Pot Stocks – Bulls & Bears Week 15

And the beat goes on…

This week's big news continued a trend we wrote about late last year. In the article, we mentioned that 2019 would be a year of massive consolidation for the industry, especially in the US markets. Since Canopy Growth first bought Mettrum Health and got the consolidation ball rolling, there have been many mergers in the past 12 months.

This week brought another to the table when Cresco Labs announced that they will purchase Origin House (formerly CannaRoyalty) for $1.1 billion in an all-stock deal. The deal is at a 5% premium to Origin's closing price on Friday (29th March) of $12.68. This is the largest-ever public company acquisition in the US and will grant each Origin House shareholder 0.8428 Cresco Labs shares if the deal is completed.

This is a mutually beneficial deal for both parties. Firstly, it accelerates Cresco Labs' entrance into the California market with the addition of Origin House's vast distribution platform. This will allow Cresco products to be sold in over 500 stores that Origin House has distribution deals for, all of which are in California.



The deal, which combines the distribution capabilities of both Origin House and Cresco Labs, also establishes the cannabis industry's first national "house of brands" with a growing multi-state footprint that includes leading distribution market share in some of the largest states in the US including California, Pennsylvania, and Illinois

Upon completion of the Transaction, as well as the receipt of licensure in Michigan and the closing of the Company's pending acquisition in Florida, Cresco Labs will have operations in 11 states, 23 facilities, more than 1.5 million square feet of cultivation, and licenses to operate up to 51 retail dispensaries. Cresco Labs brands will be sold in over 725 dispensaries across the United States.

Combining Cresco's scale, expertise and brand portfolio with Origin House's proven track record of leveraging their California-wide distribution footprint and key retailer relationships in the largest cannabis market in the world should drive significant growth for the shareholders of both companies.



"The acquisition of Origin House is another example of our focused and disciplined approach to creating a meaningful presence in key cannabis markets through excellence in brand development and distribution. It establishes Cresco Labs as the leading multi-state operator with one of the largest distribution platforms in California, which is projected to be a $7.7 billion cannabis market in 2022," said Cresco Labs CEO and Co-founder Charlie Bachtell.

"From an Origin House perspective, this transaction is directly aligned with our strategy to build a leading portfolio of cannabis brands in California and to rapidly and accretively take those brands to the rest of the U.S. market, as well as the Canadian market," said Marc Lustig, Chairman, and CEO of Origin House.

"By partnering with one of the largest and most innovative U.S. multi-state operators in existence today, Origin House will supercharge its growth and be in a position to offer it's brand partners access to 10 additional states, with licenses and supporting infrastructure already in place."


Deutschland Uber Alles

The big news out of Germany this week was that AphriaAurora, and Demecan – which has ties to Wayland Group – have been awarded licenses to cultivate a limited amount of medical cannabis in Germany


"Three companies were chosen to cultivate medical marijuana in Germany – the result of a long-delayed application process to provide product for one of the largest medical cannabis markets in the world. And we received five of the 13 lots that were up for grabs."

 – Hendrik Knopp, managing director of Aphria Deutschland.


Pharmacies sold an estimated 2,845 kilograms (6,272 pounds) of MMJ flower in Germany in 2018, more than double the 1,200 kilograms sold in 2017, according to Medical Cannabis in Europe: The Markets & Opportunities, a new report from MJBizDaily.

More than half the supply was imported from the Netherlands, with the rest coming from Canada. The combined production of the winners will be 2,600 kilograms per year, for a total of 10,400 kilograms over the four-year period.

According to the report, Aphria won five lots, for the right to produce 1,000 kilograms/year. Aurora also won five lots and Demecan won three lots. Collectively, the four can produce up to 2,600 kg/year, once agreements are formalized.

However, given the likely lead-up time to begin this production and the rapid growth of the German medical cannabis market – from 1,200 kg to 2,845 kg in a year – this 2,600 kg/year will not be sufficient to satisfy German market demands.

Bearing in mind, the volumes we are talking about here are trivial. Aphria has a production capacity of over 250,000 kilograms per annum (soon to be more with the 800,000 square foot Aphria One expansion approval), and hence this order size is insignificant in volume.

But it is very significant in its message, which is that the Canadian LP's are very well positioned for success in the European medicinal market, given that just under 80% of the 13 contracts were awarded to members of the Big 5!


"Being one of the winners in this tender reflects our ability to work with international governments and establish ourselves as a trusted partner in multiple global jurisdictions."

