It’s no secret that the marijuana industry is on fire. In the first quarter of the year, the very first cannabis exchange-traded fund, the Horizons Marijuana Life Sciences ETF, increased by 54%, leaving the wide range S&P 500, which is having its best start to the year since 1991, eating its dust.
Share-based dilution is a big deal for shareholders of marijuana stocks
But despite these significant gains, there is no guarantee that investors will come out on top. Of course, growth expectations are huge with the rollout of legal cannabis in Canada and legalizations underway at the state level in the United States. However, access to capital to take advantage of these growth opportunities has left pot shareholders at a crossroads.
Before the passage of the Cannabis Act, marijuana stocks across North America had virtually no access to non-dilutive forms of financing, such as secured loans or lines of credit. Instead, if a cannabis company wanted to expand their cultivation capacity, make an acquisition, or develop a new product, they had to raise capital through a support offer in Canada or a secondary offer in the United States. Simply put, we are basically talking about publicly traded stocks issuing stocks, convertible debentures, stock options and / or warrants in order to raise capital.
The upside is that both buy and side offers have almost always done the trick. With such robust growth estimates for the pot industry, there has always been a demand for these secondary stocks. The downside is that these secondary shares inflated the number of shares outstanding, weighing down existing shareholders and making it all the more difficult for a publicly traded company to make a significant profit.
Make no mistake: virtually every marijuana inventory has been affected by some degree of equity-based dilution, whether for organic growth purposes or to fund one or more acquisitions. But there are five pot stocks that have been more painful to own than others due to their stock-based dilution. Here are five of the worst offenders.
iAnthus Capital Holdings
With vertically integrated multistate weed dispensary iAnthus Capital Holdings‘ (OTC: ITHUF) the stock has gained 182% since Jan. 1, 2018, you’d probably think management is watching over its shareholders. But the point is, iAnthus’ frenzy of acquisitions and the need for capital to open retail stores has caused it to issue a lot of stock. Over the past 15 months, its market cap has increased by around 794%, leading to an underperformance of around 612%!
Arguably the biggest concern with iAnthus is not that the company is keen to expand its presence into new states (which is pretty much what every vertically integrated dispensary in the United States does), but rather that it seems to pay too dearly for the assets is to acquire. Based on the Company’s most recent quarterly operating results, 55% of its total assets are related to goodwill and there can be no assurance that this premium paid to acquire other companies will be recovered in the future.
It is undeniable that a gain of 182% in 15 months is solid. But with the rapid increase in the number of shares of iAnthus, consider yourself warned that hiccups could be on the horizon.
Based in Quebec HEXO (NASDAQ: HEXO) has also apparently done well for its shareholders, with a return of 108% since January 1, 2018. During this period, HEXO entered into a five-year supply agreement with its home province of Quebec for a total of 200,000 kilos of production, landed a brand partner in Molson Coors Brewery, and announced last month that it was purchasing Current brands for 263 million Canadian dollars (197 million dollars).
Again, this is a company that raised nearly C $ 150 million in a takeover bid in early 2018, and it plans to increase its maximum annual production capacity. from 108,000 kilos to 150,000 kilos with its purchase in stock from Newstrike. It is perhaps not surprising, then, that the company’s market capitalization has increased by 463% since the start of 2018, more than four times what the overall stock price has gained over the course of this period.
Basically, HEXO seems relatively inexpensive to its peers. It also has a good chunk of its production tied up in supply agreements. But investors should understand that equity-based dilution has been common for HEXO thus far, and it could negatively affect its returns in the interim.
Wall Street sweetheart in the first quarter, Cronos Group (NASDAQ: CRON), is another pot stock that has been fairly liberal with equity issuances since the start of 2018. The big one, however, came when the tobacco giant Altria closed a $ 1.8 billion equity investment in Cronos Group, which pushed its market capitalization north of $ 6 billion. Although its stock has risen 140% in the past 15 months, the market capitalization of the Cronos Group has increased by 428%.
There is certainly a lot of optimism surrounding Cronos, most of which relates to his aforementioned partnership with Altria. Now that the company has $ 1.8 billion in cash, it should be able to execute its long-term strategy of entering overseas markets, diversifying its product portfolio away from the dried cannabis flower, and can -being to increase its capacity.
But given how far behind Cronos compared to its peers in the high-tech production department, and how little was done prior to the Altria deal to launch into overseas sales channels, the icing on the cake of equity-based dilution could prevent the company from delivering significant earnings per share for some time.
Another regular offender in the equity dilution department is a high-end vertically integrated cannabis company. MedMen Companies (OTC: MMNFF). Since MedMen became a public company last year, its market capitalization has climbed 239%, but its stock price has fallen 11% for a not-so-pleasant 250% underperformance.
As with iAnthus above, MedMen must spend, spend, spend to expand into new states. The licensing and clearance process for vertically integrated businesses can be long and arduous in every legal state, so many have turned to acquiring dispensaries that have already obtained their cultivation licenses and / or in order to accelerate their entry into new markets. This could be the impetus behind MedMen’s $ 682 million purchase of shares from privately-held PharmaCann, which is slated to close in 2019. It’s unclear if MedMen is overpaying for this deal, but it’s a big sum. money that will be fully paid by issuing More Stock.
At this point, MedMen’s existing stores are generating a lot of sales per square foot. But it will be some time before this company has a chance to gain profitability, which shareholders should take into account.
Finally, what would an equity-based dilution list be without the primary offender, at least from an aggregate equity perspective? Since the end of the 2014 financial year, Aurora Cannabis (NASDAQ: ACB) has issued over a billion shares, most of which have been used to fund huge acquisitions and a handful of organic projects. Since early 2018, Aurora’s market cap is up 202%, but its share price has only gained 21%, leading to an underperformance of 181%!
Aurora has funded a number of transactions wholly, or primarily, with its inventory in an attempt to lead the pack in peak production. With the exception of the over $ 800 million CanniMed deal, which had a relatively small cash component, the $ 2 billion MedReleaf buyout, the $ 200 million ICC Labs deal and the The $ 130 million purchase of Whistler Medical Marijuana was all completed through the issuance of common shares of Aurora.
Worse yet, the carnage is not over. Aurora had nearly 44.2 million stock options and 24.8 million warrants outstanding at the end of calendar year 2018. If and when these shares are exercised, combined with compensation based and all other acquisitions Aurora makes in the future, its number of outstanding shares will explode. spent 1.1 billion, if not more. This could make making a significant profit particularly difficult for Canada’s largest producer.
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