Dai Truong's Cannabis Newsletter - Issue #30

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I’ll send an email summary with coverage of the MedMen/PharmaCann breakup tomorrow as it’s still being digested.

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Chart: Marijuana vape sales decline stabilizing in some markets

Vape sales appear to be stabilizing in most major recreational cannabis markets in the United States in the wake of the vaping health crisis, but with more bans and sales restrictions on the horizon the rebound could prove short-lived.

Cannabis

California vape maker Kushy Punch caught making illegal products

State officials suspect legal products were going out the front door, while illegal products slipped out the back.

Vape industry expert Peter Hackett, founder of the law-abiding California company AirVapor, explains the logic of selling out the back door. If a licensed company fails R&D lab testing on 30,000 vape carts at $50 retail each, do they just throw away $1.5 million?

“Hell no,” says Hackett. “That’s going to get redirected into the underground black market network.

Cresco is a cannabis industry leader in IL, says Beacon Securities

“This sale-and-leaseback agreement with IIP represents a non-dilutive capital solution for Cresco Labs that will support the expansion of our Illinois operations in preparation for the legalization of adult-use cannabis on January 1, 2020,” said Cresco Labs CEO and co-founder Charlie Bachtell in a press release.

Stanley says that the new deal is a positive for the stock and for the company, which already owns and operates five dispensaries in Illinois (the state maximum and representing five of a total of 55 statewide), with the legalization of adult-use to potentially allow for five more Cresco retail locations.

Looking ahead, the analyst sees potential catalysts for the stock in progress on the Origin House transaction, the closing of announced acquisitions in Florida, Massachusetts and New York, the third quarter financials due in November and additional M&A and buildout news.

Concerns About Illicit Vapes Could Bring New Opportunities

There are signs of hope for vape companies. Headset’s data shows stabilization in vape sales in recent weeks in California, Nevada, and Washington.

“Moving forward, we could see Vapor Pen sales increase if consumers in adult use states move their purchases from the black market and into licensed dispensaries where they can be confident they will be able to purchase fully regulated and tested products,” Headset wrote in its report.

Kovacevich echoed the sentiment. “This migration from black market to legal market is going to be gigantic. We are going to be right there to take advantage of it,” he said.

In addition to the $30 million direct listing KushCo announced last week, the company also recently partnered with De La Rue, an anti-counterfeiting company, to provide anti-counterfeit security labels. Kovacevich said the partnership already has “30 to 40 companies lining up” for its anti-counterfeit stickers.

Hexo CFO’s Resignation Prompts Double Downgrade at BofA

The abruptness of Hexo Corp.’s chief financial officer departure raises questions about whether there was more to the move than meets the eye, prompting Bank of America Merrill Lynch to double-downgrade the stock.

“Put simply: a departure that is so abrupt, from a person with CFO experience at other public companies, is concerning, and in our view will leave investors guessing ‘what don’t we know?’ for some time,” analyst Christopher Carey said in a note.

Carey cut his rating on Hexo to underperform from buy and reduced his price target to C$4, a Street low, from C$9.

Hexo has said it expects to reach C$400 million of net revenue in fiscal 2020, but Carey believes it will cut that target amid an expected slowdown in the Canadian cannabis market in the second half of calendar 2019.

This was echoed by BMO analyst Tamy Chen, who expects the industry’s third-quarter sales to provinces will decline 20% quarter-over-quarter. This will likely cause Hexo to miss its guidance that revenues will double in its fiscal fourth quarter from the previous period, she said.

Harvest Health & Recreation, Inc. Opens Fourth Dispensary in CA

“California has long been at the forefront of the cannabis industry in the U.S.,” said Harvest CEO Steve White. “We are thrilled to be working with the City of Palm Springs, whose dedication to allowing only best-in-class operators and products into the city aligns perfectly with Harvest’s mission to bring high-quality, trusted cannabis experiences to patients and customers everywhere.”

Harvest of Palm Springs follows the recent openings of Harvest’s Venice, Napa and Grover Beach locations. Harvest continues to further its footprint in California with the right to retail licenses in a number of additional California cities.

PLUS Products Launches Edibles Products into NV

Plus Products Inc. (CSE: PLUS) (OTCQX: PLPRF) (the “Company” or “PLUS”), a leading cannabis branded products company in the U.S, today announced the launch of its best-selling gummies1 into the Nevada market. The products are manufactured through the Company’s partnership with TapRoot Holdings Inc. (“TapRoot”), a vertically integrated cannabis company operating cultivation and manufacturing facilities in Las Vegas, Nevada. Commercialization comes just four months after PLUS and Taproot entered into a definitive agreement.

