Dai Truong's Cannabis Newsletter - Issue #29
#PotStocks Upside according to Analysts Price Targets. Since everybody was freaking out about PTs last week, here is the bigger picture.
📈+125% avg upside for the whole sector implying an avg FY P/S ratio of just 3X
👉POT STOCKS ARE NOT OVERVALUED IF GROWTH EXPECTATIONS ARE MET https://t.co/bt2i3oXzDH
1:53 PM - 22 Sep 2019
NBC News commissioned laboratory tests of knock-off marijuana vapes that found a pesticide linked to hydrogen cyanide in 10 out 10 products. Of the three purchased and tested from legal dispensaries in California, CannaSafe (testing company) found no heavy metals, pesticides or residual solvents like Vitamin E. But 13 out of the other 15 samples from black market THC cartridges were found to contain Vitamin E. CannaSafe also tested 10 of the unregulated cartridges for pesticides. All 10 tested positive.
Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) announced that its three cultivation facilities in the state of Illinois have been approved for growing adult-use cannabis by the Illinois Department of Agriculture. The three facilities, located in Joliet, Kankakee and Lincoln, can represent a total combined cultivation space at completion of 630,000 square feet per Illinois state regulations.
Ontario, which is Canada’s biggest market for legal pot, will begin consultations with various industry members to pursue a Saskatchewan-like distribution model where licensed cannabis producers will ship directly to retailers. The province’s government-owned cannabis business is the Ontario Cannabis Retail Corporation, a crown corporation that operates the Ontario Cannabis Store’s online retail business and sells wholesale cannabis to the province’s private retail stores.
The OCRC lost $42 million in the last fiscal year, a shortfall attributed to outsized costs in establishing the province’s new pot business. Earlier this month, the OCS announced former Ontario Lottery and Gaming Corporation vice-president Cal Bricker will take over as chief executive officer of the province’s cannabis business. Bricker will take over from Patrick Ford, who is retiring.
The decision to stop distributing cannabis in Ontario was linked to the province’s warehouse that is said to be running out of space ahead of the launch of next-generation cannabis products later this year, the sources said. The warehouse, located in Oakville, Ont., can store approximately 100,000 square-feet of inventory and employs roughly 200 people.
As the state’s leading medical cannabis provider, Trulieve’s employees are knowledgeable and eager to help patients. Trulieve encourages potential patients as well as patients who are new to cannabis and our wide array of products to connect with the staff to learn more.
The Office of Medical Marijuana Use recently announced the registry had surpassed 266,000 registered medical marijuana patients with an active ID card, with Trulieve consistently selling over half of the state’s overall volume, per the Florida Department of Health. There are presently 2,500 registered ordering physicians in the State of Florida as well.
MedMen Continues Florida Expansion With Three New Store Openings. The Company now has four operational stores in Florida, with eight additional store openings in the state planned for the remainder of the calendar year. Florida is the third most populous state in the U.S. with a robust medical cannabis program serving over 260,000 qualified patients as of August 30, 20191. In June, MedMen opened a location in West Palm Beach, its first in the state.
Harvest of Venice is located at 712 Lincoln Blvd and is open from 7am to 10pm seven days a week and features photography from Southern California photographers. Harvest is quickly expanding its presence in California with the recent openings of Harvest’s Napa and Grover Beach locations, and upcoming opening of Harvest of Palm Springs. Harvest has also secured the right to retail licenses in a number of other California cities.
It can be difficult to get a proper loan for growth-stage cannabis businesses that are still scaling and, for a long time, it wasn’t necessary. Tens of billions in equity investments have carried the development of large cannabis concerns on both sides of the border over the past several years.
But a slowing pace of equity investments has led to a wave of high-stakes leverage in the cannabis patch, as cash flow-negative companies are having to put hard-assets up for debt financing. Canadian companies like Organigram Holdings (TSX: OGI) and Aurora Cannabis (TSX: ACB) have worked out deals with Canadian chartered banks for access to traditional credit facilities within the means of their cash flow, but this summer also saw the advent of private, secured debt deals being orchestrated by obscure boutique outfits and syndicates with state-side multi state operators (MSO’s).
So far, none of the announced deals appear to have been consummated. When the Deep Dive took a look into the firms behind these debt deals, it turned out there wasn’t much to look at.
The Company’s Board of Directors has resolved to cause the conversion of all of the issued and outstanding Class A Convertible Restricted Voting Shares (the “Class A Shares”) of the Company to common shares. The conversion of 13.56 million Class A shares into 13.56 million Common shares has been completed and filed as required with SEDI. There are no remaining Class A share outstanding.
Hadley Ford, CEO, stated: “We believe that all our shareholders are well served by transparency. With this change, we are effectively eliminating our dual class equity structure with different voting rights and moving to one class of common.”
Silver Spike Capital plans to raise between $500 million and $1 billion for a direct lending fund in the fourth quarter, followed by a private equity fund of the same size. The New York-based firm is also looking to raise about $200 million for a hedge fund, said Scott Gordon, founder and chief executive officer.
