Haywood Capital Markets analyst Neal Gilmer on Friday delivered an update on Cannabis cannabis name WeedMD (WeedMD Stock Quote, Chart, News TSXV:WMD), saying that quarterly numbers below his expectations helped bring down his 12-month target on the stock.
Southwestern Ontario’s WeedMD owns and operates a greenhouse and processing facility in Strathroy, Ontario, and a processing and extraction facility in Aylmer, Ontario. Last year, WeedMD acquired Starseed Medicinal, which has a $25-million equity investment from the Labourers’ Pension Fund of Central and Eastern Canada (LPF), the largest construction union in Canada.
The company announced its second quarter 2020 results on Wednesday, showing net revenue of $5.9 million compared to $8.0 million a year earlier. The top line was driven by direct-to-consumer sales in the medical market and provincial retail channels, according to WeedMD.
“During the second quarter, we advanced our integration with Starseed to drive direct-to-consumer revenue and made significant operational progress in ramping up production,” said Angelo Tsebelis, CEO, in a press release. “Our unique medical service platform and growing brand recognition for our Color Cannabis adult-use products contributed to our revenue for the quarter.”
WeedMD finished the quarter with inventory and biological assets of $38.6 million and cash of $5.7 million. Subsequent to the quarter’s end, the company closed on a $30-million credit facility with its strategic investor LPF.
In his report, Gilmer said the lower revenue was a result of COVID-19’s impact on adult-use and medical cannabis. For his part, Gilmer had been calling for $8.6 million in revenue, while WMD’s adjusted EBITDA loss of $5.7 million was also below his estimated loss of $4.3 million. The analyst said the Q2’s gross margin was below his expectations due to certain non-cash, one-time items including an inventory impairment of $1.4 million.
“Management provided an adjusted gross margin of 52 per cent, which would have exceeded our estimate. Operating expenses were much lower than expected, with SG&A totaling $4.8 million versus our expectations for $6.9 million,” Gilmer wrote.
“We have made some adjustments to our model following the Q2/20 results and management commentary. Management suggested sales are back above levels prior to the pandemic and poised for strong growth from overall market growth [and] in addition should be fuelled by availability of its cannabis 2.0 products in Q4,” Gilmer said. “Our estimates are lower reflecting growth off the lower than expected Q2/20 and the carry through into 2021.”
With the update, Gilmer maintained his “Buy” rating but dropped his target from $0.85 to $0.50 per share, which at press time represented a projected 12-month return of 85 per cent. Year-to-date, WMD is down 69 per cent.
On the uptick in business in recent months, WeedMD wrote in the quarterly press release, “Subsequent to quarter-end, the Company has seen increasing customer activity and sales in the majority of its markets, reflecting the reopening of the Canadian economy and gradually decreasing impact of COVID-19, as people have adapted to this new environment. These positive trends have persisted and continue to improve.”