House leadership announces vote on the MORE Act for this week.
Last Friday, House Majority Leader Steny Hoyer (D-MD) announced that the lower chamber would vote on the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act in the latter half of this week. This comes after Hoyer announced earlier this month to hold a floor vote, which came after an initial attempt to vote on the MORE Act this September. The MORE Act is anticipated to pass the Democratic-controlled chamber with bipartisan support; its chances in the Senate appear far less likely.
The MORE Act would decriminalize cannabis by removing it from the Controlled Substances Act, allow states to determine their regulations on commercializing cannabis, expunge convictions for non-violent cannabis offenses, and impose a five percent federal tax on sales. The MORE Act, sponsored by Judiciary Committee Chairman Jerrold Nadler (D-NY) and Vice President-elect Kamala Harris (D-CA), cleared the House Judiciary Committee last November and has been awaiting a floor vote from the House since. While the House's approval of the MORE Act would be largely symbolic with a Republican-controlled Senate, the vote could increase Biden's pressure to embrace full legalization.
Aurora Cannabis halts operations at Aurora Sun grow facility in Medicine Hat, Canada (ACB)
ACB is a Hedgeye Cannabis Best Idea SHORT.
Aurora Cannabis is indefinitely halting operations at their Aurora Sun facility in Medicine Hat, Canada. Aurora Sun, which was touted as a high-technology hybrid greenhouse cannabis production facility, began with a 71-acre land purchase in April 2018. It was planned to be a 1.2 million sq. ft. grow facility, 50% larger than Aurora Sky, its flagship production facility located near the Edmonton International Airport. Management initially anticipated first planting in 1H 2019 and completion of the full facility in 2H 2019. By October 2019, the facility was still under construction at an expanded 1.62 million sq. ft. facility and was expected to produce 230,000 kgs of cannabis annually. At the time, Aurora management commented that the facility was “nearing completion with the majority of capital investment now behind us.” However, in the following month, after poor earnings, the company reported that it would pause construction on Aurora Sun with plans to have at least six flower rooms in 238,000 sq. ft. of space operation by 2020. Pausing construction then was estimated to save the company around C$110 million.
In a recent statement to CTV News Calgary, Aurora’s management commented, “In response to the recent shifts in the industry and our strategic imperatives, the company announced it would pause operations at Aurora Sun in Medicine Hat, Alta., indefinitely. We remain focused on advancing our portfolio of premium and super-premium brands and accelerating innovation in high margin product categories."
Aurora Sun was meant to be the company’s largest facility, ranking as their new flagship at the top of their “Sky Class” facilities. In comparison, the company’s main facility, Aurora Sky, is 800,000 sq. ft. producing 100,000 kgs of cannabis annually. As the company suspends operations there, the licensing process with Health Canada was still underway, and approximately 35 employees were employed there. At completion, Aurora Sun was expected to employ at least 600 people.
This cost-cutting move comes as the company continues to fail in posting profitability. Their ceasing operations at Aurora Sun is endemic of the overinvestment in production facilities, mismatched with market demand, that has plagued Canadian operators. The company is scrambling to achieve positive EBITDA by mid-2021, which we do not believe to be possible. ACB is struggling to keep a foothold on the Canadian market, with a cash burn that has averaged C$91 million over the past year and C$72.6 million last quarter. ACB’s balance sheet and cash flow are disastrous, with the company still facing violating a bank covenant by fiscal year-end.
Ayr Strategies moves to close on the deal in Pennsylvania before yearend (AYRSF)
AYRSF is a Hedgeye Cannabis Best Idea LONG.
Ayr Strategies, a leading vertically integrated MSO, has moved to a Definitive Merger Agreement from Letter of Intent with CannTech PA. As previously announced on August 26, 2020, Ayr intends to purchase 100% of the membership interests of CannTech PA for a total purchase consideration of $57 million, which will be paid as to $27 million in cash, $15 million in exchangeable shares, each of which would be exchangeable for a subordinate voting share, and $15 million in seller’s notes. The transaction is expected to close by year-end, subject to regulatory approval.
CannTech is a licensed operator in Pennsylvania, including a 143,000 sq. ft. cultivation and processing facility under development. The initial construction phase comprising 45,000 sq. ft. recently approved for cultivation and an expected first harvest in March 2021. The 13-acre site provides ample room for further expansion beyond the existing 143,000 sq. ft. facility. The licensed operator also has the right to operate six dispensaries poised to open in excellent retail locations, most of which are clustered in the Pittsburgh and Philadelphia regions. The first dispensary opened last month in New Castle, PA, with two more expected to open in early 2021. The licensed operator also has a strong research program in collaboration with a local medical school.
For Ayr’s Q3, the company reported record revenues of $45.5 million versus FactSet Consensus $45.5 million, in line with consensus estimates and representing an increase of 61% QoQ and 42% YoY. Adjusted EBITDA more than doubled sequentially at $19.3 million versus FactSet Consensus $18.6 million, an increase of 112% QoQ and 123% YoY. Adjusted EBITDA margin improved to 42.4%, representing an increase of 1020bps QoQ and 1550bps YoY. Ayr also had a recent, significant operational milestone in their Massachusetts operation, receiving three host community approvals to expand its existing medical footprint meaningfully. The approvals for Host Community Agreements (HCAs) mark a significant first step toward the company’s entry into the adult-use market in the Greater Boston area, with a population of 4.9 million.
There are several visible drivers of organic and acquisition-driven revenue growth over the next few years. The associated margins and cash flow should lead to years of compounding growth as the company grows in new markets. Ayr Strategies has one of the most compelling organic and acquisitive growth strategies in our covered universe.