The new funds are in addition to Silver Spike Acquisition Corp., a special purpose investment vehicle that listed on the Nasdaq in August, in a deal led by Credit Suisse Group AG. The $250 million SPAC aims to acquire a pot-related business or businesses within 18 months.
Gordon formerly specialized in emerging markets at a variety of firms, including JPMorgan and Bank of America Corp., and is also chairman of California-based pot company Papa & Barkley.
Gordon chose to focus on the direct-lending fund first because it’s the most under-served part of the industry, with the vast majority of capital coming so far from equity sales. “You can structure really interesting loans to very viable borrowers at juicy returns,” he said.
The 4-1 approval came despite concerns about public health and safety. Both new types of licenses will be reserved for the first two years for social equity and economic empowerment applicants, which are categories of businesses owned by minorities, people with drug convictions and people who have lived and worked in communities disproportionately affected by marijuana prohibition.
Cannabis industry research firm New Frontier Data reported this week that data shows vaping sales are down sharply in several states in September, and more than 60% in September. The firm said Oregon’s sharp decline may be related to the fact the vaping death here appears related to products purchased from the legal, recreational sector rather than the black market.
The crisis has begun to take a toll on the industry. Shares in Massachusetts-based marijuana company Curaleaf fell 10.4% Tuesday and another 8.6% Wednesday. The stock rebounded modestly on Wednesday. Curaleaf’s all-stock deal for the Portland-based Cura Cannabis (Select), initially pegged at nearly $1 billion, has lost more than a third of its value since it was announced in May. Its value has fallen by $135 million this week alone amid the vaping scare.
Tilt is a major player in three “constrained” markets with plant-touching assets in Pennsylvania through Standard Farms, in Massachusetts (where the company is headquartered) with Commonwealth Alternative Care and in British Columbia with Sante Veritas Therapeutics. To execute its cannabis B2B strategy Tilt has acquired Jupiter Research, Blackbird and Baker Technologies.
“We have these plant-touching assets in limited market states that generate a lot of revenue today but Tilt’s long-term goal is to support every operator in the industry instead of being competitive with them,” Conder said. “We do that by providing hardware products to operators through Jupiter; distribution, delivery and software services through Blackbird; and a CRM technology through Baker.”
Harvest Health & Recreation, Inc. Partners with Last Prisoner Project on "Prison to Prosperity" Re-Entry Program
Harvest’s “Prison to Prosperity” program will offer vocational training opportunities and educational programs specific to the cannabis industry for those who continue to be disadvantaged by a criminal record. The program will begin with a pilot project working in tandem with local reentry organizations in California and will roll out nationally at a later date.
Agam sits down the Business Innovators Radio Podcast with Rick Brown to discuss how the industry has grown and how Natura stands ready to change the face of how cannabis brands are grown.
Charlotte's Web Announces 738 Vitamin Shoppe Locations Across 45 States Commence Selling New Gummy Line
This expands Charlotte’s Web product offerings carried by The Vitamin Shoppe to include CBD hemp extract oil tinctures, liquid capsules, and now gummies. Charlotte’s Web gummies are a popular edible format providing measurable consumption of convenient bite-sized full-spectrum CBD hemp extract.
Charlotte’s Web gummies, launched in June of this year, are made with whole-plant extract from its prized hemp genetics featuring synergistic functional ingredients to support specific health related functions including everyday stress, sleep, and recovery from exercise or active lifestyles.
PharmaCielo Enters the U.S. with $3M Q4 Sales Agreement and Completes Introductory Shipments to Multi-state Distributor General Extract LLC
PharmaCielo has already successfully concluded initial shipments to the distributor in verification of shipping routes and international trade and customs requirements, with contracted shipping volumes planned for the balance of the year as per the Agreement. Introductory revenues under the contract provide 2019 revenue of $3 million CDN, with allowance for increased volumes within the period under the Agreement based on market demand, and expansion on agreement renewal for subsequent periods.
Gotham Green Partners (“GGP”) has invested an additional $20.0 million through the purchase of senior secured convertible notes from iAnthus. GGP’s investment is part of a broader $100.0 million financing plan to support the buildout of all existing markets in which the Company currently operates.
The notes have been issued by iAnthus Capital Management, LLC, the Company’s wholly owned subsidiary, have an annual coupon of 13%, payable quarterly, will mature on May 14, 2021, subject to the iAnthus’ right to extend the maturity date by twelve months, and are exchangeable into common shares of the Company (“common shares”) at a conversion price of $1.89, which represents a 25% premium to the closing price of the common shares on Friday, September 27, 2019. The notes are being issued with $10 million of attached three-year warrants with an exercise price of $1.97. Any additional notes will have substantially the same terms, including conversion price and warrant coverage, subject to compliance with the policies of the CSE. The note purchase agreement provides GGP the right to purchase additional notes of up to $66.5 million for a total of $86.5 million. The Company may obtain an additional $13.5 million from potential financing sources, including GGP or others, to fulfill its $100.0 million plan, with any such additional financing subject to the negotiation of pricing, terms and conditions in the context of the market.
