Movember shows mo love to cannabis stocks

Although a lot happened, globally over the month of November, in the end, it became the eighth consecutive month of losses. This, despite the mid-month rally that took place on the announcement of developing US legislation.

The Global Cannabis Index, as managed by New Cannabis Ventures, lost 12% over the course of the month. The index declined 54.9% in 2018 and has now lost 34.8%  in 2019 to date. The collapse has been so great, that the index is now sitting at levels not seen in over three years.

There were significant news and announcements during the month. Let's take a closer look at each of the key regions of the US, Canada, and across Asia-Pacific.

The US cannabis industry

The US Operator Index, as managed by New Cannabis Ventures, also fell (for the 8th consecutive month), declining by 6.9% for the month. The US did outperform Canada however, as a direct result of improving US company results, and the concurrent poor quarterlies from the Canadian LP's.

Source: New Cannabis Ventures
American Operator Index November 2019
Disclaimer: Past performance is not an indicator of future performance.

November was another busy month, with most of the MSO's reporting their earnings. Aggregated, the results showed a marked improvement in the top line, with some companies even starting to produce a profit (Trulieve leads the way in this department). These results led to a slight boost in investor confidence, with US cannabis stocks up ~5% on average for the month, and with Curaleaf, Green Thumb and Trulieve all up over 20% for the month.

Cresco Labs

Cresco Labs (CSE:CL) delivered a superset of results, with revenue of $36 million (21% up on the previous quarter). Their pro forma revenue of $74 million (in advance of their merger with Origin House) was also strong, and implies an annualised revenue run-rate of $294 million. In addition to the company's EBITDA of $3.1 million, Cresco also strengthened its balance sheet by signing two sale-and-lease-back agreements with IIPR to the tune of $38 million. We are bullish on Cresco Labs.

MedMen

The MedMen (CSE:MMEN) shocker persisted, as the former heavyweight of the industry continued its spectacular public downfall. MedMen bucked the trend by delivering only 5% quarter-on-quarter growth, whilst continuing to trim its expenses. Can't put lipstick on a pig, however, and with a current quarterly cash burn of close to $50 million, plus only $42 million in the bank, the company will have to continue its sale of non-core assets, whilst reducing headcount. We're firmly on the sidelines here.

Additional Earnings results included
  • Curaleaf (CSE:CURA) reported their Q3 earnings, generating $62 million of revenue (27% growth on the previous quarter) and $9 million adjusted EBITDA
  • Trulieve (CSE:TRUL) continued to deliver with strong Q3 results that included $71 million in revenue (up 22% on the previous quarter) and a whopping  adjusted EBITDA of $37 million
  • Green Thumb (CSE:GTII) led the pack on growth when they reported Q3 revenue of  $68 million (52% up on the previous quarter) partially driven by the acquisition of Integrated Associates
  • Harvest Health (CSE:HARV) delivered a 25% increase in revenue, but alarmingly for investors, saw EBITDA losses widen to 33%
  • iAnthus (CSE:IAN) – still one of the dark horses in the US MSO race – reported Q3 revenue of $22m (up 16% on the previous quarter) and with a small adjusted EBITDA of $2.2 million
  • KushCo Holdings (OTC:KSHB), the US market leader in the supply of packaging and product services to the industry, saw their Q4 FY19 revenue increase to $47 million, with an associated 22% adjusted gross margin. Improvement is being made.
  • Liberty Health (CSE:LHN) made investors sit up and notice, as the Florida-centric MSO delivered Q2 2020 revenue of $11 million (representing a 93% increase on the previous quarter).
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Legal Headwinds continue to blow

The mid-month rally was driven by news that the House Judiciary Committee passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act. This bill looks to be one that would end the federal prohibition of cannabis in the US. Make no mistake, this bill stills needs to hit the Congress Floor, and although we believe this to be some way off, it's another step in the right direction if you consider the current SAFE Banking ACT and STATES Act currently in play.

We firmly believe that the eventual legalisation of cannabis at the Federal level will be one of the largest catalysts the industry has ever experienced. We do not see this being a quick move, but believe that 2020 will certainly see momentum gained rather than lost.

The FDA and its stance on CBD

The FDA was quite active in November regarding CBD. First, it issued warning letters to a number of CBD producers for violating the Federal Food, Drug, and Cosmetic (FD&C) Act. It then came out expressing concerns that it cannot conclude that CBD is safe for human or animal consumption. This statement immediately impacted the CBD-producers and is a sector headline risk in our opinion.

