Bottoming Out but Not Yet a Rally

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Friends,

In June, we shared our view here that the market would do better in the second half of the year. The Global Cannabis Stock Index sold off during the month and closed at an all-time closing low of 14.76 on June 30th. It closed on 8/19 at 15.05, up 2% quarter-to-date, but the cannabis sector is lagging the overall stock market. The S&P 500 is up 11.9% quarter-to-date, almost 6 times the return of cannabis stocks.

We remain optimistic about the potential rally over the rest of 2022 and beyond. The GCSI is down 2.3% in August after breaking a string of 16 straight monthly declines in July, when it rallied 4.3%. We think that the negative trends that the industry has experienced this year were evident in the Q2 financial reports that have been delivered this month, and the investors are selling into the reports. Among ancillary names in the index, for example, GrowGeneration, Hydrofarm, Leafly and WM Technologies all posted new 52-week or all-time lows after the reports, but they all rallied subsequently. Among MSOs in the index, Ayr Wellness and TerrAscend have tumbled to its lowest price in more than a year after its report.

There have been no examples yet of companies in the index having better than expected earnings driving big gains in price, and we think the overall sentiment of the mid-year financial reports is not exciting investors despite the large decline in prices year-to-date. We remind our readers that the index is down over 54% thus far in 2022, and we are finding many stocks with attractive valuations.

To us, it looks like the index has bottomed, though it isn’t yet in the rally mode substantially. We just went through a tough earnings season, but we expect things to look better for Q3 and beyond. A full quarter of adult-use in New Jersey and improvement in the largest state for cannabis, California, could help the reported numbers look more appealing to investors.

While the overall market is stuck near the lows still, we are happy that the returns in the model portfolios at our premium service, 420 Investor, are all up substantially more than both the GCSI and even the S&P 500, with a range of quarter-to-date returns of 21.9% to 24.7%. All are up thus far in August after generating big returns in July.

Despite a move only modestly higher, the cannabis stocks appear to have a good bottom overall. We continue to believe that cannabis investors will be rewarded for researching the industry and pursuing investments prior to the improvement we expect in the news flow.


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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

Exclusives

Canadian cannabis sales inched up 1% sequentially to a record C$377.5 million in June. Sales were up 23% from the previous year, up from the 19.5% May growth rate. In Ontario, the largest province, sales were up 3.3% from May and up 41% from a year ago. Sales were flat in Alberta, Quebec was down 1.4% from May, while British Columbia was down 1.7% from May.

GrowGeneration has 62 stores in 13 states, but rather than be spread out, the company is doing some consolidating where stores are in close proximity to each other. At the same time, GrowGeneration is adding retail locations in three new markets, New Jersey, Virginia, Missouri, bringing its reach into 16 states. In an exclusive interview, Co-Founder and CEO Darren Lampert said the company wants to be conveniently located for growers and individual consumers.

Greenlane Holdings has found a way to shore up its balance sheet by raising non-dilutive capital. The company is doubling down on its portfolio of consumer brands strategy and exiting its legacy resource intense packaging business.  In an exclusive interview, Greenlane’s CEO Nick Kovacevich discusses how the company has been navigating a challenging cannabis environment and identifying new opportunities.

Village Farms International spent decades in the agriculture and horticulture industries before entering the cannabis market. The company is increasing its retail sales, but it still has a thriving wholesale business as well. In an exclusive interview, President and CEO Michael DeGiglio talks about the company’s future entry into the U.S. market with the acquisition of CBD company Balanced Health Botanicals.

Funding

High Tide has secured a $19 million credit facility which it expects to use to fund continued growth, general working capital requirements, and potential future M&A activities. The facility, which is expected to close in the third quarter and has a five-year term, is coming from Connect First Credit Union Ltd. “We have watched locally based High Tide execute over the last several years. Accordingly, we are very excited about this new partnership between High Tide and connectFirst helping to create a more prosperous Alberta – and beyond, said Sourav Neogi, relationship manager, corporate and commercial banking at Connect First.

XS Financial has closed a $24 million credit line with Needham Bank. An existing $4 million line of credit with an FDIC-insured bank will be retired, and the same bank will provide $4 million in the new credit facility. In addition, XSF fully retired its previously announced $15 million line of credit with the Garrington Group concurrently with the closing of this one. XS Financial plans to use the proceeds, along with cash on hand, to fund additional CAPEX and equipment leases with new and existing customers.

