Pot Stocks – Bulls and Bears Week 8

Overall the market experienced a pretty steady week, this week, with support and resistance levels rarely being challenged in any meaningful way. The big winner this week was MediPharm Labs, up 36.6% on the news of a new extraction agreement, with a 'leading licensed producer'.

Under the terms of the deal, Medipharm will supply $35 million of private label purified cannabis oil concentrates, and the Licensed Producer will immediately purchase (upfront) $7.66 million of cannabis oil concentrate from MediPharm Labs' inventory in February.

In addition, the Licensed Producer will purchase a minimum of $27 million of cannabis oil concentrate over a 12-month period commencing March 2019, with an option to purchase an additional $13.5 million over the same period, bringing the total value of the agreement to over $48 million to February 2020.

This is on the back of their announcement last week, that they had inked a three-year extraction agreement with TerrAscend for processing dried cannabis into oil concentrates. We recently wrote about MedPharm Labs and will be covering the extracts market in detail in the coming week.

 

 

Organigram continued to show strength during the week, still riding high on the back of their very impressive Q2 2019 results. Slang Worldwide, who recently IPO'd only 2 weeks ago continues to buck the trend and perform really well post the IPO. The shares are now up 20% since listing on the CSE and we believe Slang provides a great opportunity for investors looking to take advantage of companies focussing on the retail consumer brand's market.

Green Thumb Industries, whom we recently covered, this week announced the closing of their deal with Advanced Grow Labs (AGL) and by so doing, entered the Connecticut market. AGL is one of only four companies in Connecticut licensed to grow and process cannabis. Operating off a 41,000 square foot manufacturing facility in West Haven with the potential to expand, AGL also has an ownership stake in a recently-awarded dispensary that will be located in Westport which makes it the only vertically licensed company in the state. GTI was up 8.96% for the week.

The Australian cannabis stocks continue to perform poorly in 2019 and seem to be lagging the global markets in a big way. The only real explanation for this is the pathetic state of the current medicinal marijuana market in Australia. With a little over 2,000 patients currently registered in the 2 years since medicinal cannabis was legalised, Australia's program continues to lack any sort of real substance.

The Green Fund's Paper Portfolio is currently up 74.22% since January 1, 2018, and 30.31% up Year to Date.

 

Newsworthy Highlights

The week was dominated by earnings reports from Supreme, Aurora and Canopy Growth. We'll run through them in the order in which they were released.

 

Aurora posted their Q2 2019 results on Tuesday, and the results were pretty impressive. Top line revenue came in at $54.2 million which was an increase of 363% over the previous year. Their recreational sales totalled $21.6 million, which they believe accounted for 20% of the Canadian recreational market.

Their Gross Margin of 52% was down from 58% in the previous quarter, and the continuing decline in margin was blamed on a combination of three factors; the exercise tax imposed on medicinal cannabis, the lower wholesale prices received for the recreational market and the lower mix of oils as a % of revenues.

Management explained that some of the cost of sales pertained to cultivation assets that were yet to be fully commissioned, and pointed towards significant increased in production capacity as the main drivers for growth in the coming 5-6 quarters.

Aurora also gave an update on their Polaris facility – an industrial facility that will focus on the large scale production and manufacture of edibles. Extracts and edibles are associated with high margins and command premium pricing, and we believe this to be a very good move ahead of the oncoming legalisation of edibles in Canada in October 2019.

 

 

Next up and off the earings rank was Supreme Cannabis. Supreme released their Q2 2019 results on Wednesday, and they could only be categorised as good, bad and ugly. The good was their top line numbers. Revenue of $7.72 million was an increase of 359% on the previous year, and gross margin came in at 48% (up 4% on the prior quarter).

The bad was the fact that they still produced a net loss of $1.55 million, although this was down from the loss of $5.39 million in Q1 2019. However, it was ugly, that deserves the real mention. Their reporting was…ugly. Specifically, the lack of detail. There simply was none.

For a leading Canadian Licensed Producer to not specifically provide data on key metrics such as the number of grams sold, the number of grams harvested, and the prices per grams broken down into medical, recreational and overall sales – is simply staggering.

Supreme's entire business model is based on the premise that they will supply premium grade cannabis at premium prices. If this is the case, then how are we meant to evaluate their business model, if we cannot ascertain how many grams they sold, to whom and for how much?

Yes, their results sound great, but we cannot validate their business model against these results with such uncertainty and lack of clarity surrounding key cannabis metrics.

