Marijuana stock investors were supposed to clean up in 2019. Canada had recently legalized adult-use cannabis sales, high-margin derivatives were months away from hitting dispensary shelves, and state-level legalization momentum appeared strong in the United States. Yet when the year ended, pot stocks were a disappointment across the board.
To our north, regulatory issues have stymied the ability of growers to get product in front of customers. Health Canada delayed the launch of derivatives until mid-December, while Ontario, the nation's largest province by population, had only 24 open dispensaries as of the one-year anniversary of adult-use sales beginning. Meanwhile, in the U.S., a combination of high tax rates and supply problems has allowed the black market to thrive.
After such a miserable year, the expectation now is that pot stocks will rebound as they mature. But for one well-known cannabis stock, this hasn't been the case through the first month of 2020.
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The CEO of struggling multistate operator MedMen steps down
Late last week, vertically integrated multistate operator MedMen Enterprises (MMNFF) announced that CEO and co-founder Adam Bierman would be stepping down from his role as CEO, effective Feb. 1. Ryan Lissack, MedMen's COO and chief technology officer, will temporarily fill the role as CEO until a long-term replacement is found.
Additionally, Bierman agreed to surrender all of his Class A super voting shares, which is something that co-founder Andrew Modlin agreed to do in December. In other words, the only remaining class of shares left is MedMen's Class B common stock, with one share equating to one vote. Bierman's and Modlin's Class A shares had previously represented more than enough weight to overrule MedMen's common stockholders, but that won't be the case any longer.
Bierman's departure was viewed by many, including myself, as long overdue. MedMen is, arguably, in worse financial shape than any other cannabis stock. Management recently confirmed that, as part of its restructuring, the company has been attempting to pay off some of its vendors in common stock. This strategy is being employed by MedMen in an effort to conserve its capital, and it comes just over three months after MedMen called off its all-stock acquisition of privately held multistate operator PharmaCann. Though it was noted that completing the acquisition would have placed MedMen into a number of noncore markets, the reality looks to be that MedMen simply didn't have the cash to take on new stores and PharmaCann's expansion strategy.
Making matters worse, despite working out up to $280 million in financing from private equity firm Gotham Green Partners, MedMen no longer has access to the final $115 million in financing it hadn't accessed. At this point, the company's long-term future is very much in doubt, which is all the more reason Bierman had to go.
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These marijuana CEOs should resign, too
The thing is, Bierman isn't the only marijuana CEO who should resign or be shown the door. There are two other popular pot stocks whose CEOs have done them no favors of late.
One is Terry Booth, the CEO of Aurora Cannabis (ACB -6.81%), the most-held stock on millennial-focused investment app Robinhood. Aurora certainly looked to have a number of competitive advantages with regard to peak production potential and international expansion, but Canada's regulatory issues, along with the company's own overzealous expansion, have put it in a serious bind.
More specifically, Aurora Cannabis' balance sheet is a disaster. On the one hand, some Wall Street analysts question whether Aurora has the capital to meet its debt obligations. Even with $400 million in at-the-market offerings at its disposal (a fancy way of saying that Aurora could sell up to $400 million in stock), there aren't any guarantees it'll be able to pay for its ongoing expenses and debt obligations.
On the other hand, Aurora looks to have grossly overpaid for its more than one dozen acquisitions completed over a three-year stretch. Now lugging around 3.17 billion Canadian dollars in goodwill, representing 57% of total assets, Aurora appears to be inching closer to a massive writedown.
As the icing on the cake, Aurora Cannabis' share count has grown by more than 1 billion shares over the past 5.5 years, and hiring billionaire activist investor Nelson Peltz as a strategic advisor hasn't landed the company any equity investors or jaw-dropping deals. In my view, it's time for Terry Booth to step aside.
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The other cannabis CEO who should have the sense to step down is HEXO's (HEXO) Sebastien St-Louis. Like Aurora, HEXO looked to be in position to succeed heading into the launch of recreational marijuana in Canada. But with the exception of signing a five-year wholesale supply agreement with its home province of Quebec for 200,000 kilos-in-aggregate, little has gone right.
Since October, HEXO's chief financial officer has resigned, the company pulled its guidance that called for CA$400 million in 2020 sales, production has been completely idled at the Niagara grow farm and in parts of the flagship Gatineau facility, and it laid off 200 workers. Worse yet, following the release of HEXO's fiscal fourth-quarter results, St-Louis noted that his company would need to achieve 20% market share throughout Canada to become profitable, which looks to be an impossible task given its current problems.
Interestingly, when MKM Partners chose to downgrade HEXO and slash its price target last week, covering analyst Bill Kirk noted that HEXO has a particularly poor track record of making statements that come true. My expectation is that HEXO will spend most of 2020 reducing its costs and backpedaling on its operating performance.
HEXO is a mess, and if the ship isn't righted soon, it could be delisted from the New York Stock Exchange. With faith in management seriously compromised, it's time for HEXO's board to consider looking beyond St-Louis for answers.
