The crazy bull run of 2019 slowed down gently this week, with many of the stocks in decline, or only slightly up.
The big mover of the week was KushCo holdings. The stock has been hammered in the past couple of weeks post their disastrous capital raise. In their defense, it is very difficult to raise capital in the US or to even think about getting long-term debt finance. We published an article this week covering KushCo and their various divisions. We still believe this to be the best pick & shovel play in the current cannabis market.
As for the decliners this week, there were many of them. Winning the race no one wants to win was Australia's Auscann. At the end of January, Auscann's DayaCann announced a research and production agreement with Khiron Life Sciences, and then a week later they released their financials, and to be honest they were pretty disappointing.
Often seen as #2 in Australia behind the Cann Group, they delivered only $10k worth of revenue in 2018, compared to Cann Group's $570k. In addition, with the former CEO Elaine Derby stepping down in December (pre-announced), Auscann is being run with an interim-CEO.
The stock has been one of the poorest performers this year, down 30.16% when the markets were up over 40%. Auscann needs to show a clear path to significant revenue and a better strategic approach to capturing the prescribing doctor market, or they are at risk of being left behind. Althea for one is really excelling in this area.
Canopy Rivers also ended the week down, albeit on the back of two pieces of positive news. They increased their investment in Italian Hemp company, Canapar, and announced an $85 million equity offering, with their cornerstone investor – Canopy Growth – committing to a minimum of $30 million of the allotment.
In general, we are quite happy with this light water spray cooling down the markets. Although we still do not believe there is any real catalyst that could cause this run to end, we do believe that it is not realistic to expect 30% month on month growth for the rest of the year.
A near term catalyst that could spark another hyperbolic run, is the States Act, which if passed, would enact the Cole Memo (so to speak) into law, cementing the rights of the individual States to govern cannabis as they see fit. Should this go through, then we expect a massive run on the US cannabis stocks.
But that's later. For now, we are hoping to see a continuation of the increased trading volumes, and great results when Canopy Growth and Aurora announce their earnings later this month.
Namaste my friend – now there's the door!
In Australia, it was the NAB CEO and Chairman that got the boot. In Canada, it was Namaste's CEO, Sean Dollinger, who was giving his marching orders. Namaste is a technology company that collects data from all links in the chain.
On September 18th last year, Citron put out a short-sell report on Namaste. In it, they alleged that stock promotion activities, high fees charged, and outright fraud was taking place. Specifically, they pointed to a transaction involving the purchase of assets of which Sean Dollinger had an interest.
In addition, they documented fees that were more than three times salaries and suggested multiple issues with the company financials. Based on this report, the Namaste Board undertook an internal investigation, and post their findings, have terminated his role as CEO and as a Director. In addition, the company has commenced legal action against Dollinger.
That didn't stop Dollinger though. The very next day, he announced he was counter-suing the company, and the case is now going before the Ontario Superior Court of Justice Commercial List. Then, later that day, Dollinger appeared on Midas Touch Live YouTube channel. How do you think he came across?
Keeping with the legal theme, in Florida, Trulieve (who currently operate 24 dispensaries) won its suit to have the restriction of the number of dispensaries any one licensee can open, be lifted. The courts ruled in favour of Trulieve, who argued that the current cap of 30 dispensaries, was discriminatory to patients looking for ease of access and help. Although there is no final agreed number yet, and the State will most likely appeal.
Canopy Rivers gets money and spends money
Canopy Rovers had a busy week. In a nutshell, Canopy Rivers is an investment platform that focusses on investing in, and supporting, companies operating in the Cannabis Industry.
They work collaboratively with Canopy Growth to identify cannabis companies looking for "smart money" (in other words, not just capital, but capital that comes with know how). These companies then get plugged into the Canopy Growth/Canopy Rovers ecosystem, and as more companies are added to this platform, the more valuable the ecosystem becomes.
This week they announced a $17 million investment in an Italian hemp company, Canapar, that manufactures and process CBD oils and isolates. They have access to over 1,000 hectares of hemp in an outsource farming model and are currently expanding their extraction facility and capacity in order to meet the growing demand for CBD oils and extracts.