Earnings

4Front Ventures increased Q2 revenue by 9% sequentially to $28.4 million and was up from $27.1 million in the previous year. During the quarter, the company grew its leadership team to include chief financial officer, general counsel, president of California operations, and executive vice president; as well as two additional board members. “We believe we are poised for a significant leg of growth to take place over the next 12 months as we leverage our investments in state-of-the-art automation and scaled manufacturing processes, supplemented by strategic and accretive M&A,” said CEO Leo Gontmakher.

Agrify Q2 revenue was down 26% sequentially at $19.3 million. However, revenue rose 63% from $11.8 million year-over-year. The company missed its earnings estimate for the quarter and said it is in the process of restructuring its credit facility and reducing operating expenses to strengthen its cash position. “Despite this difficult business environment, which has impacted our recent performance and altered our outlook for the remainder of 2022, we are actively taking steps to adapt to the new market realities,” said Chairman and CEO Raymond Chang. In addition, the company said it amended its existing credit facility. As part of the transaction, the company is paying down a portion of the outstanding balance on the original note and exchanging the remaining balance under the original note for a new note with a significantly reduced principal balance.

Ascend increased Q2 revenue by 15% sequentially and 17% year-over-year to $97.5 million, a record since the company’s inception. “The key driver of these results was the commencement of adult-use sales at our Rochelle Park, New Jersey dispensary, one of the top performing stores in the state,” said CEO and Co-founder Abner Kurtin. The company started adult-use sales at its Rochelle Park dispensary on April 21st, with store sales reaching as high as $1.25 million in a single week. Subsequent to quarter end, the company opened its Fort Lee, New Jersey dispensary for medical sales. It currently has 22 operating dispensaries.

Auxly Q2 revenue rose 21% sequentially to C$27.3 million. The company noted that revenue during the quarter comprised of approximately 40% in sales of dried flower and pre-roll cannabis products, with the rest from oils and cannabis 2.0 product sales. Auxly CEO Hugo Alves said the company remains focused on consumers and their evolving needs “by launching 27 new SKUs during the first half of the year and will continue to prioritize investments in innovations in key growth categories.”

Ayr Wellness Q2 revenue inched down 1% sequentially to $110.1 million, but was up 21% from the same period a year ago. The company said the results were within expectations and it anticipates growth in the second half of the year to be slower. “We continue to make investments in people and processes, while remaining prudent through these turbulent economic times,” said Jonathan Sandelman, founder and CEO.

Columbia Care Q2 revenue increased 5% sequentially to $129.6 million and was up 18% year-over-year from $109.7 million. The company said New Jersey, which recently launched adult use sales, was a primary driver in sequential revenue growth, along with Virginia and West Virginia, where Columbia Care is the number one wholesaler and retailer in rapidly expanding medical markets. “In these challenging times, Columbia Care achieved exceptional results in several key markets that serve as meaningful, positive long-term indicators. Despite the economic headwinds and challenges that were particularly impactful in our most mature markets, we saw surprising resilience across the country, in addition to outstanding performance in our highest growth, emerging markets,” said CEO Nicholas Vita.

Cresco Labs increased Q2 revenue 2% sequentially to $218.2 million and was up 4% year-over-year. On July 8, Columbia Care shareholders approved a previously announced, all stock acquisition by Cresco Labs and the company anticipates it will close by year end. The company said over the next three years, growth will come from the transition to adult-use in seven large markets: New Jersey, New York, Pennsylvania, Ohio, Virginia, Florida and Maryland. “Our combined footprint with Columbia Care, gives us exposure to all of these markets and leading positions in several. This is arguably the highest value footprint in cannabis – 180 million Americans and all 10 of the 10 highest projected 2025 revenue states,” said CEO and Co-founder Charles Batchell.