Regarding the operational progress of the Company over the last 16 months, Chief Operating Officer Pat Tiernan said, “Our business has never been stronger. We currently have 27 open dispensaries, 11 of which have opened in the last ten months. We are working aggressively to open another 12 in the next six months. We are growing in each of our markets and are one of the only MSOs that has meaningful revenue in multiple states, including Arizona, Colorado, Florida, Maryland, Massachusetts and Nevada, with strong same-store sales growth across our footprint. Pro forma for our pending Sierra Well acquisition, we are generating in excess of $10 million of reported and managed revenue per month, with a rational cost structure that has us well-positioned for future success.”
Pursuant to the Offering, the Company issued 7,350,000 units (the “Units”) at a price per Unit of C$10.00 (the “Offering Price”), for gross proceeds of C$73,500,000. The Offering was conducted by a syndicate of underwriters, led by Canaccord Genuity Corp., and including Beacon Securities Limited, Cormark Securities Inc., Eight Capital and GMP Securities L.P..
The Company also granted the underwriters an over-allotment option to purchase up to an additional 1,102,500 Units at the Offering Price, exercisable in whole or in part, at any time on or prior to the date that is 30 days following the closing of the Offering. If this option is exercised in full, an additional C$11,025,000 will be raised pursuant to the Offering and the aggregate proceeds of the Offering will be C$84,525,000.
Each Unit consists of one subordinate voting share of the Company and one half of one subordinate voting share purchase warrant of the Company (each full warrant, a “Warrant”). Each Warrant entitles the holder to acquire one subordinate voting share of the Company at a price of C$12.50 per share, subject to adjustment in certain circumstances, for a period of 3 years following the closing of the Offering.
Cresco Labs Enters Into Sale-and-Leaseback Agreement With Innovative Industrial Properties (IIP) for Illinois Facilities
Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) announced that it has signed a binding agreement to sell its Joliet and Kankakee, Illinois properties to Innovative Industrial Properties, Inc. (“IIP”) for ~$46.3M, which amount includes funding for additional tenant improvements at the Kankakee property. Concurrent with the closing of the sale, Cresco Labs will enter into a long-term, triple-net lease agreement with IIP and will continue to operate each property as a licensed cannabis cultivation and processing facility. The two properties represent approximately 100,000 square feet of industrial space in aggregate. The agreement is expected to close within the next 30 days.
KushCo Holdings, Inc. (OTCQX:KSHB) announced it has entered into definitive agreements with investors for the purchase and sale of 17,197,570 units, with each unit consisting of one share of common stock, par value $0.001 per share, and a warrant to purchase half a share of common stock, at an offering price of $1.75 per unit, pursuant to a registered direct offering. The warrants will have an exercise price of $2.25 per share, will be immediately exercisable and will expire five years from the date of issuance. The gross proceeds of the offering will be approximately $30.1M before deducting placement agent fees and other estimated offering expenses.
Jefferies LLC and A.G.P./Alliance Global Partners are acting as co-lead placement agents for the offering. The Company’s share price has gone down 41% from $2.63 (announcement) to $1.55 (Friday’s close).
Auxly Closes C$123 Million Investment and R&D Partnership with Imperial Brands and Strengthens its Board
Auxly Cannabis Group Inc. (TSX.V: XLY) (OTCQX: CBWTF) announced that its transaction (the “Transaction”) with Imperial Brands PLC (“Imperial Brands”) has closed. As announced on July 25, 2019, Imperial Brands invested C$123M by way of a debenture pursuant to the Transaction, which is convertible into 19.9% ownership of Auxly. Imperial Brands grants Auxly global licenses to its vaping technology, access to its vapor innovation business, Nerudia, and will use Auxly as its exclusive partner for the future development, manufacture, commercialization, sale and distribution of cannabis products of any kind anywhere in the world.
MediPharm Labs and TerrAscend Enter Major Private Label Concentrate Supply Agreement With Potential Value Up to $192M
Under the terms of the Bulk Resin Supply Agreement (the “Agreement”) dated September 24, 2019, TerrAscend will purchase a minimum of approximately $27 million of cannabis concentrate from MediPharm Labs Inc. (“MediPharm”), a wholly-owned subsidiary of MediPharm Labs, over the course of 24-months. TerrAscend will have the option to purchase up to an additional $105 million of cannabis concentrate over the same period, subject to the availability of such supply from MediPharm. The Agreement includes an option for a 12 month mutual extension where, if extended, TerrAscend would additionally purchase a minimum of approximately $10 million, and would have a right of first offer to purchase an additional approximately $51 million over the same period, subject to the availability of such supply from MediPharm, bringing the total potential aggregate value of the Agreement to over $192 million to the end of September 2022.