We closed out an eventful 2019 that saw investor focus shift from growth to profitability, capital markets demanding a path to profitability, high-profile management turnover, scores of acquisitions scuttled and an industrywide stock selloff averaging 31% for the full year and 53% in the second half for the operators in our cannabis comp tables.
What does it signal for 2020?
We believe the shift from growth at all costs to profitability is a needed phase that will lead to a much healthier cannabis industry, one better prepared to deliver on the massive, long-term growth opportunity.
Companies that continue to burn cash will have to change course or they might cease to exist in their current form.
Those that get their spending under control, articulate a clear path to profitability, guide conservatively and deliver consistently will be in the best position to succeed.
U.S. operators trade at sharp discount to Canadian operators
This past week we enhanced our cannabis comp tables by separating U.S.-focused, vertically integrated operators from the Canada-focused operators – and the results show a significant discount for companies focused on the United States compared to Canada.
As of Dec. 31, 2019, the U.S.-focused operators are currently trading at 2.7X 2020 sales and 12.9X 2020 EBITDA, while Canada-focused operators trade at a premium at 5.0X sales and 14.9X EBITDA.
The discount carries to 2021 as well at 1.8X sales and 6.8X EBITDA for the U.S.-focused operators versus 3.1X sales and 8.7X EBITDA for Canada-focused.
|EV / Sales||EV / EBITDA|
|U.S. discount to Canada||-46%||-42%||-13%||-21%|
Akerna fires and hires CFOs
We closely follow changes in management teams given that an investment in a company is ultimately an investment in the right people.
Changes in leadership can indicate a change in the company’s strategy and execution.
On Dec. 17, Akerna (Nasdaq: KERN) terminated its CFO of only 15 months, Ruth Ann Kraemer, effectively immediately. The company replaced her with John Fowle, formerly chief financial officer of optometry software company Rev360.
Fowle’s duties, as listed in his offer letter, include multiple mentions of investor communications and planning.
As we noted at the Investor Intelligence Conference in December, we view transparent communication of targets to investors as key to reducing a company’s cost of capital.
Harvest Health to acquire cultivation facility from MJardin Group
Harvest Health & Recreation (CSE: HARV) agreed on Thursday to acquire cultivation facility GreenMart of Nevada from MJardin Group (OTC: MJARF) for $35 million in cash, $30 million of which was paid on Dec. 31, 2019, and $5 million to be paid upon license transfer.
Pat Witcher, the company’s president and CEO, said the proceeds from the transaction significantly reduce debt, strengthen MJardin’s financial position and puts the company on a stronger footing to accomplish profitability targets.
We believe strategic moves such as this will be more frequent in 2020 as companies look to sell noncore assets, and we applaud MJardin’s management in its effort to reduce debt and focus on profitability.
Craig Behnke can be reached at [email protected].
Mike Regan can be reached at [email protected].