Acreage: What’s Behind This Pot Stock’s Recent Decline?
Shares of Canada-based marijuana stock Acreage Holdings (OTC: ACRG.F) have lost a quarter of their value in the last month. In fact, the pot stock is trading at $2.52 on the CNSX which is 84% below its 52-week high. Most marijuana stocks have lost massive value in the last 15 months due to an extended bear market as well as the onset of the COVID-19 pandemic – but what’s behind this pot stock’s recent decline?
Acreage’s Disappointing Q1
Acreage announced its first-quarter results last month and reported sales of $37.6 million, an increase of 65% year-over-year. This growth was driven by the company’s wholesale business and retail dispensaries. Sales increased 17% sequentially due to an increase in demand from the Midwest and mid-Atlantic regions in the first quarter of 2020.
However, Acreage’s bottom-line continued to disappoint investors. It reported an adjusted Pro-forma EBITDA loss of $11.1 million, that widened 40% compared to Q4. Further, Acreage reported a pre-tax non-cash charge of $196 million in the March quarter which was substantially higher than company estimates between $80 million and $100 million.
It attributed these to operational and restructuring changes that are designed to improve profit margins coupled with goodwill impairment and write-down charges that were not accounted for previously.
Acreage is Struggling with Liquidity
Similar to most marijuana stocks, Acreage is also struggling with a low cash balance. It ended Q1 with a precariously low cash balance of $13.94 million. The company announced the sale of non-core assets in a strategic update disclosed in May.
It also stated its intention to focus on profitable operations which will accelerate its path to profitability and help it achieve Pro-forma adjusted EBITDA for the full year 2020. These decisions will enable Acreage operate with an optimized cost structure.
In order to shore up its financials, Acreage announced it entered into two definitive funding agreements where it will raise $60 million in gross proceeds. This includes an equity distribution with an institutional investor to sell up to $50 million of the company’s Class A subordinate voting shares as well as private placement offering where it issued $11 million in principal under a secured convertible debenture.
This shareholder dilution is a cause of concern for investors which also impacted the company’s stock price.
Revised Terms for the Acreage/Canopy Deal
Last year, Acreage and cannabis giant Canopy Growth (NYSE: CGC) entered into an agreement. Canopy agreed to acquire Acreage for $3.4 billion when marijuana is legalized in the U.S. at the federal level.
However, last month, Canopy revised agreement terms and announced it will acquire 70% of Acreage for $843 million. Further, Canopy can purchase the additional 30% in Acreage and the purchase price will be based on the latter’s 30-day volume-weighted average trading price.
We can see that Canopy has discounted Acreage’s acquisition purchase considerably. However, Acreage will receive an upfront cash payment of $37.5 million as well as a loan of up to $100 million from Canopy improving its liquidity.
Acreage: What’s Behind This Pot Stock’s Recent Decline?
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