WeedMD Q3 Financials: Expect a Much Better 2020

WeedMD Inc. (TSXV:WMD), one of the Canadian marijuana stocks, reported third-quarter 2019 financial results on November 29, 2019

SmallCapPower | December 4, 2019: WeedMD Inc. (TSXV:WMD) (OTCQX:WDDMF), one of the Canadian cannabis stocks, reported Q3/19 financial results on November 29, 2019. Third-quarter results were highlighted by net revenue of $6.7M, an adjusted EBITDA loss of $2.0M, and a net loss of $13.4M. Results were mixed; revenue missed analysts’ estimates of $9.5M, while the adj. EBITDA loss was in-line with estimates of a $1.5M loss. In conjunction with the release Q3/19 financials, WeedMD also announced the acquisition of Starseed, a Canadian-based cultivator owned by the Labourers Pension Fund of Canada (LPF), in an all-stock deal valued at $77.8M.

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Figure 1: WeedMD Financial Highlights

Source: Company reports, Ubika

Third-quarter net revenue falls 17% quarter over quarter. Q3/19 revenue declined by 17% to $6.7M (was $8.0M during Q2) and missed consensus estimates of $9.5M. The decline in revenue was driven primarily by a 37% decrease in its  average selling price per gram, however, this was offset by a 32% increase in kilograms sold. Management cited weakness in the wholesale market as a factor driving lower pricing. Additionally, management noted that a larger portion of this quarter’s revenue mix was lower-grade product, which is expected to free up space for premium product in subsequent quarters. During the quarter the Company also completed its first outdoor harvest, which yielded ~8,000 kg at an average cost per gram of $0.16. This was significantly lower than management’s guidance of 20,000 kg (previously announced in an interview with Midas Letter on Oct 8, 2019).

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Gross margin (before FV adj.) contracts fell to 29%. Gross margins contracted by 17.3% to 29%, which missed consensus estimates of 40%. Lower gross margins were due to a lower selling price driven by the sale of higher volumes of lower-grade flower. However, this could be a one-time event as management expects margins to improve as it scales operations at its Strathroy facility, driven principally by implementing its automated packaging line. Adj. EBITDA loss increase to $1.8M from $0.7M, however the loss was in-line with consensus estimates of an adj. EBITDA loss of $1.5M. Management also noted that the Company expects to be EBITDA positive in F2020E.

Figure 2: Starseed Saturday Brand

Source: Company website

WeedMD announced Starseed acquisition. WMD announced that it would acquire Starseed Holdings Inc., a Canadian-based cultivator owned by the Labourers Pension Fund of Canada (LPF), in an all-stock deal valued at $77.8M. In addition to the agreement, WeedMD will receive $25M in equity financing from the LPF. To fund the deal, and secondary equity offering, WeedMD is expected to issue 94.9M shares, bringing the Company’s total fully-diluted share count to 210.9M. The deal is expected to close by February 28, 2020. After the close of the agreement and private placement, WeedMD shareholders will own ~55% of the combined company and Starseed and LPF will own 45%. WeedMD will acquire a 15,000 sq. ft indoor facility in Bowmanville, nine medical clinics across Ontario, and 6,500 registered medical patients. Additionally, Starseed has a partnership with Laborers’ International Union of North America (LiUNA) to provide insurance-covered medical cannabis for more than 100,000 union members in Canada.

Key takeaways

Overall, the quarter missed revenue expectations but was but in-line with results of other major Canadian cultivators (most have far greater market caps), which all experience sequential declines in revenue. One of the biggest surprises was management’s miss on the outdoor grow, however, we view this as a learning year and that F2020E should show a significant improvement.

In our view, the Starseed acquisition should have an overall positive impact on the Company, and while dilutive (WMD effectively double their share-count), the Company picks up 6,500 medical patients looking for premium flower. Starseed’s ASP is $8.00/gram, compared with $2.36/gram for WeedMD. As a result of the transaction, the combined entity’s cost per gram is expected to decline to $1.26/gram from $6.00/gram. Furthermore, WeedMD received $25M from the Pension Fund, and would have a proforma cash balance of $55.7M. WeedMD stock currently trades at a F2020E EV/sales multiple of 1.2x, a discount to its small-to-mid cap Canadian peers, which trade at an average F2020E multiple of 3.0x.

Shares of WeedMD ended Monday’s trading session up 6.5% at C$0.99. WeedMD stock trades at a market cap of C$113 million.

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