Cannabis stocks had a tough week as overall sentiment in the sector turned bearish. Renewed fears of a second wave of COVID-19 infections and a new one-day record for cases in the United States caused more volatility as investors fled for safe havens. Overall, most cannabis stocks were down on the week, but despite the volatility, this week was full of news. If the market continues to show signs of weakness due to fears of a second wave hindering the reopening of the economy, we expect further downside for cannabis stocks. As it seems right now, cannabis stocks are at the mercy of overall market sentiment. Nevertheless, investors should be keeping their eyes open for any signs of improvement because the recent uncertainty has caused quite a substantial pullback in valuations for select companies.

 Aurora Cannabis provides a huge corporate update.

One of the most important news that came out of the cannabis sector this week was from Aurora Cannabis (ACB), which made a corporate announcement. Some of the highlights of that announcement include:

• Continuing to execute on corporate restructuring & the facility rationalization plan aimed at margin improvement and profitability.
• Exiting fiscal Q4 2020 at an SG&A run rate of approximately $42 Million.
• Remain on track for positive adjusted EBITDA in fiscal Q1 2021.
• Reduce its selling, general, and administrative workforce by 25 percent immediately, and another 30 percent over the next two quarters.
• Shut down 5 locations over the next two quarters, including Aurora Prairie in Saskatchewan, Aurora Mountain in Alberta, Aurora Ridge in Ontario, and Aurora Vie and Aurora Eau in Quebec.

Despite providing the market with a lot of insight, ACB shares fell after the announcement and closed lower on the week. 

Canopy Growth reduces the price of Acreage holdings acquisition.

Later in the week, Canopy Growth (CGC) provided updated terms regarding their potential purchase agreement with Acreage Holdings. The most significant changes include: 

• Canopy Growth will pay Acreage shareholders, and a select amount of convertible security holders, an aggregate of $37,500,000. That is approximately $0.30 per Existing share on an as-converted basis. The number of existing shares will determine the final amount that is to be received by each holder. 
• Acreage shareholders’ new Fixed shares represent 70% of Existing shares. Fixed shareholders will be entitled to receive 0.3048 of a Canopy Growth shares for each Fixed share held. That is a premium of approximately 120% at the June 24, 2020 closing price of Existing Shares on the Canadian Securities Exchange (the “CSE”).
• Acreage shareholders will be entitled to participate in the company’s long-term value as well as the U.S. cannabis industry. That is a result of Floating shares (defined below) that Canopy Growth may acquire. The acquisition is dependent on the occurrence or waiver of a triggering event at a price based on the 30-day volume-weighted average trading price of the Floating shares on the CSE.
• Considering the challenging economic environment and increasingly tighter and volatile financial market conditions, particularly for cannabis companies, Acreage determined that the new arrangement represents the best available prospect compliant with the agreement to maximize potential value for Acreage shareholders.

Acreage shares shot up 25% following the announcement, as investors were in favor of the new terms. CGC remained unchanged for the most part, closing down less than 1%.

Organigram provides the market with a corporate update.

Organigram (OGI) provided a corporate update this week that included essential details regarding their at-the-market offering. Their updates released this week include:

• OGI recently completed its at-the-market equity program previously announced on April 22, 2020. The company issued an aggregate of 21,080,229 common shares for gross proceeds of approximately CAD $49 million. Its peers in the cannabis sector have used this program to raise immediate capital, but that carries immediate dilution to shareholders. 
• There is also a lawsuit in the Court of Queen’s Bench in Alberta, seeking damages against many of the largest Canadian cannabis companies (including OGI). This action is not certified and does not particularize the claims against OGI or the other companies. OGI’s policy states that the company does not comment on uncertain information but is making this statement due to questions that may result from this action. OGI said they would continue to monitor this matter as it may develop.
• After OGI reviewed the perception of their Trailer Park Buds brand with Health Canada; the company is making changes to its newly launched brand and logo. OGI will move to a modified version of its logo for the short term. Over the longer term, the company is exploring options for a permanent logo and brand name for its large-format value brand. OGI will continue to have this large format value offering available in the market.

Despite uncertainty in the cannabis sector, we believe that being transparent is essential to keeping shareholders confident, and OGI seems to be doing a great job of that.

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ACB shares were trading at $12.84 per share on Friday morning, down $0.36 (-2.73%). Year-to-date, ACB has declined -50.46%, versus a -5.03% rise in the benchmark S&P 500 index during the same period.

About the Author: Aaron Missere

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...

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