The struggles of the marijuana industry are not hidden. Though the COVID-19 pandemic caused a bump in cannabis sales after the product was deemed essential, it wasn't enough to ease the financial burden most U.S. cannabis companies face because of the illegal federal status of marijuana. One such company is Acreage Holdings (OTC:ACRGF), which despite striking revenue growth has still failed to hit profitability and is bearing the brunt of a cash crisis.
Amid the economic downturn -- and with the pot industry facing a particularly tough financial scenario -- Canopy Growth (NASDAQ:CGC) and Acreage decided to amend the deal they made last year for the former to acquire the latter.
Revisiting their acquisition deal
The original deal between Canopy and Acreage, made on April 18, stated that Canopy would acquire Acreage dependent upon a "triggering event" -- namely, the U.S. federal legalization of marijuana.
On June 25, Canopy announced an amended agreement for the acquisition deal, in which it will provide an up-front cash payment of $37.5 million to Acreage shareholders. To help Acreage fund and expand its hemp operations, 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's shareholders. Simply put, each existing Acreage voting share will consist of 0.7 of a fixed share and 0.3 of a floating share.
For the fixed share, Canopy Growth will pay 0.3048 of one of its shares; in the previous agreement, it was 0.5818.
As for the floating shares, Canopy Growth will have a call right, which the company can exercise when the "triggering event" (U.S. federal legalization) occurs. The news release notes that the price of those shares will be "equal to the 30-day volume-weighted average trading price of the Floating Shares on the Canadian Securities Exchanges (CSE), subject to a minimum call price of US$6.41 per Floating Share, payable in either cash or Canopy Growth Shares at Canopy Growth's option."
The amended deal will require "approval by 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 expected to take place in August 2020."
Acreage reported its first-quarter 2020 results on the same day of the amended deal announcement. Before I shed light on how the results turned out, let me highlight one vital detail.
As part of the new arrangement, Acreage CEO Kevin Murphy also resigned that position, though he will continue as the chairman of the board of directors. Director Bill Van Faasen will act as the company's interim CEO until it fills the position.
A sudden C-suite leadership change never goes over well with investors -- especially for a company facing a financial crisis. Acreage's shares are down 16.4% so far in June, while the Horizons Marijuana Life Sciences Index ETF has fallen by 9%. For the same period, Canopy Growth's shares are up 0.27% while the SPDR S&P 500 ETF has fallen by 0.3%.
Another quarter of losses
Acreage reported a 65% year-over-year increase in adjusted revenue, to $37.6 million. That rise can be attributed to growth in retail dispensaries and its wholesale business. Revenue was up 17% from Q4 2019, and management noted that its Midwest and mid-Atlantic regions were most responsible for the increase.
Despite the surge in revenue, Acreage saw an adjusted pro forma earnings before interest, tax, depreciation, and amortization (EBITDA) loss of $11.1 million. EBITDA did, however, improve over the year-ago period, and it's up 40% from the fourth quarter of 2019.
The company also recorded a pre-tax, non-cash charge of $196 million related to the operational changes done in May as part of its strategies to improve margins and achieve positive EBITDA. This amount came in higher than its guidance of $80 million to $100 million. Acreage blamed impairment and writedown charges which weren't earlier considered.
It's not all bad news!
Now for some good news: Acreage opened two Botanist dispensaries in the quarter, one in Florida and another in New Jersey, giving it a total of 29 operational dispensaries at the end of the first quarter. In the first quarter, the company also launched its Botanist branded flower in Illinois and Botanist branded vape cartridges in all of its dispensaries in New York.
Another wise decision on Acreage's part was to shut down some of its unprofitable operations to conserve cash and focus on the profitable. There's no doubt that this will affect revenue slightly in the short term, but management expects it will "accelerate improvements in margins and returns and ultimately, their path to profitability."
Acreage ended the quarter with about $14 million of cash on hand. Management estimated during the earnings call that revenue for the second quarter will be flat versus the first quarter, largely because of the divestiture of some unprofitable operations that was announced in May. They hope margins and profits will improve eventually over the year, driven by cost-savings initiatives and growth in the wholesale business.
Canopy's loan to Acreage, as part of the amended agreement to develop its hemp business, could also bear fruit over the long term. Management urged all shareholders to vote in favor of the amended agreement, assuring them that it is the "best and most viable option for Acreage." Meanwhile, Canada-based Canopy Growth's management hopes the U.S. will be a core 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 U.S. will legalize marijuana federally by 2022 proves right, both marijuana companies will have lucrative opportunities to expand in the U.S. going forward.