 – Dr. Florian Holzapfel of Aurora Deutschland GmbH


Notably, Canopy Growth is not mentioned in this report, even though Canopy sells more cannabis in Germany than Aurora or Aphria. We cannot believe that Canopy Growth would not have bid for a license, and hence can only deduce, that on this occasion (and for once) Canopy has not been successful.



Next stop…Pot shop

Monday was a monster day for Ontario. On April fools day 2019, Ontario retail stores officially opened for business. Although only 5 of the 15 lottery license winners were actually able to open their store in time, Fire and Flower opened their Fire & Flower York Street Cannabis, in Ottawa's ByWard Market. This marked their 10th retail store nationwide.


"Today is an exciting day for Fire & Flower as we introduce our retail experience to the Ontario market and marks another important stage of our growth strategy," 

– Trevor Fencott, CEO of Fire & Flower


This is a very big deal. Ontario, the largest Canadian Province by population, was always going to be the jewel in the crown of Canada's legalisation economic boom. In a recent interview with CNC Media, Michael Armstrong, an associate professor at Brock, says Quebec's dozen retail cannabis shops are making about $900,000 a month in sales, and they have lower prices than Ontario shops will.

He believes that legal Ontario cannabis shops will average as much as $1.25 million per month in sales when they open in April, with some insiders saying even that estimate is too low. To put this in perspective, adding the 25 licensed stores in Ontario alone – a vastly insufficient number given the size of the Province – could increase Canadian recreational cannabis sales by nearly 60%.


"Ontario's 25 stores — when prices, locations and population are factored in — should each be million-dollar-a-month businesses."

– Michael Armstrong, Associate Professor at Brock


Cannabis consumers seem to prefer buying in person rather than online, Armstrong said. In the last quarter, 80 per cent of Quebec cannabis sales happened at retail stores. So did 95 per cent of New Brunswick sales, and 94 per cent of sales in Nova Scotia. Like we said, this is a big market and a very big deal. Those retail-centric companies that can scale in Ontario are going to be reporting massive revenue numbers in the years to come.


On the money

This week, iAnthus reported their fiscal fourth quarter and full year unaudited 2018 Financial Results. Highlights included

  • Revenue generating in 9 of 11 states, and a footprint allowing for up to 63 dispensaries
  • Fourth quarter revenue and other income of $2.2 million and full year fiscal 2018 revenue and other income of $4.5 million (up 165% and 88%, respectively, compared to the same periods in 2017.)
  • Pro forma revenue for the fourth quarter was $14.8 million and $49.3 million for the full year fiscal 2018
  • Opened multiple dispensaries including Boston, Brooklyn, Baltimore, and West Palm Beach

The Company's current cash balance is approximately $45 million. The Company also has the potential to receive over $125 million from the exercise of warrants that have been issued by the Company.



What was concerning for investors, was the fact that iAnthus reported a full year fiscal 2018 net loss of approximately $62.0 million. However digging a little deeper revealed that this loss included $44.1 million of non-cash charges primarily due to accretion expense, fair market value adjustments, depreciation, and share-based compensation.

"We made significant investments in expanding our footprint and scaling our operations while maintaining a prudent balance sheet in the process. With the foundation, we have built in 2018, both organically and through the acquisition of MPX, iAnthus is poised for a transformative 2019." – Hadley Ford, iAnthus CEO

After these earnings, iAnthus is one of the least costly MSOs for investors, although they still have their work cut out for them as they integrate MPX following their landmark deal in late 2018.



It was a busy week for iAnthus, as they also announced that they had acquired a CBD company, CBD For Life, in a U$16 million stock-and-debt deal. Given the small purchase price and the lack of revenue figures in the press release, CBD For Life is not necessarily going to move the needle, but the deal could help iAnthus enter the increasingly-competitive CBD marketplace, and is another signal that the booming CBD market is only getting bigger.


Trulieve trumps the competition

This week, Trulieve settled with the Florida Department of Health (DOH) regarding its request for additional dispensary licenses. The settlement comes on the back of Trulieve's victory in a trial court victory against the DOH's imposition of a dispensary cap in Florida. Under the settlement, Trulieve stores (and only Trulieve stores) that were open prior to the imposition of the cap will not count toward the cap. This means Trulieve can open up to 49 stores while peer firms can only open 35 stores, at least until April 2020 when the cap phases out.

This is potentially very significant for Trulieve, depending on how quickly they can open the stores: More mature stores perform better, so having a head-start on expansion could create durable advantages and market share.



