By Ciara Linnane, MarketWatch
Tilt Holdings Inc.
Cannabis stocks were higher across the board on Tuesday, as investors digested the first earnings reports of the season and a first look at a pot banking bill that Democrats are hoping to pass in 2019.
Aurora Cannabis Inc. /zigman2/quotes/210559470/lastsale ACB +3.00% /zigman2/quotes/203734337/delayed CA:ACB +2.59% shares was last trading up 2%, after the company said it nearly quadrupled revenue and gained strong market share in its second fiscal quarter, but also had large losses due to a decline in marijuana-related equities. Aurora has invested heavily in other companies in the sector and must track their performance as part of its earnings. Those adjustments accounted for about C$190 million ($143 million) of its losses and came after a selloff in the sector.
The numbers reflect the first full quarter since the launch of legal cannabis sales in Canada in October, the first industrialized nation to allow recreational sales of the substance. Aurora said C$21.6 million of its total sales of C$54.2 million came from Canada, which has suffered shortages at the start of the new regime.
For more on Aurora, see: Aurora Cannabis earnings show big growth in pot sales, but worrisome profit trend
Supreme Cannabis Co. Inc. /zigman2/quotes/209645734/delayed CA:FIRE +9.43% /zigman2/quotes/203819708/delayed SPRWF +12.97% shares were down 3% after the company posted earnings for its fiscal second quarter. The company had a net loss of C$1.55 million, or 1 cent a share, in its fiscal second quarter to Dec. 31, narrower than the C$2.03 million, or 1 cent a share, posted in the year-earlier period. Revenue rose to $7.72 million from $1.68 million.
The company may have been overly optimistic in valuing its cannabis plants before sale, however. Supreme said the fair value changes on the growth of its biological assets came to C$10 million, but the realized fair value changes on inventory sold or impaired was C$6 million. Combining the C$6 million with the C$4 million of production costs exceeds the C$7.72 million revenue number.
Under International Financial Reporting Standards, or IFRS, the standard used in Canada, companies are required to report the value of a biological asset at different stages of its development as a way to smooth earnings over time. For cannabis companies, it means they must book the theoretical value of the crop before they have sold it, according to Mike Miller, finance director at private-equity firm White Sheep Corp. If they end up selling it for less than the value they assigned it, they will need to make an adjustment in the following quarter.
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“The cannabis market has seen huge volatility in price, which makes it difficult to guess what the biological assets are worth,” he said. With the industry still in its infancy, there are no futures markets to help with pricing and many price estimates were based on medical cannabis prices which were higher than the prices retailers could get for recreational cannabis, he said.
“If it were 100% accurate, the revenue number should equal production cost and the adjustment and zero out. This is going to be an issue for many companies this earnings season, and until the industry matures,” he said.
Read more on the topic: How marijuana companies can profit without selling pot
Preview of cannabis earnings: Cannabis earnings: Pot stocks’ downturn may drown Aurora and others in red ink
Also on Tuesday, MedMen Enterprises Inc. /zigman2/quotes/201940908/delayed MMNFF +17.54% Chief Executive Adam Bierman issued a statement to defend himself against allegations made by former Chief Financial Officer James Parker in a lawsuit. Parker, who resigned from his post in November amid an equity raise which was cut in half, is suing the company in Los Angeles Superior Court for breach of contract and wrongful termination, among other things. At the time, MedMen refused to comment on the CFO departure and said cutting the financing nearly in half was due to a “significant selloff” in the global market.
Bierman said Parker worked at MedMen for less than 18 months before he resigned last November and has now “filed a baseless, wrongful termination lawsuit for his financial gain. We will vigorously defend ourselves in court,” he told MarketWatch in a statement.