Pot Stocks – Bulls and Bears Week 12

It was a good week, with the markets in general performing very strongly. Except of course – the Australian market. It continues to lag the global markets both Year to Date and 1 November to date.

The worst performer of the week was Terra Tech. Many of our longest-standing readers will know, that way back when, we thought Terra Tech had great potential. They have simply been a failure, and have been slow and way behind the 8-ball when it comes to access to capital. To put it in perspective just how bad it is. In mid-2018, with the stock at $0.30 they did a 1:15 reverse split.

In other words, for every 15 shares you held at $0.30, they would give you 1 share at $4.50 per share. If we were to reverse it back, the share would be trading at $0.06 per share.

Aurora Cannabis had a massive week on the back of two announcements. They completed their first batch of medicinal oils to the German market, and billionaire Nathen Pelz joined the company in a strategic advisory role. We are very bullish on Aurora's opportunities in 2019, especially given the company is talking about being cash flow positive in Q4.

Alcanna released their Q4 results and the business is performing nicely. For the first time in a long time, comparable alcohol store sales are climbing. The company's strategy of focussing on large format "depots" is working. Their chain of cannabis stores targeting the retail recreational markets is also performing very well. This week's feature article covers the Canadian retail space in detail.

 

 

Although the Australian small-cap stocks continue to perform poorly, we believe that there could be a bottom in sight. Some of the companies are already starting to produce revenue and the patient and approvals numbers coming from the Therapeutic Goods Administration (TGA) show significant month on month growth (491 approvals in December compared to 739 in February).

Only Canadian retail has performed worse and the reasons for that are pretty clear. The reasons for the lagging Australian stocks are also obvious. A tiny market, limited qualifying conditions for medicinal use, and very few doctors prescribing. But that is changing, and pretty quickly. The time for Aussie pot stocks may soon be coming.

 

Newsworthy Updates

This week, Aurora announced that it was adding to its leadership team. Nelson Petz, CEO of a multi-billion dollar fund, Chairman of Wendy's and a director at Proctor & Gamble and the Madison Square Garden company. His appointment as a strategic advisor to the company speaks volumes about just how serious they are to turn profitable. The stock really popped on this news and Aurora has been one of this week's strongest performers.

Billionaire hedge fund manager, Nelson Pelz

 

Big news this week is Harvest's announcement of their intention to acquire privately-held MSO, Verano, in an all-stock transaction for an estimated purchase price of approximately USD$850 million based on a share price of CAD$8.79.

The combined company will be the largest multi-state operator (MSO) in the U.S., as measured by licenses held and facilities permitted. Upon completion of the transaction and regulatory approval, Harvest will hold licenses that will allow it to operate up to 200 facilities in 16 states and territories across the country, including 123 retail dispensaries.

Harvest's planned acquisition of Verano will include:

  • Licenses and operations in 11 states and territories, including seven cultivation licenses, 37 retail licenses and potential to reach 150+ million Americans;
  • Vertically integrated, cash-flow positive operations;
  • Proven executive team with retail, manufacturing, branding, logistics and operational experience and 300 employees.
  • Game-changing ethanol extraction technology at pharmaceutical grade levels providing new market opportunities for cannabis biotech, food, and beverage verticals;
  • Portfolio of premium proprietary brands with 150 + product SKUs sold in 150 + retail locations;
  • Total cultivation expansion capacity of 900,000 sq. ft in Illinois, Nevada & Maryland;
  • Ownership of an interest in nine Zen Leaf dispensaries with average annual revenues 2.5x higher than retail cannabis industry averages;

Following completion of the transaction, the combined company is expected to be operating 30 dispensaries, eight cultivation facilities, and seven manufacturing facilities, with expected further aggressive operational expansion.

By the end of 2019, Harvest expects to have over 70 dispensaries, 13 cultivation facilities, and 13 manufacturing facilities in operation. The company expects continued growth in 2020. Based on the deal information above, we estimate the pro forma shareholders of the combined entity will comprise 69% Harvest and 31% Verano.

 

Aurora Cannabis announced it had commenced oil sales to German Pharmacies following receipt of all necessary approvals from the Canadian and German regulatory authorities.

Pedanios 5/1 drops have become the first extract derived oil product compliant with the German monograph for in-pharmacy preparation. Aurora is the medical cannabis market leader in Germany. The Company has supplied the German market with dried cannabis flower via Aurora Deutschland (formerly Pedanios) since December 2015, and with Canadian-grown Aurora products since September 2017.

Aurora has established a strong brand as a trusted supplier among prescribing physicians, dispensing pharmacies, and German patients. For now, Germany is a great market for Canadian LPs given the lack of suppliers and very high prices.

 

Valens Grow Works, a vertically integrated provider of cannabis products and services focused on various proprietary extraction methodologies, distillation, cannabinoid isolation and purification, announced this week, that it had entered into a multi-year extraction services agreement to provide cannabis and hemp extraction services to The Green Organic Dutchman.

Under the terms of the initial 2-year agreement, TGOD will supply Valens with an annual minimum of 30,000kg in the first year, increasing to 50,000kg in year two, of cannabis and hemp biomass which Valens will process into premium quality resins and distillates using certified organic extraction processing methods.

TGOD intends to use the concentrated cannabinoid resins and distillates to produce oils, sprays and capsules as well as oils for vaporisation and future edible, beverage and topical products.  Valens expects the first shipment to arrive and begin processing early Q2.

 

"We believe the importance of high-quality cannabis oils will continue to greatly increase as patients and consumers look for safer and healthier delivery methods."

