Acreage Holdings first quarter results are disappointing: will the amended deal with Canopy Growth help?

The struggles of the marijuana industry are not hidden. Although the COVID-19 pandemic caused an increase in cannabis sales after the product was deemed essential, this was not enough to ease the financial burden most US cannabis companies face due to the status. federal illegal marijuana. One of these companies is Area of assets (OTC: ACRGF), which, despite spectacular revenue growth, has still not reached profitability and is suffering the brunt of a cash flow crisis.
Amid the economic downturn – and with the pot industry facing a particularly difficult financial scenario – Canopy growth (NASDAQ: CGC) and Acreage have decided to modify the agreement they entered into last year so that the former acquires the latter.
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Review their acquisition agreement
The original agreement between Canopy and Acreage, reached on April 18, stipulated that Canopy would acquire Acreage based on a “trigger event” – the US federal legalization of marijuana.
On June 25, Canopy announced an amended agreement for the acquisition, in which it will provide an upfront cash payment of $ 37.5 million to Acreage shareholders. To help Acreage finance and grow its hemp business, Canopy also provided a loan of up to $ 100 million.
Canopy created fixed and floating versions of Acreage common stock to provide more upside potential to Acreage shareholders. Simply put, each existing Acreage voting share will consist of 0.7 fixed and 0.3 floating shares.
For the fixed portion, Canopy Growth will pay 0.3048 of one of its shares; in the previous chord it was 0.5818.
As for floating shares, Canopy Growth will have a right of appeal, which the company can exercise when the “trigger event” (US federal legalization) occurs. The press release notes that the price of these shares will be “equal to the 30-day volume weighted average price of the floating shares on the Canadian Stock Exchange (CSE), subject to a minimum call price of 6. , US $ 41 per free float share, payable in cash or shares of Canopy Growth at the option of Canopy Growth. “
The amended agreement will require “the approval of holders of at least 66 2/3% of the existing shares present in person or represented by proxy, voting together as a single class at a special meeting scheduled to take place in August 2020 “.
Acreage released its first quarter 2020 results on the same day as the announcement of the amended deal. Before shedding light on the results, let me highlight one key detail.
Management changes
As part of the new deal, Acreage CEO Kevin Murphy has also stepped down from the post, though he will remain chairman of the board. Director Bill Van Faasen will act as the company’s interim CEO until he holds the position.
A sudden change of direction within management is never welcomed by investors, especially for a company facing a financial crisis. Acreage shares are down 16.4% so far in June, while the Horizons Marijuana Life Sciences NBIF fell 9%. For the same period, Canopy Growth shares are up 0.27% while the SPDR S&P 500 ETF fell 0.3%.
Another quarter of losses
Acreage saw a 65% increase in adjusted revenue year-over-year to $ 37.6 million. This increase can be attributed to the growth of retail dispensaries and its wholesale business. Revenue was up 17% from the fourth quarter of 2019, and management noted that its Midwest and Mid-Atlantic regions were primarily responsible for the increase.
Despite the increase in revenue, Acreage recorded adjusted pro forma earnings before interest, taxes, depreciation and amortization (EBITDA) of $ 11.1 million. EBITDA, however, improved compared to last year, and is up 40% compared to the fourth quarter of 2019.
The company also recorded a pre-tax non-cash charge of $ 196 million related to operational changes made in May as part of its strategies to improve margins and achieve positive EBITDA. This amount is higher than his forecasts by 80 to 100 million dollars. The acreage charged depreciation and impairment charges that were not previously taken into account.
It’s not all bad news!
Now some good news: Acreage opened two Botanist dispensaries during the quarter, one in Florida and another in New Jersey, giving it a total of 29 operational dispensaries by the end of the first quarter. In the first quarter, the company also launched its Botanist-branded flower in Illinois and its Botanist-branded vape cartridges at all of its dispensaries in New York City.
Another wise move on Acreage’s part was to shut down some of its unprofitable operations to save money and focus on profitable businesses. There is no doubt this will affect revenues slightly in the near term, but management expects it to “accelerate the improvement in margins and returns and ultimately their path to profitability.”
Look ahead
Acreage ended the quarter with approximately $ 14 million in cash on hand. Management estimated when announcing the results that second quarter revenues would be stable compared to the first quarter, in large part due to the divestiture of certain unprofitable operations announced in May. They hope that margins and profits will eventually improve during the year, thanks to cost reduction initiatives and wholesale growth.
Canopy’s loan to Acreage, as part of the amended deal to expand its hemp business, could also pay off in the long term. Management urged all shareholders to vote in favor of the amended deal, assuring them that it is “the best and most viable option for Acreage”. Meanwhile, based in Canada Canopy growthManagement is hopeful that the United States will be a key market for the company and that the amended agreement with Acreage will strengthen their path forward.
If Canopy CEO David Klein’s opinion that the United States will legalize marijuana federally by 2022 turns out to be correct, the two marijuana companies will have lucrative opportunities to expand in the United States in the future.
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