Emerald Health red flag, Cresco Labs’ Tryke purchase a go, Curaleaf reprices acquisition & more

Red flag alert: Emerald Health Therapeutics loses its CFO and COO in one day

A single C-level departure is a yellow flag that deserves further investigation, but two in one day? That’s a major red flag.

Emerald Health Therapeutics’ CFO and COO both departed the company this week as part of a 20-position reduction of workforce.

Another red flag is how the company chose to communicate the news to investors. Major developments like this should be the headline or first paragraph, but Emerald Health Therapeutics (TSXV: EMH) mentioned these key departures in the third paragraph of the news release.

The workforce reduction is a continuation of cuts that started in late summer. Since Aug. 1, the company eliminated about 65 staff positions, or 33% of its total workforce.

Emerald cited a focus on improving cash flow in the near term and accelerating the path to long-term profitability as reasons for the moves.

Emerald is one of many businesses re-focusing on positive cash flow. A maturing market requires more sustainability.

Cresco Labs can proceed with acquisition of highly profitable Tryke

Sometimes a solid, yet standard, customer experience results in a higher profit-margin than a glitzier “customer experience.” Tryke is one of those cases.

We recently did a thorough analysis on the impressively high EBITDA margins of Tryke’s basic dispensaries compared to Planet 13’s fancier “customer experience” dispensaries. Both have large stores on the Las Vegas strip – across the street from each other. Margins at Tryke are solidly ahead of Planet 13.

On Oct. 30, the Hart-Scott-Rodino waiting period expired for the proposed Cresco Labs (CSE: CL) acquisition of Tryke Cos., meaning the transaction can move forward.

Curaleaf renegotiates Cura Partners deal

In yet another sign of a difficult cannabis stock environment, the stated value of Curaleaf’s (CSE: CURA) yet-to-close acquisition of the Select brand from Cura Partners was reduced by a massive 70%.

The company detailed new terms for the deal in an Oct. 30 news release.

Original deal ($ mil.) 5/1/19
  CURA shares offered 95.6
  CURA share price $13.30
Base deal value 1,271
  Earnout potential 200
Potential deal value 1,471

 

Updated deal ($ mil.) 10/30/19
  CURA shares offered 55.0
  CURA share price $6.83
Base deal value 375.7
  Earnout potential 477.0
Potential deal value 852.6

Cura Partners’ equity holders still have the option to receive some or all of the 40.6 million CURA shares that aren’t part of the updated base terms of the deal.

Those shares are now contingent on Cura Partners achieving sales targets between $130 million and $250 million for calendar 2020.

The fixed and variable composition of the deal also has changed significantly, with far more value of the updated deal contingent upon CURA hitting certain sales targets.

Original deal
Fixed value 86%
Variable value 14%
Updated deal
Fixed value 44%
Variable value 56%

The updated deal has a second contingent clause in the structure: If Select brand sales exceeds $300 million of sales in 2020, Select equity holders receive an additional $200 million of Cura shares.

That last contingency sets up a very strong incentive for Select brand management to push sales to the $300 million level in 2020. That last contingency concerns us in that it provides the management and sales team of Select strong incentive to hit that $300 million sales mark by any means fair or foul.

MedMen’s many changes

MedMen’s fiscal 4Q2019 revenue miss wasn’t the only factor driving down the stock 25% on Monday. The revenue miss was small, but the news release and conference call contained a slew of meaningful changes to its operating plans, board of directors and lending terms from Gotham Green Capital.

We recently examined 30 cannabis companies to show which might be at risk of having to alter future expansion or investing plans, or to raise very expensive and dilutive capital. MMEN was the company most at risk.

The Los Angeles-based company announced a lot of changes, but we believe they are needed, particularly as the firm seeks to reach EBITDA break-even by the end of calendar 2020.

Among them:

  • Reducing expansion in non-core states.
  • Deeper dives into core states.
  • Ramping up capacity utilization in its factories.
  • Optimization of retail assets.
  • Leveraging its omnichannel strategy.

We believe the changed investor mindset about capital raising, growth discipline and cost efficiency aren’t short-term concerns that go away soon.

Traditional or larger institutional investors not rooted in cannabis advocacy will focus more on detailed, well-documented business plans, current profitability or defined break-even targets, and consistent, clean operational execution.

Hexo challenges run deep

It is stunning how drastically Hexo Corp.’s outlook has changed in the past several weeks relative to the company’s original 2020 revenue guidance of CA$400 million.

The company retracted its 2020 target and, in an Oct. 29 news release, issued fiscal 1Q20 revenue guidance of CA$14 million to CA$18 million, implying a CA$56 million to CA$72 million 2020 run rate.

The low end of Hexo’s fiscal 1Q20 guidance would be a sequential decrease from the fiscal 4Q19 revenue of CA$15.3 million.

Management cited slower-than-expected store rollouts across Canada, consumer demand-based product mix shifts and lower-than-expected sell-through for the lowered outlook.

The vast majority of revenue is driven by a number of retail locations, product mix and consumer demand. Those are tough headwinds to fight through.

Hexo’s challenges must run very deep to warrant such a massive swing in the company’s outlook.