– Brian Athaide, CEO of TGOD

 

Valens has been working closely with TGOD to expedite the pathway to organic certification for the company's organic processing methodologies. Upon certification, Valens will offer a 1-year exclusivity to TGOD for certified organic extraction processing services.

 

This week Origin House (former CannaRoyalty) announced the launch of Continuum. Continuum is the business name for RVR Distribution, the first locally licensed distributor in West Sacramento, California, and Alta Supply, one of the first licensed distribution companies in Oakland, California.

Through three fully-licensed facilities in Alameda, Yolo and Orange counties and over 90 employees, Continuum has state-wide presence and offers coverage across Northern and Southern California. With a growing network of brand partners and retailers, Continuum is well positioned to ensure a reliable, safe and compliant supply chain to drive success for its partner and customers.

"Our California brand focussed business model is powered by statewide distribution. We made strategic acquisitions of companies – RVR Distribution and Alta Supply – and consolidated these companies' operations, into Continuum."

– Afzal Hasan, President Origin House

 

Innovative Industrial Properties (IIPR) continued their bull run when they announced this week that they were declaring a Q1 2019 dividend of $0.45 per share.  This dividend represents a 29% increase over IIP's fourth quarter 2018 dividend of $0.35 per share of common stock and an 80% increase over IIP's first quarter 2018 dividend of $0.25 per share of common stock. The dividend is equivalent to an annualised dividend of $1.80 per common share and is the eighth consecutive quarterly dividend payable to common stockholders declared since IIP completed its initial public offering in December 2016.

 

 

They also released their Q4 and full year 2018 financials results.

IIPR generated rental revenues of approximately $4.7 million in the quarter, representing a 111% increase from the prior year's quarter. This was in line with analysts expectations.
IIPR recorded net income attributable to common stockholders of approximately $2.3 million for the quarter, and adjusted funds from operations ("AFFO") of approximately $3.6 million, up 344% from the prior year's quarter. IIPR also paid its seventh consecutive quarterly dividend of $0.35 per share in January 2019, representing a 40% increase from the prior year's quarter.

 

In Australian news, this week saw Auscann's Chairman – Mal Washer – pick up 144,000 shares on market at $0.38 per share. This brings his total holdings in Auscann to 12.85 million shares. This investment comes hot off the heels of the announcement of their new CEO – Ido Kanyon.

Kanyon brings more than 15 years' senior executive experience in the pharmaceutical industry most recently at multi-billion dollar Teva Pharmaceutical Industries. Teva is the world's largest generic pharmaceutical company which also specialised in the development and commercialisation of active pharmaceutical ingredients and specialty proprietary medicines.

 

 

The stock has been one of the poorest performers on the ASX over the past year and many feel that Auscann has potentially lost its way. We will be covering Auscann in detail soon, so watch this space.

 

HEXO announces its acquisition of Newstrike. The deal significantly increases HEXO's reach in the Canadian market, up to 89% from 75%. The purchase is for $263 million in an all-stock deal. This continues the trend we identified for 2019 – consolidation. First, it was Harvest, now HEXO. Newstrike shareholders will receive 0.063 HEXO shares for each Newstrike share they own.

HEXO listed the highlights of this transaction as:

  • Capacity boost with state-of-the-art cultivation infrastructure: The Transaction gives HEXO the capacity to produce approximately 150,000 kg of high-quality cannabis annually. The Transaction also provides HEXO access to four cutting-edge production campuses totalling close to 1.8 million sq. ft. of near-term cultivation space and diversified growing and production techniques. This is in addition to HEXO's 579,000 sq. ft. facility for a manufacturing and product development centre of excellence in Belleville, Ontario.
  • Diversified domestic market penetration: Combined, HEXO and Newstrike have established distribution agreements in 8 provinces including Ontario, Quebec, British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia, and Prince Edward Island, allowing broad consumer access to HEXO's products across Canada.
  • Premium indoor facility: Newstrike's licensed indoor facility provide HEXO with access to diversified growing techniques and positions HEXO for flexibility for international exports as global cannabis markets continue to open.
  • Accretive synergies: The combined entity is estimated to realise annual synergies of $10 million, allowing HEXO to operate more efficiently with a commitment to continued excellence.

"With Newstrike, we're adding talented employees and infrastructure to take HEXO to the next level on our journey to become one of the largest cannabis companies in the world. We're extremely proud of our record of execution, and today are committing to achieving over $400 million in net revenue in 2020."

– Sebastien St-Louis, CEO HEXO Corp.

HEXO is paying almost no premium for Newstrike. When announced the deal was at a 4% premium to the market prices, but by the end of the day had come to 0%. This also gives HEXO much more scale when it comes to Provincial supply agreements. HEXO had agreements in Ontario, Quebec and British Columbia and can now add Alberta, Nova Scotia and PEI. This puts HEXO in a tie with Aurora for the number of provinces and past both Organigram and Tilray.

 

 

HEXO's biggest risk was always their reliance on their Quebec supply agreement. The largest agreement given out by any province, they were potentially seen as an "eggs all in one basket" kind of company. This really gives them both coverage and scale and significantly reduces their business risk. In summary – this is a superb deal for HEXO. Both HEXO and Newstrike shares were up on the announcement.

 

This week saw CV Sciences report their Fiscal Year end 2018 financial results. We can sum this up in one word – underwhelming.  Revenue rose 5% quarter on quarter – their lowest revenue growth in ten quarters – and gross margins fell to 65% – their lowest in eight quarters.

I have written about this in a separate post and will not repeat myself here. Except to say that 5% quarterly growth and 65% growth margins are going to need to be addressed moving forward if investors are to stay excited about the company's prospects.

 

 

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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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