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Cannabis Revival and Year of the SPAC’s: What’s To Be Expected the Rest of 2021?

By Michael Sassano
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The unusual nature of 2020 gave rise to a reciprocally roller-coaster-like cannabis market. Cannabis was cemented officially as an essential industry with the rise of COVID-19, and November elections resulted in even more United States markets welcoming medical and adult-use sales.

The stagnant cannabis stock market of 2019 became a thing of the past by the end of 2020. Throughout the course of last year, bag holders anxiously watched cannabis options creep back up. Now, nearly two years since market decline in 2019, the cannabis stock market is exploding with blank checks and buyout fever. Much of this expectant purchasing is due to Canadian companies considering U.S. market entrance. Combined with the recent surge in the use of special purpose acquisition companies (SPACs) to invest, this has led to an increase in asset prices.

A SPAC is defined as “a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.” Though they have existed for decades, SPACs have become popular on Wall Street the last few years because they are a way for a company to go public without the associated headaches of preparing for a traditional IPO.

In a SPAC, investors interested in a specific industry pool their money together without knowledge of the company they’re starting. The SPAC then goes public as a shell company and begins acquiring other companies in the associated industry. Selling to a SPAC is usually an attractive option for owners of smaller companies built from private equity funds.

The U.S.-Canadian market questions that this rising practice asks are: Can Canadian companies enter a bigger market and be more successful? Is it advisable for U.S. companies to sell their assets to Canadian corporations whose records may be marred by a history of losses and a lack of proper corporate governance? Regardless — if both SPAC’s and Canadian bailout money is here, what comes next?

What is Driving this Bull Market?

Underpinning these movements are record cannabis sales internationally, making last year’s $15 billion dollars’ worth of sales in the U.S. look small in comparison. New markets have opened up in various states and countries throughout 2020, and that trend is only expected to continue. New demographics are opening up, especially among older age groups. This makes sense, as most cannabis sales — even in a recreational setting — are people treating something that ails them like insomnia or aches and pains.

Cannabis is set to take off, and we are entering only the second phase of its market expansion. The world is becoming competitive. Well-run companies that are profitable in key markets are prime targets for bigger, growing companies. At the same time, the world of SPACs will continue to drive valuations. Irrespective of buying assets, growing infrastructure is and will continue to be greatly needed.

The Elusive Profitability Factor

When Canada blew up, one of the biggest changes was companies began focusing the year on cost cutting and — most importantly — profitability. Profitability became the buzzword. But bigger companies are on the search for already-profitable enterprises, not just those that have the potential to be. However, profitability is currently still unobtainable in Canada. Reasonable forecasters should expect this year will show a few companies getting bailed out while many others will be forced to either merge for survival or declare bankruptcy.

An ideal company’s finances should highlight not only revenue growth, but also profitability. Attention should be focused on how well businesses are run, and not on how much money they have the potential to raise or spend. Over the years, there have been many prospective companies that spent hundreds of millions only to barely operate, and are now shells in litigation. Throwing money at any deal should have been a lesson learned in the past, but SPACs are tempting because they are trendily associated with new, interesting management styles and charismatic businesspeople.

Companies should be able to present perfect and clear financials along with maintenance logs for all equipment. In today’s day and age, books must be stellar and clean. As money pours into SPACs, asset valuations for all qualities of companies will rise. The focus instead becomes about asset plays, which will cause assets to continue rising as money is poured into SPACs.

Once upon a time, if number counters presented a negative review or had to dig too much, executives would turn a cold shoulder on investment. But in the age of SPACs, these standards of evaluation will be greatly undervalued. Aging equipment and reportability of every piece of equipment may or may not be properly serviced and recorded in a fast-moving market. Costs of repair or replacing equipment that isn’t properly maintained may be a problem of the past. Because when money comes fast, none care for the gritty details.

Issues for SPACs

Shortage of talent and training has become a big concern already in the era of SPACs. How many quality assets are out there? Big operators in the U.S. are content and don’t see Canada as an enticing market to enter. So, asset buys are likely to primarily be in the U.S. Large companies like Aphria may buy out some of the major American players, but most Canadian companies will use new funding rounds to pay down debts. Accordingly, they will then be forced to piece together smaller operators as a strategy.

