Although a Canadian federal task force issued favorable recreational cannabis recommendations last week, stocks levered to this development saw mixed reactions from the market.
The market initially responded favorably to the task force’s recommendations but concerns regarding the timeline to implementation impacted market sentiment and this caused investors to exit their positions, which sent stocks lower on average.
Former deputy prime minister and chair of the federal government’s cannabis task force Anne McLellan recently told CNBC, “I think one of the things we were struck by was how complex this transition actually is, and not only in terms of drafting legislation at the federal and provincial levels and putting in place all the infrastructure and training, but the psychological transition. Going from something that has been prohibited for decades, to a world where it’s a legalized product, sold in a regulated market — so the transition is going to be enormous.”
When looking at the potential catalysts for the Canadian cannabis industry, none is more significant than the legalization of recreational cannabis at the federal level. This development will serve as a catalyst to the entire cannabis industry and the recent weakness has created a great opportunity for investors interested in the burgeoning cannabis industry.
Investors looking for a new growth field should take advantage of the recent weakness within the Canadian cannabis industry and focus on companies that will see remarkable growth for years to come.
We want to recap of some of the activity within the Canadian cannabis industry last week and highlight recent company developments that we find to be significant.
1) Canabo Medical Edges Lower Despite Significant Developments
One of the companies near the top of our radar screen is not a licensed producer of medical cannabis. The company is Canabo Medical Inc. (CMM.V) (CAMDF) and it owns and operates CMC Clinics, the largest chain of medical cannabis clinics in Canada.
Canabo Medical does not operate like a typical Canadian cannabis company and we are favorable on the company for the following reasons: 1) The company owns a growing database of valuable patient data, 2) Canabo recently received a $8.4 million investment from Aphria at a more than 55% premium to the current price of CMM.V, 3) The company announced a study on 7,500 patients during 2017, 4) Canabo has made entered into attractive partnerships and agreements that will continue to support growth, and 4) Its valuation is attractive as the value of a patient to its market capitalization is in dollars. This is much lower than licensed producers as a patient’s value is worth thousands of dollars.
Canabo benefits from having three primary revenue streams: physician consultations, database subscriptions and independent medical evaluation consulting.
The company owns a database of more than 10,000 patients. Canabo’s data includes a full medical profile of each patient, as well as their cannabinoid consumption and efficacy following the start of their treatment.
This data will assist in the advancement of research for the benefit of insurers, medical practitioners, clinical researchers and the pharmaceutical industry. The data will also be used to build a long-term view of how medical cannabis is helping patients over time by condition, medication usage, and on many other fronts.
In early December, Canabo a letter of intent with Peak Medical Group to provide physicians and clinic space to assess up to 20,000 new patients under Canabo’s medical marijuana assessment, prescribing, educational procedures and protocols.
Peak Medical Group immediately began to provide training for up to 60 physicians and educators in Canabo’s proprietary training protocols with all resulting patients under this agreement to be enrolled in Canabo’s medical data collection program.
A few days later, Canabo announced an agreement with Aphria Inc. (APH.V) (APHQF) to raise gross proceeds of $8,400,000 through a private placement of 6,000,000 shares at $1.40 a share. Aphria will own approximately 16.6% of the total issued and outstanding common shares of the company (on an undiluted basis).
Canabo also announced plans to complete a 7,500 patient observational study with Andrew Davis, Ph.D., of Acadia University in 2017. The study is expected to publish its initial results in late 2017 and complete study findings in 2018. The study will focus on correlations within the patient database in three specific areas:
- The relation of opioid use following therapies by condition and patient category
- The relation of benzodiazepines use following therapies by condition and patient category
- The change in quality of life measurements following therapies by condition and patient category
2) Emblem Corp Commences Trading and Issues Company Update
Emblem Corp (EMC.V) (EMMBF) made its debut on the TSX Venture exchange last week under the symbol EMC.V, and the United States over-the-counter (OTC) exchange under the symbol EMMBF.
Emblem is a fully licensed medical cannabis producer and the company is actively registering patients. Since inception, Emblem has raised over $42 million dollars and it currently has $27 million in cash which will be used to expand production capacity and prepare for the legal recreational market.
Emblem’s facility currently operates with two flowering rooms, one vegetation room, one mothering room and one propagation room, supported by trimming and drying facilities, fulfillment, administration and a 625kg vault. The company will bring three new growing rooms on-line in March and another one on-line June.
