The global financial markets haven't seen a crash this bad since the GFC, so which pot stocks will survive this plummet?
The Coronavirus crisis has ground the world to a halt, with entire countries effectively ceasing operations as they attempt to gain control of the COVID-19 situation. Unemployment is skyrocketing, airlines are predicted to go bankrupt, and stock markets are crashing.
The COVID-19 crisis has led to one of the most precipitous declines in global stock markets since 2008, with The Dow Jones Industrial Average closing down 2,997 points last Tuesday, equating to a 12.93% drop – its worst one-day point loss ever. As a result of all the pandemonium, U.S. President Donald Trump has even gone as far as to say that the country may be headed for a recession.
Of course, cannabis stocks aren't immune to this downturn in global markets and investor sentiment. In fact, they were headed downward long before the coronavirus crisis kicked into hyperdrive. For the past year, pot stocks have been plummeting, with the Global Cannabis Stock Index worth a fifth of what it was last year.
At this point, you could be forgiven for thinking that all hope is lost when it comes to pot stocks and that the horse has truly bolted.
Though the truth is, there's underlying value to cannabis that can never be fully stripped away. The number of cannabis dispensaries reached a whopping 7,490 across the U.S. in 2019, sales for recreational marijuana reached $7.3 billion, and just last month, Illinois generated $75 million in just two months of legal weed sales.
Here in Australia, we've only legalized medical marijuana, with the exception of the ACT legalizing cannabis possession (and not distribution), though we're also seeing a strong upward trajectory to our prescriptions. In 2019, the Therapeutic Goods Administration granted over 25,000 applications from doctors to prescribe cannabis medicines, which was more than a 10-fold increase over the previous year.
Some people want cannabis as a recreational good, and others need cannabis for its medicinal properties.
Clearly, there are solid foundations under the crumbling walls that represent the cannabis industry at the moment, so the question then becomes, which pot stocks have got what it takes to survive the current capital crunch of 2019-2020 during this hyperbolic economic downturn?
Listen up, as we explore who will swim, and who will sink, in the ASX-listed landscape of pot stocks.
1. Althea Group Holdings (ASX:AGH)
Althea Group (ASX:AGH) is an Australian cannabis company that is aiming to corner the market on the importation, cultivation, and supply of medical cannabis. The company was founded in 2017, and in that time Althea has already developed five branded medicinal products that have hit the market.
Additionally, Althea is one of the few companies operating in Australia that has been granted a full set of licenses from the Office of Drug Control (ODC) and Agriculture Victoria, allowing it to engage in cultivation, manufacturing, production, import and export activities.
Althea has several very promising factors going for it; the company has been performing significantly above expectations in recent months, as the end of Q4 2019 saw Althea exceed its 4,000 patient end-of-year milestone with an additional 719 new patients added in December alone. This process was greatly expedited thanks to the growing number of healthcare professionals who prescribe Althea products, which has been growing year-over-year at over 2100%, now sitting at 459 Australian Healthcare Professionals.
We spoke with Althea's CEO Josh Fegan to discuss his plans with how the company will navigate through the Coronavirus crisis, to which he responded that the keyword for Althea is "Longevity."
"Althea never set up to be some sort of fly-by-night success. It's a sustainable business model. It's happening, but we all need to understand he's going to take time to build."
Our supply chain is unaffected by the coronavirus.Josh Fegan, Chief Executive Officer of Althea
Being a medical company that serves the needs of real patients, with increasing brand awareness among health professionals, Althea's necessity won't be waning any time soon. "Patients do need their medicines, like any indication and any other medication that people are utilizing pretty much as a maintenance drug, it's going to be required."
"We're extremely healthy with 15.5 million dollars in the bank. We're nearing breaking even in profitability for the Australian business in isolation, which is a real positive, and we've got meaningful revenue offset in the expenditure that we have now," Mr. Fegan added.
