Share consolidation sweeps marijuana industry as stock prices flop

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Image depicting consolidation of cannabis stock shares

(Image by morzan/stock.adobe.com)

In the face of slumping marijuana stock prices, publicly traded Canadian cannabis producers and U.S. ancillary companies are increasingly turning to share consolidations to maintain their listings on the Nasdaq exchange.

Canadian grower Canopy Growth Corp. is the latest to announce plans for a share consolidation after the company ran afoul of the Nasdaq’s minimum bid-price requirement.

Nasdaq-listed cannabis companies that have completed share consolidations include Canadian producer Hexo Corp. – now part of Tilray Brands – which consolidated shares in December 2022, and fellow Canadian grower Organigram Holdings, which consolidated shares in early July.

Massachusetts-based marijuana ancillary company Agrify Corp. also consolidated shares in July.

Although negative sentiment surrounding cannabis stocks could potentially change because of external factors, all signs suggest more share consolidations to come: Several cannabis producers and ancillary firms are under Nasdaq warnings regarding their low share prices, and share consolidations are a possible solution.

High-profile examples include Canadian producer Aurora Cannabis and Village Farms International, the British Columbia-headquartered parent company of cultivator Pure Sunfarms.

Equity analyst Nadine Sarwat, the London-based director of North American cannabis with Bernstein Research, said she wouldn’t be surprised to see the share-consolidation trend continue.

“Because we aren’t seeing any indication that the problems that are causing these issues are being solved,” she said.

For example, the Canadian government’s review of its cannabis legalization law is running late, Sarwat observed.

“And unless you believe that there is going to be a meaningful change there, that then becomes really difficult to say (that) a lot of these companies are going to see a far rosier future,” she said.

“And then in the U.S., we’re still seeing meaningful price compression in cannabis – there’s a lot of excess supply, depending on the state, federal (reform) isn’t very clear yet,” Sarwat continued.

“That’s not to say that the industry cannot be successful in 10 years, but there is more to suggest that the pain is going to continue before it gets better.”

Equity analyst Jesse Redmond, head of cannabis at Florida-based Water Tower Research, explained that in bullish times, when certain equities have gained significant value, companies have chosen to split their shares in order to lower the price of each share.

Such share splits make the stock “more accessible to investors. … You’d wake up the next day with four times as many shares at a quarter of the price,” he said.

“Traders figured out that once companies announce stock splits – and especially the day after they happen – typically the shares rally, because people like getting more shares, and the lower stock price sometimes opens up a name to more retail investors.”

Share consolidations, also called reverse share splits, are the opposite: Outstanding shares are combined, increasing the value of each share.

“Mathematically, they’re both a zero-sum game,” Redmond said.

A company’s market capitalization is not affected by either a share split or a share consolidation.

However, share consolidations can help a company keep their listing on a major exchange such as the Nasdaq.

Such listings are particularly important at a time when funding remains in short supply for cannabis operators.

Nasdaq share-price warnings

The latest wave of high-profile cannabis share consolidations has been driven by the listing requirements of the Nasdaq stock exchange, which requires stocks to maintain a $1 minimum closing bid price.

If a stock trades below that $1 minimum for 30 consecutive business days, the Nasdaq issues a warning and grants a 180-day period for the company to regain compliance.

A second 180-day period might be granted to companies trading on the Nasdaq Capital Market, one of the exchange’s three tiers.

Cannabis companies are listed on all three tiers, which also include the Nasdaq Global Select Market and the Nasdaq Global Market.

Staying above that $1 minimum is clearly presenting a challenge for several Nasdaq-traded cannabis producers – a distinctly Canadian and international group, since U.S. plant-touching companies can’t list on the Nasdaq because marijuana remains illegal under federal law.

“On one hand, what you’re seeing is continued challenges in the fundamentals of these companies,” Bernstein analyst Sarwat said.

Those challenges aren’t all the companies’ fault, she added: Canada’s cannabis excise tax structure presents an obstacle to profitability, and restrictions on cannabis marketing make it “difficult to bring up brand equity, which is how you justify charging the higher price.”

But Sarwat said some companies do bear responsibility for their own woes, such as overbuilt production capacity.

“And now you’re seeing those companies having to significantly pare back capacity, and it has impacted their financial performance, and that’s now being reflected in lower share prices,” she said.

Until recently, Sarwat added, higher marijuana equity valuations were maintained somewhat on hopes for U.S. federal legalization and an accompanying inflow of capital from major institutional investors.

“And now you’re having a realization that that federal change is probably not going to happen anytime soon, and that’s also depressing the stock prices.”

In addition to Aurora and Village Farms, international cannabis companies Akanda Corp. and Clever Leaves Holdings have been given share-price warnings, Nasdaq’s noncompliance list shows.

Several U.S. ancillary cannabis companies have made the Nasdaq’s naughty list for the same reason:

‘Uncertain time for cannabis’

Consolidating shares doesn’t guarantee a permanent solution to the Nasdaq’s minimum bid-price requirement, since equity valuations are at the whim of market forces.

Even after Organigram consolidated its stock, for example, its Nasdaq-traded shares declined to less than $1.50 after the company reported third-quarter earnings.

Cannabis equity analyst Redmond believes marijuana investors are increasingly focused on profitable companies, moving away from metrics including adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and toward metrics such as operational cash flow and free cash flow.

“During this uncertain time for cannabis, I think people are starting to gravitate toward the less speculative businesses that are less reliant on the debt markets,” he said.

Redmond anticipates that cannabis businesses with trouble generating cash flow will see their share prices continue to drop.

“And, in some cases, those will drop below $1 and then we’ll find ourselves needing to do more of these reverse (share) splits,” he said.

However, Redmond added that positive U.S. political progress, including cannabis banking reform and the potential for rescheduling or even descheduling marijuana, could improve the MJ sector’s fortunes.

If such political progress causes U.S. cannabis stocks to rally, he expects that would affect American ancillary MJ companies and Canadian cannabis producers as well.

“When people get bullish on cannabis, or they see positive headlines about cannabis, a lot of the big players still can’t invest in the (over-the-counter-traded) and the (Canadian Securities Exchange-traded) names,” Redmon said.

“… I think you’ll see money come into those Nasdaq-listed names because they tend to have better liquidity, and they’re more accessible to the bigger, institutional-type investors, especially the ones with the quantitative programs that might be trading off of the headlines.”

Solomon Israel can be reached at solomon.israel@mjbizdaily.com.