Canopy Rovers also added to their balance sheet this week, with the announcement of an underwritten equity offering for $85 million, of which Canopy Growth has committed at least $390 million too. More money in the war chest for future additions to the ecosystem. Canopy Rivers is one to watch.
News from our MSO's
Turning our attention to the Multi-State Operators (MSO's), this week saw MedMen announce that they had bought the two MedMen-branded stores from Captor, for $31 million in an all-stock deal. The two dispensaries are located in Santa Anna and West Hollywood (where GTI just moved in).
Speaking of Green Thumb Industries this week bought California-based Success Holding for an undisclosed amount. Success Holdings is the owner of the BeBoe brand. Described by The New York Times as being the "Hermes of marijuana", BeBoe products are now sold in over 125 retail stores and offer a range of iconic gold vapes and a co-branded CBD-infused drink with Dirty Lemon. I've stated before the value in owning brands, and although right now there is no Coca-Cola in the market, that time will come and with it, big winners.
Goodbye MPX and helloooo iAnthus
This week (finally) saw the closing of the merger between MPX Bioceuticals and iAnthus. The deal, valued at $1.6 billion, is transformational in our opinion. One of the biggest issues facing iAnthus was their lack of revenue. iAnthus have a very strong and well-seasoned management team, with excellent access to capital. But with no real brand and little revenue, they were lagging their peers big time.
MPX is the reverse. Light on management experience and with average access to capital, they bring their award-winning MPX extracts brand to the table, as well as significant revenue from their Nevada operations (almost $14 million per quarter). This really is a well-arranged marriage.
The combined entity, operating as iAnthus will be one of the larger MSO's by revenue, and will have excellent brand recognition in the market.
The deal gives MPX shareholders one iAnthus share for every six (there about) of their MPX shares. In addition, MPX shareholders were given MPX International shares (1 for every 10 of their MPX Bioceutical shares). MPX International is MPX's Canadian operations and assets.
Green Growth Brands (you know them as the hostile Aphria takeover bidders) this week announced they had done a deal with Authentic Brands and Greg Norman to produce a range of CBD-infused personal care products for the "active man and woman". This deal is very similar in nature to the deal Tilray did with Authentic brands. Watch this space…
Fire & Flower announced they would be listing on the CSE on the 19th February under the ticker FAF. Fire & Flower is a leading independent adult-use cannabis retailer poised to capture significant market share in Canadian provinces and territories that allow for the private retail of adult-use recreational cannabis. The Company provides its customers with expertly-curated product selection and education-driven customer experience.
They launched on October 17th, 2018 – the day Canada legalised cannabis for adult recreational use – and since then have racked up over $10 million in revenue. Starting with 5 stores on Day One, they have now pushed that number to 9 stores across Alberta and Saskatchewan. We think Fire & Flower could end up being one of the larger players in the retail market.
And finally, this week Ontario awarded six new supply agreements.
"Today the Ontario Cannabis Store, the province's sole legal online retailer and wholesaler for recreational cannabis, announced that it has entered into supply agreements with six additional Health Canada-licensed producers and 11 new providers of cannabis accessories"
The new producers are:
- Acreage Farms, an Invictus subsidiary
- The Green Organic Dutchman
- Pure Sunfarms
- Whistler Medical (purchased by Aurora)
- Sundial Growth
This is very big for both Indiva and TGOD. For both of them, this marks their first supply agreement in Canada. TGOD has been under immense pressure since Aurora declined to take up further investment by letting their options lapse. With a staggeringly high valuation, we have never been favourable on TGOD, and this highlights the number one reason.
Why would we favour a company with zero supply agreements and no revenue, with a $2bn+ valuation over CannTrust with 8 supply agreements, over $9 million in revenue in Q2 2018, and valuation of only $1 billion?
As for Indiva, this was a critical next step for the company who received their sales license so very late in the game. They really need to show some traction and quickly now, in order to sit at the table, they believe they deserve to be at.
Until next week friends.