Decibel Cannabis Q2 revenue was up 12% sequentially to C$18.6 million and shot up 49% over Q2 2021. Growth was fueled by expanded distribution particularly in Ontario, the continued launch of new products in various provinces and continued growth in demand for derivative products. “Our new unique and innovative product development and revenue generating initiatives have once again produced quarter-over-quarter record performance,” said CEO Paul Wilson.

iAnthus Q2 revenue inched up 2% sequentially to $43.5 million, but fell 20% from the same period prior-year revenue of $54.2 million. In June, the company closed on its previously announced recapitalization transaction, providing for $25 million in additional financing. At the same time, the company announced the departure of two board members.

Greenlane Q2 revenue fell 14% sequentially to $39.9 million, but rose 15% year-over-year. During the quarter, the company announced it would sell its packaging division and reinvest in its consumer brands business. “The packaging business is a thriving business, but one that ties up a lot of our resources, space, and working capital. We expect to achieve significant proceeds from the sale of this business unit allowing us to generate substantial non-dilutive capital that will be re-invested into growing our consumer business,” the company said in a news release. Greenlane also secured a $15 million asset-based credit facility for working capital. It also announced Craig Snyder was promoted from chief commercial officer, to president.

IM Cannabis Q2 revenue inched up 1% sequentially to C$23.8 million. However, it increased 114% year-over-year from C$11.1 million. The company said its long-term strategy “relies on geographic diversification and preparation to target, upon legalization, new adult-use recreational cannabis markets in Germany followed by the rest of Europe.” The company has embarked on a restructuring of its Canadian operations as part of its efforts toward global integration and to reduce costs. “We expect the majority of savings to begin to materialize in the third quarter, with full realization in the fourth quarter of this year,” said CEO Oren Shuster.

Planet 13 Q2 revenue grew 11% sequentially to $28.4 million, but was down 14% from $32.8 million during the same period a year ago. The company said the second quarter saw the implementation of many of its growth initiatives including the acquisition of a Florida property for its cultivation and production campus and the expansion of its Nevada cultivation. It also entered into leases on two more Florida dispensary locations and agreed to an option to purchase the remaining 51% ownership of Planet 13 Illinois. “Our expansions are progressing according to plan and it is likely that a year from now we will have doubled our retail and state footprint,” said Co-CEO Bob Groesbeck.

The Parent Company Q2 revenue was down 17% sequentially to $27.4 million and fell 49% from the previous year’s quarter revenue of $54.2 million. The company said that since implementing the first phase of its long-term profitability plan, it achieved $9.3 million in annual expense savings. In the next phase of the profitability plan there are additional major initiatives underway that are expected to help reduce cash operating expenses by $30 million by year end. “Our team remains focused on our business transformation, and this quarter’s results are an early indication that our profitability improvement plan is working,” said Chairman and CEO Troy Datcher.

TILT Holdings increased Q2 revenue by 11% sequentially to $47.1 million and was down 3% from last year’s Q2 revenue of $48.5 million. The company said its cannabis operations grew more than 20% year-over-year. During the quarter, Tilt launched new products, announced new partnerships, and broke ground on a 5,000 square-foot cannabis dispensary located on Shinnecock tribal territory in Southampton, New York. “Early results have shown that we have the right strategy in place and the right team to execute upon it. That said, we are committed to increasing our pace given market conditions, with even more brand partners and SKUs to launch across a larger operating footprint going forward,” said CEO Gary Santo.

urban-gro Q2 revenue dropped by 23% sequentially to $16.3 million, but rose 27% compared to the prior year period of $12.8 million. The company said it was diversifying its business into other sectors, which will help insulate it “from the broader turbulence that other ancillary industry participants are experiencing. “While we’ve shifted our guidance strategy to one that’s more focused on the near-term given the recent market volatility, it should not be inferred as a slowing of our opportunity pipeline,” said CFO Dick Akright.

Verano Q2 revenue was up 11% sequentially to $223.7 million and was up 12% from the previous year’s quarter. During the quarter, Verano launched adult-use sales in New Jersey and exceeded a milestone of operating more than 100 dispensaries following the opening of seven new stores in Florida, West Virginia and Pennsylvania. It also announced a partnership with Mission Green to advance cannabis clemency and social equity initiatives, and launched mobile applications and rewards programs for its flagship Zen Leaf and MÜV dispensaries. “I am proud of what we have accomplished since going public last year and remain confident that the strategy and plans we have in place will drive long term, sustainable growth for Verano,” said founder and CEO George Archos.


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Sincerely,

Alan & Joel

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Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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