Michigan expands social equity areas as adult-use marijuana program nears

Michigan cannabis regulators more than doubled the number of communities eligible for social-equity assistance, from 19 to 41 communities eligible. Nearly 1,000 of the state’s 1,773 communities reportedly have decided to opt-out, or ban retail stores, at least initially.

Identified social equity communities include Detroit, East Lansing, Flint, Kalamazoo, Muskegon, plus numerous smaller municipalities.

$400M invested in Colombia cannabis industry, official tells Latin American Cannabis Symposium

Colombia offers the land, workforce and regulatory framework for companies to focus on a specific segment of the cannabis industry.

One of those opportunities is to develop differentiated genetics for the purpose of wholesaling, both in the domestic market – where hundreds of companies already have a license or are applying to have one, but they still haven’t developed their own genetics – and in the export market.

High ambitions: Uruguay cannabis firm targets booming global market for medical marijuana

“Our goal is to create a billion-dollar industry here in Uruguay in the next five to seven years,” Jordan Lewis, chief executive of Fotmer Life Sciences, told Reuters at the Montevideo lab. The firm soon hopes to announce shipments to the European Union, where Germany is the key market, he added.

Uruguay has been ahead of the curve. It was the first country to legalize the growing, sale and smoking of marijuana in December 2013 in a pioneering social experiment closely watched by other nations debating drug liberalization.

CBD

Whole Foods Responds to Surging CBD Demand

Whole Foods announced it will increase topical CBD product offerings in an additional 13 states. The states newly involved in the product expansion are as follows: Arkansas, Arizona, California, Georgia, Kansas, Michigan, Missouri, Nevada, Oklahoma, Pennsylvania, South Carolina, Texas and Virginia.

Customer interest in CBD has been growing according to Jennifer Coleman, the Global Senior Category Merchant for grocery chain. “We’re thrilled to roll out topical CBD products in even more stores and to share new, exclusive items from our longstanding supplier partner Pacha Soap Co,” Coleman said in a press release. Also included in the press release was the announcement of an exclusive line of CBD bath products.

Deals

Viola Closes $16M Investment Led By Gotham Green Partners

This latest round of funding will assist with the acquisition of a 34,500 sq. ft cultivation, processing and distribution facility in Adelanto, California as well as the completion of Viola’s 48,000 sq. ft facility in Detroit, Michigan.

Viola raised $15M prior to this round of funding, which enabled the company to grow its product offerings and footprint within the cannabis industry. The company is currently operating in California, Colorado, Oregon and Michigan, with plans to expand into Maryland, Nevada and Arizona in 2020.

Canopy Growth Announces Purchase of Majority Stake in Biosteel Sports Nutrition

Canopy Growth Corporation (“Canopy Growth” or the “Company”) (TSX: WEED) (NYSE: CGC) is pleased to announce that it has completed an all-cash transaction to purchase a majority stake in BioSteel Sports Nutrition Inc. (“BioSteel”), a leading producer of sports nutrition products. The transaction provides Canopy Growth with a significant platform to enter the sports nutrition and hydration segment, and lays the groundwork for the adoption of cannabidiol (“CBD”) in future product offerings in accordance with regulations globally including products to be sold in the U.S. containing CBD sourced from federally permissible industrial hemp.

High 12 Brands Announces Completion of Series A Financing

High 12 Brands, a cannabis consumer packaged goods company, announced the closing of its CDN$6,301,802 oversubscribed Series A financing. The financing was led by Zola Global Investors Ltd., a family office that focuses on building lasting businesses in the cannabis industry. The investment round also included investments from JW Asset Management, Artemis Growth Partners, Cassidy Asset Management, Uji Capital, Ela Capital, and other leading global cannabis funds and executives. High 12 will use the funds to launch and build its portfolio of cannabis branded products across markets in the United States, Canada, and globally.

Canopy Rivers Invests Additional US $10M in TerrAscend

Canopy Rivers, along with Canopy Growth Corporation, first invested in TerrAscend in November 2017. In October 2018, both parties restructured their investment in TerrAscend. This restructuring enabled TerrAscend to pursue strategic international transactions in the cannabis space while ensuring all parties remained compliant with industry and securities regulations.

Team

MPX International Appoints Former Reynolds and British American Tobacco Board Member Jean-Marc Lévy to Its Advisory Team

“The medical cannabis industry is ripe with opportunity and I am excited to align myself with MPXI to help lead and drive strategic business development opportunities,” said Jean-Marc Levy. “The company’s previous strong track record of success in the US, highly experienced management team and the significant progress they’ve made since the beginning of this year were just a few of the aspects that drew me to work with this globally-oriented growth story.”