Pot Stocks – The Bulls and Bears Week 13

Without a doubt, the week belonged to the HEMP/CBD stocks, driven off the back of CVS announcing they will retail Curaleaf's CBD products in 800 of its stores. A momentous moment for the hemp-derived nutraceutical industry, and opens the door for Walmart to follow.

 

Not surprising, the rest of the hemp stocks followed suit. CV Sciences, Charlotte's Web and Elixinol all up over 18% for the week. Elixinol continues to be a very strong performer and broke through the $4 mark for the first time. Even at these prices, we continue to believe that Elixinol is undervalued.

 

Canada had a mixed week this week, with CannTrust continuing its monster run in 2019. Most of the attention in Canada now turns to Ontario as the largest Province in the country launches its's brick and mortar retail stores on the 1st April.

 

The US continued to show strength this week, with MedMen finally starting to climb again after lagging its peers significantly in 2019. This was on the back of the announcement that Gotham Green had added to their balance sheet to the tune of $250 million. We continue to believe that MedMen could be a significant MSO player, especially given the strength of its Retail Brand.

 

The big mover in the Aussie market this week was the Cann Group on the back of its announcement to build its 34,000 square foot facility in the Mildura region of Victoria. When complete and at full production, the facility would make the Cann Group one of the largest producers in Australia. Althea continues to show strength, and we continue to be strong believers in what they are doing.

 

Newsworthy Announcements

 

This week Curaleaf announced its expansion into Nevada via a strategic acquisition.  The company signed a definitive agreement to purchase Acres Cannabis. Acres has a 269,000 square foot cultivation facility on its 37 acres of land in Armagosa Valley. The facility is the State's largest and also had a state of the art production and extraction lab. They also have one dispensary in the city of Las Vegas and another under construction.

The Amargosa Valley facility site is currently under construction, adding another 133,000 square foot of capacity. Once complete, the behemoth 400,000 square foot the facility is expected to generate 100,000 pounds of dry flower per year at full scale.

 

Acres Dispensary in Las Vegas, Nevada

Acres also operates an award-winning 19,000 sq. ft. dispensary in Las Vegas. The cannabis experiential store is open 24 hours a day, 7 days a week, and hosts America's first marijuana farmers market every weekend.

Steeped in the cannabis culture, the facilities offer a museum and open view processing kitchen where customers can view the processing of edibles and extracts. Acres also has a second dispensary in Ely, Nevada currently under construction and scheduled to open later this year. The deal, valued at $70 million will be wit $25 million in cash and the balance in stock.

 

 

Another entrant to the lucrative Florida market. It certainly is starting to get crowded. This week Cresco Labs announced they were entering the Florida market through the purchase of the assets of VidaCann. VidaCann currently operates 7 dispensaries with plans to open another 7 by end of Q2 this year and an additional 6 on top of that by the end of the year.

The purchase price of $120 million is a combination of cash and shares, but the company did not disclose the breakdown. What was noted, was that the shares issued as part of the purchase are subject to a 6-12 month lock-up.

 

 

Harvest One announced this week their supply agreement with Shoppers Drug Mart. The company, through its wholly-wholly-owned subsidiary, United Greeneries, announced that they will be supplying Drug Mart with their range of medicinal cannabis, Satipharm.

 

 

Satipharm has a colour coded schema for identifying its product range from the high-THC SatiWhite through to the high-CBD SatiPurple. "We are incredibly proud to be working with Shoppers Drug Mart to supply them with our premium, indoor grown cannabis under the Satipharm health and wellness brand, " said Grant Froese, CEO of Harvest One.

 

 

This week Tilray announced their Full Year 2018 financial results. Q4 2018 revenue of $15.5 million(up 55% on the previous quarter) with $3.1 million on gross profit (only 2% increase over the previous quarter). The reason for the lag in gross profit would be put down to lower gross margins on the sale of cannabis to the retail market.

The Full Year 2018 revenue of $43.1 million was an increase of 110% on the previous year, driven by bulk sales to the recreational market. Interestingly, extracts represented 49% of revenue, up significantly from 20% in 2017. They still burnt cash however, with a net loss of $67 million, largely as a result of non-cash, stock-based compensation charges of $21 million.

 

"2018 was a very successful year for Tilray. Our team made significant progress including increasing production capacity, expanding and strengthening strategic partnerships, and acquiring complementary businesses to accelerate future growth."

– Brendan Kennedy, President and Chief Executive Officer of Tilray

 

During the year they expand their relationship with Novartis subsidiary, Sandoz Canada. They also announced a combined $100 million research and development partnership with AB Inbev to focus on the development of non-alcoholic THC and CBD beverages. And of course, they acquired Manitoba harvest, the world largest hemp foods company, for $419 million.

We still believe Tilray to be horribly overvalued and will continue to monitor the stock closely to try and find a more suitable entry point. The stock is currently offered in Canada at $70.12.

 

 

This week saw the New Jersey Assembly and Senate committees vote in favour of companion bills that would legalise marijuana and provide for the expungement of prior cannabis convictions.

The committee wins come one week after Democratic Governor Phil Murphy and leaders in both chambers announced that they'd reached an agreement on legalisation legislation following months of contentious negotiations. Conflicting stances on certain aspects of regulations—namely the tax rate—were resolved, but the last-minute amendments caused hours-long delays in both committee hearings on Monday.

The governor also included legalization revenue in his budget proposal earlier this month, projecting $60 million in resulting tax monies for the 2020 fiscal year.

However, not everyone was in favour, in particular the Republicans (shocked).  While the Assembly committee approved the bill first, it was less clear whether the Senate committee would push the bill forward. In the run-up to the vote, Republican Senator Kip Bateman complained that the committee hadn't seen the final version of the bill and said he would be voting "no."

