Cannabis business-to-business company MJardin Group (MJARF) saw its stock pop some 12% Thursday after the company announced it would release first-quarter earnings on May 30 -- just weeks after delayed fourth-quarter numbers came out.
The news prompted market chatter that this must be a good sign for MJARF, and could mean that better revenue numbers lie ahead. But MJARF's rally came just days after Canaccord Genuity analyst Bobby Burleson downgraded the stock to a "Hold" from a previous "Speculative Buy."
The trouble seemed to begin when the company, which also trades on the Canadian Securities Exchange under the ticker "MJAR," changed CEOs in February. At that point, Burleson reduced his estimates for the company's performance by taking estimates from Massachusetts recreational pot sales out of his model.
Burleson noted that Massachusetts has been slow to award recreation-sales licenses, so many cannabis companies that planned to operate there have had to adjust their business plans. He said MJAR "had [letters of intent] that they talked about for Massachusetts, but they never materialized. And that was 40% of our original forecast."
However, that wasn't the end of the analyst's cuts to his MJardin forecast. This month, Burleson eliminated California sales as well from his expectations, and lowered the numbers for Canada and Colorado due to what he called the company's "slower-than-anticipated ramp."
"We are now taking California out of our model and are currently modeling 45% of revenues from Colorado next year, 42% from Canada and 13% from Nevada," he wrote in a research note. "We had previously forecast approximately 10% of revenues to come from California based on the company's previous outstanding [letters of intent]."
All in all, Burleson cut his target price for the stock to C$2 from a previous C$5.50. The stock did have a 52-week high of C$8.90 when it first went public, but has basically dropped ever since and closed at C$1.21 even after factoring in Thursday's big rally. (MJAR was suspended from trading by the Canadian Securities Exchange last week, although the suspension was lifted when the company addressed the issues the exchange had.)
Burleson also cut his 2019 revenue estimate for the company to C$30.2 million from an earlier C$101.9 million. The analyst likewise dramatically scaled back his 2019 EBITDA estimate to just C$7.6 million from a previous C$48.8 million.
Markets usually see a change in CEOs within months of going public as a major red flag, but Burleson seemed to dismiss that as a problem for MJardin.
He wrote in a note that outgoing CEO Rishi Gautam was more of a private-equity guy who had steered the company to an IPO, but that it was now time to put a business operator in charge. The company appointed Adrian Montgomery as interim CEO and chairman of the board in February.
Gautam initially remained on the MJardin board as well, but left last week. Additionally, Chief Strategy Officer Mr. Francis Knuettel II and the Chief Operating Officer Jorge Boone resigned.
Canaccord's Banking Relationship with MJardin
Now, Canaccord is known as a big supporter of cannabis companies on the banking side, and it's previously disclosed MJardin as a client of the firm's investment-banking services.
And even as Burleson downgraded MJARF stock and sliced his earnings estimates just six months after the cannabis firm went public, he's made some supportive statements about the firm.
After MJardin presented at a Canaccord cannabis conference this week, Burleson wrote: "We continue to believe MJAR's proprietary cultivation knowledge is unique, and along with other proprietary data can be leveraged to deliver exceptional operational metrics. The company's grow software enables comprehensive monitoring of plant growth, yields and inventory levels in real time, and enables predictive analytics to optimize harvest cycles and planting rotations for the most effective yields."
However, the analyst remaining on the sidelines for now and not recommending buying the stock.
Canadian cannabis b-to-b firm Tilt Holdings (SVVTF) is another Canaccord Genuity client that underwent a quick management change shortly after going public.
Former CEO Alex Coleman stepped down and Mark Scatterday took over as Tilt's interim CEO as a search for a permanent chief got underway. Scatterday previously founded Jupiter Research, which is now a wholly owned Tilt unit.
Coleman said at the time that Tilt went public that he believed the firm, which also trades in Canada under the ticker "TILT," could deliver $500 million in revenue by 2019's end. That's an almost-impossible target to reach when the company's 2018 pro-forma revenue was $98 million.
But to be fair, the firm had previously guided 2018 pro forma to be $70 million, so TILT beat on that guidance. However, 2019 revenues won't come close to the $500 million that Coleman suggested, and now the CEO himself is gone as well.
The company gave the same reason for his departure as Burleson gave for the MJardin CEO's exit. Joel Milton, Tilt's senior vice president of business development, said that Coleman was more of a private-equity guy.
But besides changing CEOs, TILT shocked investors a couple of weeks ago when the company took an approximately $500 million goodwill-impairment charge on sales of $5.7 million.
In a regulatory filing, the company attributed the writedown to the "outlook on the medical cannabis industry in Canada as a result of the legalized recreational market. The impairment was determined by comparing the [subsidiary's] value-in-use to its carrying value."
Milton said that the valuation was determined by Canaccord, not by the various companies that make up TILT. He essentially put the blame on Canaccord.
Coleman told the publication Midas Letter that "you basically had, in a very short period of time, a writeup based on an IPO price and a writedown based on discounted cash flows, which really don't take into consideration the value of the enterprise."
Like MJardin, Tilt recently presented at a Canaccord conference. Burleson and Canaccord's other analysts recapped the company's remarks by saying that Milton "highlighted TILT's differentiated b-to-b approach to the market, which offers multiple opportunities for growth and synergies across the company's assets in cultivation/production, consumer brands, software and distribution. Additionally, Mr. Milton highlighted the recent appointment of Mark Scatterday to the position of interim CEO. We believe Mr. Scatterday's operational experience will be invaluable as TILT transitions to the next stage of life as a public company. In our view, looming [recreational-pot] licenses in Massachusetts could provide positive catalysts for the shares. In the near term, strong vape-hardware sales should support the stock given this segment makes TILT one of the largest U.S. cannabis players by revenue."
Burleson has given the stock a "Speculative Buy" rating and a C$4 target price -- well above the C$1.90 that it closed at Thursday.
The Bottom Line
Investors might want to give these stocks a six-month cooling-off period before investing. Let the private-equity CEOs depart, and let the numbers shake back down to reality.