Cannabis Company Death Watch: Tilray, Aurora, Canopy and Aphria

Tilray, Inc (NASDAQ:TLRY), Aurora (NYSE:ACB), Canopy (NYSE:CGC) and Aphria (NYSE:APHA) have all suffered valuation declines in 2019 that appear yet again to be showing signs of a bottom. But some of these corporate cannabis behemoths are better positioned than others relative to their peers. At least the diminishing threat of conflict in the Middle East means that these stocks are free to resume their trajectories driven by their own fundamentals as opposed to by geopolitical tremors.

But are any of these original corporate founders of the entire cannabis industry at risk of going bust altogether?

The answer is not readily apparent.

Aurora tops the list of companies that have potentially bitten off more than can be chewed – especially in this new cash-constrained, unexpected reality. The rapidity with which Aurora has gone from global contender to asset-shedding, Chief Corporate Officer-dumping, cost-cutting maniac is a pretty telling drama as just how fearful management has become. Who is interested in a $17 million greenhouse in Exeter in Ontario?

Get ready for a reduced offering price

Aurora’s investment activity has led to a portfolio of underperforming assets that will likely act as a drag on the company’s ability to reverse its share price deterioration.

Radient Technologies Inc. (TSXV: RTI), Cann Group Ltd. (ASX: CAN), Micron Waste Technologies Inc. (CSE: MWM), Choom Holdings Inc. (CSE: CHOO), CTT Pharmaceuticals (OTCC: CTTH), Alcanna Inc. (TSX: CLIQ), High Tide Inc. (CSE: HITI), EnWave Corporation (TSXV: ENW), Capcium Inc. (private), Evio Beauty Group (private), have all suffered alongside the entire sector in terms of valuation squeeze. (See Chart Below)

One must wonder what covenants might lie waiting in the convertible debenture agreements that could trip the entire enterprise into a default event.

Speaking of default, Tilray’s debenture, wherein they raised a total of US$450 million announced when the stock was trading at $300 a share is probably flirting with something approaching lender’s remorse.

Consider this paragraph from the notes of the company’s recent 10Q:

To the extent the Company so elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture will, for the first 365 days after such event of default, consist exclusively of the right to receive additional interest on the notes. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s election (the “cash conversion option”). The initial conversion rate for the Convertible Notes is 5.9735 shares of common stock per one thousand dollar principal amount of notes, which is equivalent to an initial conversion price of approximately $167.41 per share of common stock. Throughout the term of the Convertible Notes, the conversion rate may be adjusted upon the occurrence of certain events.

While protected from the risk of collapse due to insolvency, the initial conversion price clearly indicates that nobody saw this price collapse coming. The question is whether or not the covenants provide any mechanism for the conversion price to be adjusted to a floor price closer to where the stock is trading now. Not that the lenders want to find themselves the operators of a bunch of non-performing cannabis assets, should that be where we’re at in October 2023 when the debentures mature.

Aphria’s biggest existential threat comes from its internal legal problems. There is still a plethora of lawsuits and investigations pending involving several of Aphria’s earlier transactions, and there is still a great deal of uncertainty as to who knew what when and how.

Of all the biggest players, Canopy has the biggest cushion to weather the cannabis valuation storm now upon us. With $2.7 billion in cash still sitting on the balance sheet as of the last quarter, Canopy has the luxury of conserving cash and waiting out the storm, or, if necessary, becoming a beer company.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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