"We're in a very healthy position. I want our shareholders to know that we're watching the coronavirus situation very carefully, and we're implementing different management policies to ensure that our working capital is protected and that we're in as good a shape, if not better, when the fog lifts, when we come to the other end of this."
With a solid balance sheet, increasing profits, a growing patient base, and most importantly, solid management, we believe Althea is sitting very pretty at the moment, and the current Coronavirus crisis will hardly make a dent in this one.
Disclaimer: Past performance is not an indicator of future performance.
2. THC Global (ASX:THC)
THC Global (ASX:THC) has a lot going for it, but can it survive the current capital crunch?
THC's primary asset is it's Southport Facility, the largest extraction facility in the Southern Hemisphere. Southport has the potential to produce a whopping annual processing capacity of 120,000kg of cannabis. In total, this capacity is enough to support more than 250,000 Australian patients, with plenty of weed left over to export into the global cannabis market. Not only that, but the facility is decked out with all federal and state licenses necessary to enable commercial-scale GMP manufacturing of value-added cannabis extracts.
This company's swath of permits and licenses allow THC Global to export its products into Europe and North America, on top of supplying patients in Australia and New Zealand.
And if the Southport Facility wasn't enough, THC has several operations throughout Australia, one of which is its Bundaberg Facility. The Bundaberg Facility is fully licensed by the ODC, allowing for farm-to-pharma production at the site, and most recently the company also announced that it had received an expanded commercial cultivation permit from the Australian Office of Drug Control. This allows THC to commence production towards the supply of medicinal cannabis medicines to an initial 6,000 Australian patients.
Of course, all of this is very, very good stuff. While other pot stocks may depend on their unachieved potential, perhaps in the case of future clinical trials, THC has a real-world value that is instead predicated on their capacity to produce enormous amounts of vertically-integrated, value-added cannabis products.
However, there is one big question mark looming above THC Global, which is, can it survive the current capital crisis?
Last year, THC spent $7.8 million in operating expenses, which was softened by proceeds from shares issued, conversions of options and loan repayments, totalling $5.7 million. This lowered the net cost of THC Globals operations to just shy of $2.8 million.
Unless the company raises additional capital, (which will be very difficult in the current climate) THC Global's cash runway is very short. With only $3.5 million in the bank, the company may very well burn through its remaining capital in the coming months. We think they could well be in trouble.
3. Cann Group (ASX:CAN)
Cann Group (ASX:CAN) has the stated goal of becoming the leading developer and supplier of cannabis, cannabis resin, and medicinal cannabis products in Australia. Cann Group was a first mover in the Australian cannabis landscape, as the company was granted the very first Australian Medicinal Cannabis Research Licence in February 2017.
A lot of hype surrounded Cann Group as they have been building the largest cultivation facility in the country, the Mildura Facility. Though as exciting as the potential for this facility is, developing the Mildura Facility isn't cheap – with a hefty price tag of $184 million.
Unlike THC's Southport Facility, which they picked up at a heavily discounted rate, building Cann's Mildura Facility has been much more arduous than initially expected. Previously, Cann Group Limited (ASX:CAN) had intended to complete the Mildura facility as a single-stage development—with a total capacity of 70,000 kgs.
However in November last year, the company announced the facility development would be put on hold, and that Cann would be reviewing a "revised construction plan" for the project, after having sunk $47 million on its acquisition and construction, in the hopes that they can begin to expedite the production of a smaller amount of raw cannabis in order to help generate capital.
This news didn't bode well with investors, as the stock price in Cann Group went from $1.00 in Mid-November to $0.39c just a month later.
While the stock rallied back up in Mid January, the Coronavirus-induced capital crunch will definitely throw a spanner in the works for Cann Group. Moreover, the company's latest half-yearly results show that Cann Group used $6,589,609 in operating expenses, with only $8 million left in the bank.
Cann Group has just over 6 months of cash runway left in the bank, and with a capital raise being nearly impossible in the current climate, the outlook for the company is also looking very bleak. This is one pot stock that we are staying well clear of.
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