Emblem’s initial public offering on Monday was nothing short of a success. During the first day of trading, EMC.V traded more than 6.2 million shares and the shares traded as high as $3.98. The company continued to see strong market interest throughout the week, but the shares came down from its highs and EMC.V is trading at $2.80.
On Thursday, Emblem released a company update that reviewed its accomplishments and plans for 2017. The company operates three distinct divisions which can create value for each other. Its production division is committed to cultivating the highest quality product possible, its healthcare division is designed to address challenges patients face with accessing the ACMPR system, and its pharmaceutical division is pioneering the next generation of Canadian medical cannabis: medication made available in standard pharmaceutical dosage formats.
Emblem will be focusing on the upper echelon of the recreational market where it expects the margins to be the most attractive. The company will be deploying significant capital for the construction of the highest possible closed box horticultural environment capable of producing the highest quality product.
Emblem has plans and funding in place to increase production capacity to 12,000 kilograms a year, especially for the arrival of recreational cannabis. The company has additional longer-term plans to expand production to over 21,000 kilograms a year.
Emblem’s pharmaceutical efforts are led by President John Stewart who will lead the launch of cannabinoid-based medications in customary pharmaceutical dosage forms such as liquids, gel caps, oral sprays, and inhalers. Stewart has launched 11 new products, including OxyContin and was previously the CEO of Purdue Pharma, the largest privately held pharmaceutical company in the world.
By using a more natural cannabis extract, Stewart is trying to create safe standardized dosage medication in pill form. The development of a product like this would allow Emblem to compete in the global pain and sleep market, the largest pharmaceutical markets in the world.
We are favorable on Emblem for the following reasons: 1) The company operates three distinct divisions which can create value for each other, 2) It has seen very strong interest from the marketplace, 3) Its Emblem Cannabis division started selling medical cannabis in August and we expect to see continued growth on a month-over-month basis, and 4) It is led by a management team that has a proven track record of building successful multi-billion dollar companies.
We expect Emblem to see rapid growth on account of its unique three-pronged approach: dedicated to the production of premium quality cannabis, patient and physician education creating easy access and a pharmaceutical approach that is second to none.
Emblem has seen its share price move lower following its initial public offering and we are not surprised by the recent consolidation. Despite this recent weakness, we remain favorable on Emblem on account of its long-term opportunity and attractive business model and we see value at current levels. Although we see significant upside from current levels, investors should wait for the shares to find a bottom and we plan to add to our position if EMC.V breaks below $2.50.
3) Canopy’s Acquisition of Mettrum Creates Arbitrage Opportunity
Earlier this month, Canopy Growth Corp (CGC.TO) (TWMJF) announced plans to acquire all of the issued and outstanding shares of Mettrum Health (MT.V) (MQTRF).
Under the terms of the agreement Mettrum shareholders will receive 0.7132 common shares of Canopy Growth for each common share of Mettrum, representing consideration of C$8.42 per Mettrum common share based on the closing price of CGC.TO on November 30th.
MT.V currently provides investors with an arbitrage opportunity as the shares trade at a more than 8% discount to Canopy’s acquisition price (based on the current price of MT.V and CGC.TO). If the acquisition is approved, investors can profit from this opportunity by buying MT.V. We continue to monitor trading activity very closely and we plan to take advantage of the arbitrage opportunity created by the difference between the price of CGC.TO and MT.V.
We are favorable on this acquisition for a number of reasons and believe it will immediately prove to be accretive. The combined company will bring together Mettrum’s simple and proven Mettrum Spectrum brand with the medically-focused brand of Bedrocan Canada and the lifestyle-focused brand of Tweed. On the hemp side of the business, the integration of Mettrum Originals with Canopy Growth’s recently acquired hemp.ca platform will solidify Canopy Growth’s position in the hemp market
Following the completion of the acquisition, Canopy Growth will have a cash balance of approximately $68 million, will have one of the strongest balance sheets in the industry and will be well-funded for expansion and product development initiatives.
4) The Big Get Bigger
Last week, one of Canada’s largest licensed medical cannabis producers announced two purchase and sale agreements to acquire more than 200 acres of land for less than $7 million.
We continue to remain favorable on Aphria’s (APH.V) (APHQF) long-term opportunity within the Canadian legal cannabis industry due to the following reasons: 1) The company continues to acquire new properties and increase it potential production capacity prior to the legalization of recreational cannabis, 2) Aphria continues to enter into new strategic partnerships and invest in complimentary businesses to increase market awareness, 3) Fundamentals continue to improve and its balance sheet continues to strengthen, and 4) Its valuation has improved on account of the shares falling 20% in the last month.
