Acreage Holdings Charge Is Double What It Told Investors To Expect

Following the company’s heavily discounted deal with Canopy Growth and the departure of co-founder and CEO Kevin Murphy, Acreage Holdings, Inc. (OTCQX: ACRGF) reported first-quarter 2020 reported revenue of $24.2 million, an increase of 88% increase compared to the same period in 2019, and a 15% sequential increase. The earnings were unaudited.

The revenue that was reported paled in comparison to the company’s charges, which were almost double what Acreage had told investors they could expect.  Acreage reported a one-time, non-cash pre-tax charge of $196.0 million, or $164.7 million after taxes. The company had originally told the market it could expect to see a charge between $80-$100 million. Acreage blamed the discrepancy on current fair market value in certain states and the write-down
for its services agreement in Maine, which was not initially contemplated.

The net losses were equally eye-popping at $172 million. These results explain the departure of Murphy and his replacement by Bill Van Faasen.

“With the COVID-19 pandemic affecting millions across the U.S., the cannabis industry was faced with yet another significant challenge. Our dispensary and processing and cultivation associates quickly adapted to these changing dynamics ensuring our patients and customers in need were still served with dignity and respect, while maintaining a safe environment for everyone. Additionally, I am pleased with the reacceleration of our reported and pro forma revenue as our wholesale business continues to ramp and our dispensaries continue to mature,” said Bill Van Faasen, interim Chief Executive Officer of Acreage.

The company continues to report pro forma numbers, however, many past deals in which Acreage included those pro forma numbers have been terminated or sold. At this point, the company that once claimed to be the largest cannabis business in the country only has (assuming completion of pending acquisitions), 15 operational dispensaries. Acreage has or will have management or consulting services agreements, (including pending acquisitions), with entities operating 12 dispensaries.

Murphy’s Voting Shares

Not unlike the structure that was originally established at MedMen (OTC:MMNFF), Murphy, he exercises a significant majority of the voting power in respect
of the Acreage Shares. According to the company’s May MD&A, “The Subordinate Voting Shares are entitled to one vote per share, the Proportionate Voting Shares are entitled to 40 votes per share, and the Multiple Voting Shares are entitled to 3,000 votes per share. As a result, Mr. Murphy has the ability to control the outcome of all matters submitted to the Company’s shareholders for approval, including the election and removal of directors and any arrangement or sale of all or substantially all of the assets of the Company.”

“As a shareholder, even a controlling shareholder, Mr. Murphy will be entitled to vote his shares, and shares over which he has voting control, in his own interests, which may not always be in the interests of the Company’s shareholders generally. Because Mr. Murphy holds most of his economic interest in the Company’s business through High Street, rather than through the Company, he may have conflicting interests with holders of the Acreage Shares.”

The company is hosting a call to discuss the earnings on Friday morning. The stock closed higher by 23% on Thursday to end the day at $2.88.

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


One comment

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    Lance Brofman

    June 27, 2020 at 10:50 am

    New York Can Either Reduce Spending by $30+ billion or Auction 100 Cannabis Licenses

    Estimates of the budget shortfall for state and local governments in New York caused by COVID-19 range from $30 to $60 billion. That does not count expenses and lost revenue resulting from recent protests and looting. Just the police overtime and lost revenue from boarded-up storefronts, would be a major budget problem for New York City in pre-pandemic times.

    So far, most New York State and local officials’ plans for dealing with the budget shortfalls seem to be, to hope for money from the Federal Government. Maybe. Governor Cuomo and some others have mentioned legalization and taxation of recreational cannabis as a possible source of funds to address the budget shortfalls. However, it is always with a caveat that it is a complex issue. One way of speeding up the much-needed revenue is to simply copy much of what Colorado has done.
    Colorado legalized adult cannabis in 2014. In 2019 $302 million in cannabis taxes were collected by Colorado. New York has more than three times the population of Colorado. Thus, just copying Colorado’s laws would be expected to bring in more than $1 billion in taxes in New York. It would be possible to sell municipal bonds secured with cannabis tax revenue, as has been done with the tobacco settlement payments. However, a better idea would be to auction cannabis licenses. This would allow New York State and local governments to both get immediate funds and also have all of the recurring revenue from taxing cannabis.
    The easy way to allocate the auction revenue between the state and other entities such as New York City, would be to actually have two auctions simultaneously. In order to be in the recreational cannabis business, an entity would have to have a license from both the state and the local government. This would allow any of the counties in New York to opt-out from legal cannabis by simply not participating in the auction. Obviously, a license for New York City would sell for much more than for one, in a small upstate county.
    Auctioning 100 state and 100 local cannabis licenses could easily bring in more than $30 billion. As with New York City taxi medallions, the licenses would be transferable and some understanding as to the limit on future issuance would be required. The tax rates on cannabis sales could be set at Colorado levels, again with some limit on future tax levels and those with the initial licenses. To maximize the proceeds, the Dutch auction method could be used. This encourages buyers to bid very high since all winning bidders pay the same clearing price. We are now in a frenzy of investors trying to get in on the ground floor of legal cannabis. This is similar to what happened with casino gambling, after Atlantic City was the first non-Nevada jurisdiction to allow casinos. As with the casinos, some investors did well with well managed companies. Some investors and lenders lost everything as with the Trump Casinos. The big winners were the governments who collected billions in casino taxes.
    In New York and other jurisdictions, cannabis legalization has been delayed by the issue of social equity, which is the concept of reparations for those harmed by the war on drugs, many of which were minorities. My view is that, unlike slavery, where no direct victims are still alive, reparations for those harmed by the war on drugs should be handled with a commission like the 9-11 or Deepwater Horizon oil spill settlement. Those imprisoned for drug offenses, or that suffered in other ways, could receive certain payouts as could the children of those who suffered when their parents were imprisoned. The dire fiscal straits that New York and other state and local governments find themselves in, as a result of COVID-19, could hasten a resolution of the social equity issue and remove it as an impediment to cannabis legalization. This could be very good for cannabis stocks…”

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