Cannabis Companies Announce 2015 Operating Results

Earnings season has started to heat up for the cannabis industry. Yesterday, three companies announced financial and operating results for the fiscal year which ended on March 31, 2015. We have noticed consistent trends with a few of these companies which have raised a number of red flags. Investors need to conduct thorough due diligence before investing and Technical420 is here to help!

The companies we are going to highlight include: Tweed Marijuana Inc. (TWD) (TWMJF), Growblox Sciences, Inc. (GBLX), and AeroGrow International, Inc. (AERO).

Tweed Marijuana Inc. (TWD) (TWMJF) filed audited financial statements for the 15-month period which ended on March 31, 2015. Tweed received approval to revise its year-end to March 31^st in its inaugural operating year to align with its subsidiaries, Tweed Inc. and Tweed Farms Inc. This resulted in the company having a 15-month fiscal year. Fiscal year 2016 will start on April 1^st, 2015 and will end on March 31^st, 2016.

Operational Highlights

Tweed has 34,000 sq. ft. of greenhouse growing space and 12 (out of 30) climate-controlled indoor growing rooms at its facility at 1 Hershey Drive in Smiths Falls, ON.

On June 24^th, Tweed announced an all-stock acquisition of Bedrocan Cannabis Corp. (BED). The transaction is expected to close at the end of August 2015. Bedrocan will operate as a distinct licensed producer and brand and will continue to pursue research & development opportunities that will benefit all of Tweed’s operating companies. Tweed’s existing subsidiaries, Tweed Inc. and Tweed Farms Inc., will continue to operate under their present structure and distinct market positioning.

In April 2015, building permits were issued to commence infrastructure enhancements at Tweed Farms’ 20-acre property in Southwestern Ontario. The current phase of construction will add 316,000 sq. ft. of cost-effective growing space and a separate 24,000 sq. ft. packaging facility with a storage vault.

Financial Highlights

• Revenue during the three and fifteen month periods was $1,225,689 and $2,371,351 respectively. During the year, Tweed saw its revenue grow quarter over quarter. During the second quarter, Tweed generated $188k in revenue. The company generated $316k in the third quarter, $641k in the fourth quarter, and $1.2 million in the fifth quarter. 
• Gross profit was $2.41 million and $2.82 million during the 3 and 15 month periods.
• Operating expenses were $2.89 million and $11.03 million during the 3 and 15 month periods.
• The average price per gram sold was $7.25 and $7.17 for the 3 and 15 month periods.
• Gross margin for the three and fifteen month periods was 197% and 119% respectively, due to the gain on the change in the fair value of seeds and cannabis plants.
• During the fiscal year, Tweed generated a $9.34 million net loss (a loss of $0.29 per share on both a basic and diluted basis). The loss reflects the initial year of launching commercial operations and establishing the largest cannabis-growing platform in Canada. Tweed considers these to be necessary investments for an industry leader who wants to continue to increase its market share.

Liquidity Highlights

• As of March 31, 2015, Tweed had $21,445,821 in cash and cash equivalents and $24,850,548 in working capital.

Outlook

Technical420 is favorable on these results and we think that the company is just starting to see the benefits of its investments. We expect to see Tweed report improving fundamentals as they continue to execute on its plan and expand its cultivation centers. Tweed’s acquisition of Bedrocan will help the company grow and take market share in the Canadian medical marijuana industry.

Growblox Sciences, Inc. (GBLX) filed its 10-K for the year that ended on March 31, 2015. The company did not generate any revenue during the year and we expect to see the company raise capital which will be dilutive to current shareholders.

Financial Highlights

• During the year, Growblox did not generate any revenue and the company incurred $2.99 million in general expenses. The expenses included a $1,000,584 increase for raising capital, $278,518 increase in travel, $717,028 and 415,037 for legal and professional fees.
• Payroll and related expenses were $4.4 million.
• During the year, GBLX generated a $7.7 million net loss.

Liquidity Highlights

• As of March 31, 2015, GrowBlox had a $0 cash balance. On June 9, the company signed a note agreement for $1,750.000 to fund the construction of the grow operations for GBS Nevada LLC.
• Cash flows from operations are insufficient to fund business operations for the next twelve-month period. GBLX will have to generate additional liquidity or cash flow to fund current and anticipated operations. This will likely require the sale of additional common stock or other securities.
• During the year, net cash provided by financing activities was generated from promissory notes, sales of common stock and exercise of warrants that totaled $3,869,001 and $6,466,828.

Outlook

Technical420 is not favorable on GBLX’s operating results. We have stated that we think the company was (and still is) overvalued and Technical40 remains cautious with shares of GBLX. We do not expect the market to react favorably to this announcement and we remain on the sidelines with GBLX.