Aphria is one of the largest licensed producers of medical cannabis in Canada and the company is well positioned to capitalize on this rapidly growing opportunity on account of organic and inorganic growth initiatives.
The company announced a purchase and sale agreement to acquire 200 acres of fully serviced vacant land for $6.24 million. The land is not next to Aphria’s existing operations and it needs to receive a new site license from Health Canada for it. The company expects the transaction to close in January.
Aphria also announced that it removed all conditions attached to a purchase and sale agreement to acquire five-acres of largely vacant land for $750,000. The land located on the eastern border of its existing Health Canada approved site license and it will be merged into Aphria’s existing address so it does not need to apply for a site license for it.
These developments came only a few days after Aphria closed its short form prospectus offering and raised over $40 million on a bought deal basis. A total of 10,062,500 common shares were sold at $4 per share, for aggregate gross proceeds of $40,250,000. The offering was underwritten by a syndicate of underwriters led by Clarus Securities Inc. and included, Cormark Securities Inc., Mackie Research Capital Corporation, Haywood Securities Inc. and Sprott Private Wealth LP.
The proceeds are expected to be used in connection with the ongoing expansion of Aphria’s production capabilities beyond the ongoing Part 2 and 3 expansions. The funds will also be used for the planning, design, development, construction and implementation of a project internally identified as Part 4 Expansion which is expected to start during the third quarter (remains subject to board approval). Until approved, the net proceeds will be held as cash balances in the company’s bank account or invested at the discretion of the board.
Aphria CEO Vic Neufeld said, “Aphria, with 52 acres of land on its primary site license, is well on its way to its previously discussed 1 million square feet of growing space. Securing a second site represented an important part of Aphria’ diversification plans. Being able to secure a 200-acre site, in one acquisition, positions Aphria to rapidly advance its expansion plans, when demand for recreational use of cannabis is legalized.”
5) Turnaround Story of the Year
One company we continue to remain favorable on is Aurora Cannabis (ACB.V) (ACBFF). We consider Aurora to be the turnaround story of 2016 as the company went from having zero patients to having one of the largest patient bases in the legal medical cannabis industry.
Aurora Cannabis has been selling cannabis products for less than 12 months and continues to register new patients at industry leading rates. The company has been executing on its business plan as it continues to increase its market share in the Canadian cannabis market.
At the end of November, Aurora Cannabis announced that it has broken ground on an unprecedented 800,000 square foot production facility that will be known as Aurora Sky. The hybrid greenhouse facility is expected to be the largest and most advanced cannabis production facility in the world.
Last week, the company released on update on this project and said that the facility is currently under construction at the Edmonton International Airport (EIA). We are favorable on this location due to its strategic advantages which include access to reliable low-cost power, and unparalleled proximity to infrastructure and essential services, such as gas, water, sewage, public transportation, courier services, and international customs for clearing supplies and equipment.
The company said that it believes that Aurora Sky will be able to produce 100,000+ kilograms of high quality cannabis per year. The location of the new facility provides unrivaled access to transportation, industrial infrastructure, power, water, gas, and courier services. Aurora also expects the high level of automation at the facility to provide for ultra-low per-gram cost of production. The company expects the facility to be completed in October 2017.
Aurora also announced a memorandum of understanding with Radient Technologies (RTI.V) last week. Under this agreement, the companies will evaluate an exclusive partnership with regard to the joint development and commercialization of high-quality standardized cannabinoid extracts.
Radient currently operates from a 20,000 square foot, GMP compliant, Natural Health Products Directorate (NHPD) licensed facility in Edmonton, Alberta, extracting natural ingredients for a range of industries. Radient operates under strict quality controls and owns patented extraction technologies that were originally developed by scientists at Environment Canada.
6) An Undervalued Execution Story
OrganiGram Holdings (OGI.V) (OGRMF) is one of the largest and best licensed producers of medical cannabis in Canada and last week, the company reported its full year financial results for the year that ended on August 31st.
During the year, OrganiGram sold more than 730,000 grams of medical cannabis, representing an increase of more than 450% over the prior year. Highlights from its full-year results include a more than 500% increase in revenue and a 29% improvement in adjusted margin.
OrganiGram continues to grow at rapid rates and the company also offers investors leverage to United States cannabis industry. In early September, OrganiGram announced that it entered into an exclusive product development and distribution agreement with TGS International. The agreement will provide for consulting services related to the development and operation of a commercial scale cannabis extracts production and processing facility as well as the exclusive licensing in Canada of over 225 unique cannabis products.
