Week 12

Update for Cannabis Industry between February 2nd and February 6th.

There were no M&A's during this week in Canadian Market, so I have decided to review some recent financials of Canopy Growth Corporation.

If you have read some of my previous blogs, if not I would recommend reading it to slightly catch up, I have explained and commented the liquidity issue that Canopy Growth Corporation is going through and this is driven by lack of sales and acquisitions they keep on doing.

To respond to it, they have recently decided (January this year) to take a US$150 million in cash pursuant to a senior secured term loan in the aggregate principal amount of approximately US$162.1 million from JGB Collateral LLC. (JGB Management Inc). For context it is a lender that focuses in credit-lending to niche industries like cannabis.

Is that a good move?

In my opinion, it is alright as it saves them slightly and here is why.

To start off, it is good to understand the terms. They have taken a relatively big loan (Essentially represents a bit over 25% of their total assets excluding cash) and collateralized it with their Buildings and greenhouses which are worth about about the same as the full loan taken. Then, the annual rate is of 9.50% (SOFR Rate at a minimum of 3.25% + 6.25% premium) which is quiet similar to industry standards. While the maturity is of 5 years. This basically means that their lowest monthly payment would represent about US$3.26 million (or CAD$4.45 million) which means that at maturity, they would of repaid at least US$45.0 million dollars in interest alone. 

Their cash flow from operating activities has been negative for the past year. Over the past nine months, cash flow from operating activities totaled -CAD 45,552,000 and this is mainly due to their gross margins that keep retracting months over months (Check the picture on the right side) despite sales going up.

And to add a cherry on top, they have also issued Loan Warrants to lenders where holders can exercise their warrants at US$1.30 per Canopy Share for a period of 5 years. Let's be honest, it ain't happening anytime soon if margins keep on decreasing.

At the end of the day, they needed this cash to continue operating as per usual and I believe that they have to review their current margins as decreasing prices to capture more market share is not always a great move given the current market where it becomes tight as a producer. 

On the other side, it also shows that Canopy takes on higher leverage which usually plays in their favor during the upsides. 

I will keep on following this company as the acquisition of MTL Cannabis caught my eye as they acquired it at a fair deal and see how that plans out for them.