AeroGrow International, Inc. (AERO) filed its 10-K for the year that ended on March 31, 2015. AeroGrow is a developer, marketer, direct-seller, and wholesaler of advanced indoor garden systems. As of March 31, 2015, the company has manufactured and shipped approx. 1.3 million AeroGarden units and approximately 3 million seed pod kits to consumers and retailers through two sales channels:

• Retail Sales Channel: Consisting of approximately 2,750 retail outlets (both online and storefront) in North America and in five countries
• Direct-to-Consumer Sales Channel: Includes web sales and a direct mail catalogue business, with approximately 714,000 catalogues mailed in Fiscal 2015. 

Operational Highlights

AeroGrow’s growth was driven by sales in its retail distribution channel (online and in-store) which increased by 200% year over year. AERO’s online retail partners continue to report strong sales. The company’s partners include Amazon, Costco, Walmart, Home Depot, and others. Revenue from Amazon grew 270% during the fourth quarter.

AeroGrow ran tests at stores with various products at certain price points. The company said they learned a lot from these tests and developed a plan to drive promotions, product placement, pricing, and other factors in order to build a strong in-store program over time.

AeroGrow’s focus for FY 2016 will be to continue growing its key distribution channels, including testing an international sales model. The company plans to continue to introduce innovative new products into the market, while focusing on margins and profitability.

Partnership with Scotts Miracle-Gro

In April 2013, AERO entered into a securities purchase agreement with SMG, a wholly owned subsidiary of Scotts Miracle-Gro. According to the agreement, SMG acquired 2,649,007 shares of Series B Convertible Preferred Stock and a warrant to purchase shares of common stock. The Series B Preferred Stock is convertible into 2,649,007 shares of common stock ($4 million divided by a conversion price of $1.51 per share).  The warrant entitles Scotts Miracle-Gro to purchase a number of shares of common stock that, on a “fully diluted basis,” constitute 80% of outstanding capital stock.  The warrant can be exercised at any time for a period of five years between April 22, 2016 and April 22, 2021.

Under the agreement, AERO’s Board of Directors is required to consist of five members.  While the warrant is outstanding, SMG is entitled to elect one director and have one additional Board observer. Because the Series B Preferred Stock is entitled to vote on an “as-converted” basis with the common stock, SMG controls approximately 31% of the voting power of outstanding equity.  If SMG exercises the warrant, its voting power will increase. In July 2014, AERO entered into a $4.5 million term loan agreement with Scotts Miracle-Gro. Interest was paid in April 2015 in the form of 136,895 shares of AeroGrow common stock.

As of March 31, 2015, AERO reserved 3.6 million shares for issuance under the terms of warrants, options, convertible preferred stock, and other arrangements, including the conversion of Series B Convertible Preferred and exercise of warrants issued to Scotts Mircale-Gro.

Financial Highlights

• During the year, AERO generated $17.9 million in revenue, an increase of 91.5% from the prior period. 
• Sales to retail customers increased by 208.8% to $11.2 million during the year. 
• Direct-to-consumer sales increased by 21.0% to $6.7 million.
• During the year, sales of AeroGarden garden units increased by $8.8 million due to the increase in retail sales. Seed pod kit and accessory sales increased by $908,000 as AERO’s established base of AeroGardeners continues to grow. 
• Gross margin during the year was 31.0%, down from 40.3% in the prior fiscal year. The change is a result of a change in sales mix.
• Operating expenses were $6.4 million, an increase of 37.1% over the prior fiscal year. 
• General and administrative expense totaled $2.1 million, an increase of 19.8% when compared to the prior period. The increase was due to increased investor relations, contracted IT and other services, and depreciation expenses. 
• The company recorded an $827,000 operating loss during the year ($876,000 during the same period last year)
• Adjusted EBITDA improved to a record $609,000 for the year
• AERO incurred a $191,000 net loss during the year

Liquidity and Capital Resources

AERO said that its existing cash and cash equivalents, along with the cash generated though operations, will be sufficient to meet capital needs for the next twelve months.

As of March 31, 2015, the company had a $1 million cash balance, a $2.6 million inventory balance, and $1.3 million in net accounts receivable.

Outlook

Technical420 is favorable on AERO’s operating results due to following: 1) Strong revenue growth, 2) Strategic partnership with SMG continues to expand AERO’s reach, 3) Favorable guidance for growth during the 2016 fiscal year, and 4) Increasing market share in a high growth industry.

Important Investor Disclosures:

Technical 420 LLC, and any of its directors, officers, employees, affiliates, or subsidiaries does not accept any form of compensation from companies in return for writing reports on them. Also Technical 420 LLC, and any of its directors, officers, employees, affiliates, or subsidiaries do not hold any stock positions in companies covered by Technical420LLC.

All information relied upon for the above report is publically available via various research resources, including third-party sources we consider reliable, but we do not guarantee that any of such information is accurate or complete.

Technical420 LLC is not a FINRA member firm. Technical420 LLC is responsible for the preparation and distribution of research created in the United States. Technical420 LLC is located at 40 SW 13th St. Suite 1002, Miami, FL 33130.

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Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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