 

"The proposal is a deal with the devil that sacrifices children and communities for short-term political gain."

– Republican Senator Michael Doherty

 

It is not often we comment on matters of the political arena but on this one we have to. Honestly, one has to question the intelligence of Sen. Doherty when he labels recreational legalisation as a "deal with the devil."

In mature recreational states, kids have not suddenly taken to pot like a bee to honey, and it has not sent an entire youth generation on a downward spiral to heroine addiction. This kind of simple-minded thinking is outdated and to be honest, just a crock of shit. We'll stop there.

 

 

This week, Elixinol Global announced a new take on its best-selling product, Extra-Strength Hemp Balm, a soothing topical CBD product for relief and recovery. The balm is specially formulated with a synergistic blend of hydrating plant butter, organic herbal extracts, and essential oils, and contains an unprecedented 250mg of pure, full-spectrum, CBD for double the rejuvenating power and relief of the original hemp balm.

 

 

"If you've completed a rigorous workout or are coming home after a team practice or game the extra-strength hemp balm is perfect for quick recovery. Rather than reaching for the over-the-counter muscle soother, simply massage the balm into skin post-workout and feel the muscle recovery begin."

– Gabriel Ettenson, Elixinol President.

 

 

 

This week Australian-based Cann Group signed a non-binding heads of agreement (HOA) to purchase a site within the Mildura region in northwest Victoria for $10.75 million and expects produce about 50,000 kilograms of dry cannabis flower per annum from the new facility.

The company intends to use the site to construct a state fo the art cultivation facility, that when complete would make Cann Group one of the largest cultivators in the Southern Hemisphere. When completed it is expected that the new 34,000-square-metre greenhouse will be the largest purpose-built medicinal cannabis production facility in Australia.  

The Cann Group estimates the facility will cost about $130 million to construct, which it plans to fund through a mix of debt and equity. Once operational, Cann expects the Mildura facility will generate between $160 million and $200 million in annual revenues.

 

"This is particularly important given the off-take agreement we have executed with our strategic partner Aurora Cannabis, who has committed to purchase all of our production in excess of that required for patients here in Australia."

– Peter Crock, Cann Group CEO

 

In addition, Can Group also announced a 5-year off-take agreement with its cornerstone investor, Aurora Cannabis. The new off-take agreement will see Cann Group supply good manufactured practice (GMP) processed dry flower, extracted resin and manufactured medicinal cannabis products to Aurora until 2024.

 

 

This week saw Curaleaf announce their Q4 and Full Year 2018 financial results. And boy – were they good. Curaleaf jumped as much as 17 percent at one point, giving the company a market value of more than $2.6 billion. The stock had already gained 41 percent this year, though it has yet to reach the level where shares were sold in an October private placement that brought the company public through a reverse takeover in Canada.

Back to the results. Revenue $31.9 million for the quarter (up 49% on the previous quarter) and $77 million for the year, up 298%. Curaleaf also generates "Managed Revenue" which is revenue they get from managing a store on behalf of another licensee (MedMen also have this model).

Operating costs grew inline with revenue and hence Curaleaf delivered an EBITDA loss of $3 million and operating cash flow defunct of $15 million. However, these losses pale into insignificance when once considers their balance sheet. With over $267 million sitting in the bank, they are one of the best capitalised MSO's in the US.

 

CVS to distribute Curaleaf CBD products in over 800 stores

On the back of these stellar results, Curaleaf then went on to announce the largest distribution deal in US history, when they revealed that it's CBD line will be sold by CVS in around 800 of their stores.

"CVS confirmed that it has started selling CBD creams, sprays and lotions in eight states, including California, Illinois, Colorado, and Alabama. The products will be sold in store aisles, and drugstore chain isn't offering any supplements or food additives containing CBD, a company spokesman said in an email.

This is the largest CBD distribution deal to date and is only the beginning for Curaleaf. CVS has over 10,000 stores and hence the future potential benefits of this deal are far-reaching. Not surprisingly, the stock really popped this week and has been one of the strongest performers.

 

And for their final mention, this week also saw Curaleaf and Trulieve gain from the legal changes in Florida surrounding smokable flower. This week same Governor DeSantis and the legislature remove the ban on smokable medicinal cannabis and further open to the Florida market potential.

Prior to this, Florida cannabis dispensaries could only sell dry cannabis in "tamperproof" vape pods, intended for use with expensive vaporisers. Now, with the new laws, Trulieve and Florida producers and retailers will be able to sell dry cannabis in normal packaging, allowing the consumer to see cannabis before they purchase it and too easily and legally smoke cannabis.

This is very likely to increase the size of the Florida medical cannabis market, as cannabis smokers switch from black market sources to legal cannabis. The Florida market is one of the most robust and valuable medicinal markets in the US and is estimated to be worth $1.3 billion by 2021.

 

 

 

MedMen announced this week they had secured $250 million in the form of convertible credit facility from Gotham Green Partners. Considered one of the preeminent Private Equity firms in the US (in the cannabis industry), the deal represents another key milestone in the long-standing relationship between MedMen, Gotham Green and Cronos. That's right – Cronos.

Mike Gorenstein, who is the President and CEO of The Cronos Group, is also a founding partner in Gotham Green. Run by Jason Adler, Gotham have made significant investments in the cannabis space, most notably their $50 million investment into iAnthus.

"We continue to be impressed with MedMen's industry-leading retail execution and iconic branding. With MedMen's fortified balance sheet, the Company's future has never been brighter"

– Jason Adler, managing member of GGP. 

 

And we'll leave it there for the week. And they told you money doesn't grow on trees.

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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