and is currently trading at US$0.68 per share.
- Hexo Corp. (TSX: HEXO; NYSE: HEXO) stock price dropped below US$1.00 six months ago and is currently trading at US$0.42 per share.
Cannabis Retail Store Closures
The Covid-19 virus, which has recently been labeled as a pandemic by the World Health Organization (“WHO”), is spreading globally, and economies are slowly locking down to contain the virus. This is affecting retail businesses of all industries as both the Centres for Disease Control and Prevention (“CDC”) and the WHO recommend people stay at home.
In response to Covid-19, cannabis companies and governments have slowly been closing retail locations to support the collective effort of containing the virus.
Below are recent related events:
- Canopy Growth Company (TSX: WEED; NYSE: CGC) closed all Tokyo Smoke and Tweed branded retail shops, including 23 stores across Newfoundland, Saskatchewan, and Manitoba.
- E.I. Cannabis announces provincial closure of 17 retail liquor and cannabis stores.
- Delta 9 Cannabis Inc. (TSX: DN) continues operations across its four stores in Manitoba while increasing measures for sanitation and cleanliness.
For Canadian cannabis companies, stock prices will continue to be under pressure as the overall market struggles to find footing amid the coronavirus crisis. Once the overall market recovers, cannabis company investors should focus on companies that are increasing sales quarter-over-quarter, improving margins, and posting positive cash flows, and companies with a solid balance sheet to weather any new black swans.
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