Down 20 one day, up 200 the next

Last week the CannTrust share price got decimated following the release of very average quarterly results. The stock dropped just over 20% in one day, although it has slowly started to recover some of these losses. However this week, they released some positive news. got has completed their purchase of land for a potential outdoor grow.

"CannTrust Holdings Inc. is pleased to announce that it has closed the first of its previously announced transactions to acquire 200 acres of outdoor cultivation land. The Company has purchased four parcels of land for cash, representing 81 acres of land, to advance its outdoor cannabis cultivation operation in British Columbia," said Peter Aceto, Chief Executive Officer of CannTrust.

That land is in British Columbia – an expected location, but it wasn't mentioned on the conference call last week. Shares of CannTrust are down marginally. After this purchase, potential CannTrust cannabis growing capacity is 200,000-300,000 kg/year or more.


Extracting real value

MediPharm Labs released their Q4 2018 and Full Year 2018 results this week, and they were phenomenal, to say the least.  Fourth Quarter 2018 highlights included:

  • Revenue of $10.2 million, commencing November 12th after receipt of sales license from Health Canada
  • Gross Profit of $4.0 million, with associated Gross Margin of 39%
  • Adjusted EBITDA of $2.1 million
  • Signed large private label cannabis oil sale agreement with Canopy Growth Corporation for the sale of up to 900 kg over 18 months
  • Expanded licensed extraction throughput capacity by 50% to 150,000 kg per year



Full Year 2018 highlights included:

  • Signed 4 multi-year tolling agreements with James E. Wagner Cultivation Corporation, INDIVA Limited, Emerald Health Therapeutics, and The Supreme Cannabis Company
  • Purchased 3.8 million grams of dried cannabis from multiple Licensed Producers to build inventory of cannabis oil to address significant consumer demand
  • Initiated construction of MediPharm Labs Australia state-of-the-art cannabis extraction facility with License expected H2/19
  • Completed equity financings of over $25 million and debuted as a public company on the TSX Venture Exchange on October 4, 2018
  • Awarded "Start-Up of the Year" at the Canadian Cannabis Awards by Lift & Co


"2018 was a breakthrough year for MediPharm Labs. We became the first fully Licensed Producer to specialise solely in extraction and quickly scaled operations to emerge as the dominant market leader in the manufacturing of high quality, pharmaceutical-like production of cannabis derivative products – the future of cannabis."

– Patrick McCutcheon, Chief Executive Officer


As many of our readers would know by now, we are very bullish on the extraction sector. The fastest growing area of the cannabis industry, it is redefining the way people consume cannabis and the form factor, and MediPharm is at the tip of the spear in this area. We wrote about them last year when the price was just over $2 and suggested to our readers that it was a solid buy. Not just producing solids…but a solid buy!


New kid on the Hemp Block

In Australia this week, a new Hemp player joined the market with Ecofibre listed on the ASX under the ticker ASX:EOF. The Brisbane-based company, whose chairman is a staunch supporter of medicinal cannabis, raised $20 million at $1 per share from an initial public offering last month to list with a market capitalisation of more than $300 million.

It is the first Australian cannabis-related IPO of the year and funds raised will be used to accelerate the commercialisation of Hemp Black – a range of innovative hemp-based textiles being developed in partnership with Thomas Jefferson University in the United States.



Barry Lambert, the Ecofibre chairman, said the ASX listing has been timely given the hemp industry's rapid growth.

"Consumers are increasingly aware of [hemp's] many benefits and regulators have responded by making hemp products more accessible," he said.

"Our vision is to become the global leader in hemp technologies by providing innovative solutions which address emerging health and resource sustainability issues."

In the US, the company produces nutraceutical products for human and pet consumption, as well as topical creams under subsidiary Ananda Health – a vertically-integrated business marketing under brand names Ananda Hemp and Ananda Professional to wholesale, retail and white label customers in the US.

Hemp food products grown and manufactured in Australia include protein powders, dehulled hemp seed and hemp oil under a second, vertically-integrated subsidiary known as Ananda Food. Products are sold to domestic, and potentially Asian customers and growing areas have been increased significantly for existing and potential future demand.




The company's third line is the pre-commercial Hemp Black business, which seeks to develop and eventually distribute its hemp-based, high-performance clothing on a global scale. Although we think the company is currently very overvalued and overhyped, it could be one to watch. We'll keep you updated.


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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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