TGS International is an affiliate of The Green Solution, a vertically-integrated cannabis company that owns and operates over 300,000 square feet of state licensed and regulated production, processing, and manufacturing facilities as well as 11 medicinal and/or adult-use retail locations in Colorado with three additional locations set to open by the end of 2016.
TGS has commercially developed an extensive line of cannabis extract and derivative products. Their award winning proprietary brands, The Green Solution and NectarBee have generated $100+ million in cumulative sales through their affiliated Colorado operations, including $43+ million in 2015.
In late November, OrganiGram was selected to be the exclusive Canadian cannabis producer, business partner and brand developer for Nova Scotia-based Trailer Park Boys (TBP), a well-known name within the Canadian entertainment industry. In 2014, TBP entered into an agreement with Netflix and its global popularity has significantly increased since then.
The company will work with TPB to develop branding, packaging, and a competitive product portfolio targeted towards recreational marijuana consumers. The agreement also includes product placement opportunities as well as branding of peripheral cannabis items.
The agreement, which has an initial term of five years, encompasses an exclusive product and branding partnership in Canada in exchange for consideration that includes a combination of cash royalties and other non-monetary consideration.
7) Stock Jumps More Than 70% Post-Acquisition
Vinergy Resources (VIN.CN) rallied more than 70% last week and this move comes after the company announced an agreement with a private company that assigned Vinergy the rights and obligations of a letter agreement from December 13th. The letter agreement was between the private company and MJ Biopharma, a private British Columbia company.
Pursuant to the terms of the agreement, Vinergy will acquire all of the issued and outstanding securities of MJ Biopharma, a private cannabis technology company based out of British Columbia that is currently focused on manufacturing breath strips, time release capsules, extract oils, food products and infused juices, teas, coffee and extract drinks, and pharmaceutical grade delivery systems.
MJ Biopharma’s expertise lies in its extracts and custom formulations. The company is also focused on licensing and partnering on the development of technologies and products for the medical and recreational cannabis market in Canada and abroad.
Pursuant to the terms of the agreement, Vinergy will issue 5 million shares at $0.20 a share to MJ BioPharma shareholders.
- An additional 2.75 million shares will be issued upon the commercialization of MJ BioPharma’s strip technology.
- An additional 1 million shares will be issued when each of two alternative selected extractions/products are ready for commercialization.
In aggregate, up to 9,750,000 shares may be issued to MJ BioPharma shareholders. The shares will be subject to escrow conditions and/or resale restrictions as required by applicable securities laws and the policies of the Canadian Securities Exchange. The transaction remains subject to certain closing conditions, including, completion of due diligence, the negotiation and signing of a definitive agreement and obtaining all necessary approvals.
In connection with the transaction, Vinergy announced plans to complete a non-brokered private placement offering of up to 10,000,000 units at $0.20 per unit for gross proceeds of up to $2,000,000. Each unit will consist of one common share and one-half of one transferable common share purchase warrant. The warrant has a 12-month term and is exercisable into one additional share at $0.40. All securities issued during this offering will be subject to a four-month hold.
Important Investor Disclosures
Disclosure. Compensated Affiliate. This report was authored by and is property of StoneBridge Partners LLC. All information and data relied upon in drafting this report is publicly available. The author believes and considers its sources to be reliable, but does not guarantee the accuracy or completeness of any information contained in this report. Any and all information, data, analyses and opinions are provided for informational purposes only and is not intended, in any manner, as investment advice. Any projections or other information generated by StoneBridge Partners LLC regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. None of the material contained in this report is intended as a solution or offer to sell or purchase a specific stock or any other investment. This report is not directed to, or intended for distribution or use by, any person or entity that is a citizen, resident or located in any municipality, state, country or other jurisdiction where the distribution, publication, availability, or use of this report is contrary to any governing law or regulation. The securities discussed in this report may not be eligible for purchase and/or sale in certain jurisdictions or by particular individuals. It is important that you check any and all governing laws and/or regulations that may be applicable in your jurisdiction. Investing in securities of issuers organized outside of the United States, including ADRs, entail certain risks. The securities of non-United States issuers may not be registered with, nor be subject to the reporting requirements of the United States Securities and Exchange Commission. Please contact a Financial Advisor for professional advice regarding any and all securities investments. This report is intended for informational purposes only. StoneBridge Partners LLC’s officers, directors, employees, affiliates, or subsidiaries may have positions in securities covered by StoneBridge Partners LLC. StoneBridge Partners LLC receives compensation from the company and/or has a position in the securities mentioned in this report