 

And finally, just yesterday, the big daddy of the group – Canopy Growth – announced their Q3 2019 earnings. Delaying the announcement and publication of the results until late into Valentine's Day night, Reddit went crazy with speculation of bad numbers and poor results. This turned out not to be the case. Simply put – Canopy delivered a set of results that clearly cements their place as champion of the cannabis heavyweight division.

Net revenue of $83.0 million (an increase of 282% over the previous year), over 10,000 kilograms sold, including 70% of that to the recreational market (an increase of 334% over the prior period), and all with an average selling price of $7.33 (which is the highest of any of its peers.)

There were a couple of negatives, two to be exact. The first was their gross margin, which came in at 22% (well below the 28% from the previous quarter) and which was significantly lower than both Supreme at 48% and Aurora at 52%.

And secondly, Canopy also continued to lose money through operations and growth ($157 million to be exact), although this was an improvement on the last quarter. However, post Constellation Brand's second investment, and with over $4 billion in the bank, it doesn't make this a critical number…for now. At some point though, Canopy is going to have to start making a profit.

 

 

In other news, Bhang – manufacturers of the 8x Cannabis Cup winning range of chocolates, gums, oral sprays, and vapes – this week announced that it would be running educational sessions with Indivia to educate the Canadian consumer market on edibles, extracts and the ways to consume them.

Operating alongside their Canadian exclusive manufacturing partner – Indiva – and utilising their Californian parent company's (Origin House) chain of 180 Smoke retail outlets to run the programs, Bhang aims to grow brand awareness by running these educational evenings across Toronto.

 

 

Sunniva announced that they estimated their sales in 2019 – in the Californian market – will surpass the $55 million mark. With an additional purchase order for $4 million in branded products received this week, bringing the total purchase order value from selected retail dispensaries in California to $11.2 million in 2019, Supreme aims to deliver these products using a mix of its own production capacity and through 3rd party flower supply agreements. This is one stock we are excited to see play out in 2019 and believe this could hold significant upside for investors should Sunniva deliver on their California business strategy.

 

Colorado announced that Cannabis sales had surpassed the $6 billion mark since the legalisation for adult recreational use took place on January 1st, 2014. In that timeframe, the State has also collected just over $907 million in taxes, with tax revenue in 2018 totally $266.5 million alone.

 

 

 

According to a report in the New York Daily News, it would seem that litigation-hampered MedMen is now no longer a part of the New York Medical Cannabis Industry Association. Their removal from the association comes following allegations of financial impropriety and accusations of sexism and bigotry among top executives.

According to a recent lawsuit filed in Los Angeles Supreme Court by former chief financial officer James Parker, company executives, led by CEO Adam Bierman are alleged to have committed fraud, dipping into to company finances to personally enrich themselves at the expense of shareholders.

The suit also alleged the use of what the Daily News described as "homophobic and racial slurs. In one instance, Parker claimed that Bierman called a Los Angeles city councilman a "midget negro."

While we certainly do not believe this is going to impact MedMen in the long run, the embattled "Apple of Cannabis" is certainly taking on some seriously negative PR right now, and we remain cautious on the company while they navigate this quagmire.

 

And finally, this week saw a group of banking officials sit in front of a subcommittee of the US Congress, in order to try and open doors to a better banking environment for cannabis companies operating in states that have legalised cannabis either for medicinal and/or recreational use.

They argued that with access to regular banking facilities (that all other legally operating businesses have access to) would reduce crime, reduce the heavy company taxes as a result of rule 280E and would allow cannabis companies better access to long-term debt and other such facilities.

 

 

Wednesday's hearing was on a bill that, as of yet, is not even actually and officially a bill.  The Secure and Fair Enforcement Banking Act (SAFE Banking Act) was first introduced way back in 2017, and the bill that was discussed Wednesday is the same bill from two years ago, but it has yet to be officially introduced in this Congress. At this stage, it's what Congress calls a "discussion draft."

Up until now, banks have been reticent to deal with cannabis companies for fear of falling foul of the Federal Government. This makes it incredibly hard for cannabis companies to do banking in the US. Tax law 280E does not allow any company that handles a Schedule 1 drug to claim any of its business expenses against tax, and on top of this, most of the companies are having to deal in cash, as even credit cards can be out of bounds to them.

In essence, you have legal businesses, operating in a State legal environments, that cannot even have a credit card terminal at their POS. Whilst this discussion is not going to solve the issue of legalisation, it does address banking, and with better banking and access to capital, many cannabis companies could really start to thrive in their legalised and regulated State environments.

As always, we'll keep you posted.

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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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