The Canadian cannabis industry

For a while now we have been saying that there were serious problems with Canada's legalisation rollout and the rapidly increasing supply of cannabis. The legalisation was initially plagued by an undersupply of cannabis and almost nowhere to get it. Supply of flower has quickly shifted into oversupply, yet the number of retail stores is still simply insignificant (there are only 25 stores in the whole of Ontario).

As a result of this oversupply, there has been significant cost compression, with the wholesale per gram pricing that the Canadian LP's have been reporting, declining consistently quarter on quarter. This is evident by the fact that HEXO came out with a range of product priced well below the black market, as price compression forces the LP's to do something to gain more revenue and market share.

Source: New Cannabis Ventures
Canadian LP Index November 2019
Disclaimer: Past performance is not an indicator of future performance.

Since the North American spring this year, most of the LPs are down 70%–80%. And the November earnings month did nothing to help them. The aggregated theme was one of missing revenue guidance, complaints of oversupply, lack of retail outlets to move inventory, and significantly reduced guidance for 2020, with profitability (it seems) even further off.

Canopy Growth

Canopy Growth (NYSE:CGC) had a very rough month after their reported Q2 2020 earnings were released.  The stock plunged to a new multi-year low (approaching the levels that Constellation bought in at), on the announcement of very disappointing earnings that saw revenue decline 15% quarter on quarter, and losses continue to blow out.

During the month, Canopy Growth also announced its product portfolio is set to be launched as part of the legalisation of edibles and extracts in Canada, which is expected to hit shelves later this year. The range includes a distilled cannabis concept, a line of chocolates, vape cartridges and vape pens.

Organigram

Organigram (TSE:OGI) delivered a disastrous set of Q4 FY19 financial results. Net revenue of CAD$16.3 million saw their revenue decline by a whopping 34% (which was also its second consecutive revenue-declining quarter. The company – often nicknamed "the executioner" – in recognition of its ability to execute on its strategy, saw its gross margin dive off a cliff, coming in at 5% (down from 50% in the previous quarter). 

This was not just a blowout in the cost of sales, but rather the perfect storm of sales allowances, C$1.6M in inventory write-offs for packaging and expired products, and the ramping up of their facility. The end result was an adjusted EBITDA loss of (CD$7.9 million), down from positive adjusted. EBITDA of CAD$7.7 million in the prior quarter.

Additional Earnings results included

The Australian cannabis industry

Although still small, the Australian medicinal cannabis market continues to grow at an exponential growth rate, firmly cementing its status as the fastest-growing medical cannabis market on the planet. Although the market for cultivation and production is still small, cannabis biotech companies, built on a foundation of federally legal cannabis clinical trials, are really starting to blossom.

Zelda Therapeutics 

In November, Zelda Therapeutics (ASX:ZLD) gave an update on their Phase II Insomnia Clinical Trial, announcing the trial is now fully enrolled with no serious adverse events reported to date. The preliminary results of the trial are expected in Q1 2020. Zelda also recently announced the completion of their merger with Pennsylvania-based Ilera Therapeutics, officially forming Zilera Therapeutics.

Medlab Clinical

During the month, Medlab Clinical (ASX:MDC) announced their October results, delivering records for both monthly revenues, and for the number of cannabis bottles dispensed. They also updated the market on their NanaBis Observational Study, which has enrolled 160 of the 2,000 proposed patients.

THC Global

Big news during the month for THC Global (ASX:THC), as it – finally – received its manufacturing permit for the Southport Extraction facility. The facility is the largest pharma bio-floral extraction facility now operating in the Southern Hemisphere and can support a minimum of 250,000 Australian patients (the potential size of the entire Australian medicinal market), as well as supplying the global export market.

Althea Group Holdings

Speaking of patients, the Althea Group (ASX:AGH) passed through the  3,000 patient mark in Australia and remains on track to reach 4,000 patients by 31 December 2019. This equates to a year-on-year patient growth of over 2,000%.

The Bottom Line

We are still very firm in our belief that investors should look to the USA if they are looking to make any significant gains in the coming 18 to 24 months. The US represents a much bigger growth story, given its sheer population size (10x bigger than Canada) and the fact that it is still federally illegal.

With the oversupply of cannabis, lack of retail outlets, and capital crunch, Canada is in the midst of what could be a 2-3 year consolidation period. During that time, we think many companies will fall to the wayside, leaving only a handful to profitability dominate the market landscape.

We maintain our opinion that the global cannabis industry will continue to go from strength to strength in 2020, as increasing global acceptance of cannabis continues.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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