A cannabis company’s personnel and office culture are very important when looking to integrate into a larger corporate culture. Remember, it’s not just the brick and mortar that is being invested into, it is also the people that run a facility. Maintaining employee retention when a deal occurs is always critical. Your personnel should be highly trained and professional if you want to exit. Easy to plug-in corporate structures make all the difference in immediately gaining from the sale or having to retool the shed and bring in all new people.

The rise of the SPAC-era and Canadian entry into the U.S. market will cause asset increases, but it is only the second chapter in the market expansion of cannabis. Proper buys will nail profitability, impeccable books, proper maintenance records and will have created an efficient corporate structure with talented personnel. The rest will be overpriced land buys that will require massive infrastructure spending. The basics of a well-run organization don’t change. The cannabis market is going to ROAR, but don’t worry if the SPACs pass you by- they are buying at the start of cannabis only.

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Is the Green Rush Over?

By Brian Mitchell
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Ever since California legalized medical use of cannabis in 1996, entrepreneurial people and people with money have been looking to turn the cannabis trade into a bonafide industry. The cannabis Green Rush has been a fast and chaotic ride as growing legalization opened myriad opportunities. It seemed for a while that pot was too big to fail.

Yet the second quarter of this year saw the majority of publicly traded cannabis companies recording double-digit losses (with 10 top cannabis stocks with a combined value of $55 billion losing an estimated $21 billion in collective value). Meanwhile, some of the industry’s most recognizable brands are under pressure to cut costs in favor of demonstrable profitability. It is clear that investors have become leery of inflated and unsustainable valuations.

But pot is still too big to fail.

New York Stock Exchange
Image: Rolf Kleef, Flickr

Polls show an ever-growing majority of Americans believe cannabis should be legal, and the number of states with legal weed continues to grow. The state-sanctioned market will reach nearly $13 billion in sales this year, according to BDS Analytics, with about a quarter in California, the largest, most mature legal market in the world. Total U.S. sales are on track to reach $30 billion by 2024. Legal cannabis remains the biggest investment opportunity of our times, but the Green Rush may be over. And that’s a good thing.

Get over the “green rush” mentality

From the Gold Rush to the Dot Com Boom, great opportunities have tended to create irrational mobs. Have you ever watched a group of Black Friday shoppers? In a frenzy, you often do not stop to evaluate if something is a bargain or if you even need the item. In the investment world, that type of frenzy leads to bubbles. When the Dot Com bubble burst in 2000, almost half the industry’s rising tech companies shuttered their doors, and an estimated $4-6 trillion in shareholder wealth vanished.

A similar thing is happening in cannabis.

The end of the Green Rush means we can now focus on safeguarding cannabis’ future, and not pillaging it for a quick profit.Growing legalization has created an influx of capital, but much of the early institutional money and retail investors went to Canada, where the absence of a federal prohibition allowed for a robust financial market to flourish. Canopy Growth Corp. was the first large-cap cannabis company to go public in 2016, followed by other large licensed producers or LPs. Because they are not violating U.S. laws, Canadian cannabis companies were able to uplist to the NASDAQ and NYSE as well.

American cannabis companies on the other hand – unable to freely tap capital markets at home, flooded Bay Street looking to go public on the Canadian Securities Exchange, and the rush went on hyperdrive. Soon market caps became grossly inflated, and too many cannabis companies that were barely showing profit took big gambles with other people’s money. Now, those investors are paying the price.

But a burst bubble is a good thing. It is a correction that forces companies to focus on priorities and fundamentals, and cannabis is no different. The end of the Green Rush is the start of a real industry with surviving operators becoming even stronger, less reliant on speculation and more focused on performance.

There will always be companies going public to create liquidity, and there will always be venture funding at the ready for any promising new startup. But cannabis will only survive if companies focus less on raising money and more on actually running their businesses.

Cannabis is creating unprecedented cultural and lifestyle shifts. It’s helping shape how people assess, diagnose and treat a broad span of health and wellness issues. Cannabis is helping to break the barriers of opioid addiction, and it’s even beginning to rival the alcohol industry. One out of every five beer drinkers in a Nielsen Market Insights report said they will spend less on store-bought beer due to consuming cannabis. Among the 65 percent of people who purchased over-the-counter drugs for pain relief, 35 percent said they will consider cannabis as a substitute.

The end of the Green Rush means we can now focus on safeguarding cannabis’ future, and not pillaging it for a quick profit.

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Aurora Expands Canadian (And Global) Footprint

By Marguerite Arnold
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aurora logo

With the summer season (and recreational reform) fast approaching and the continued growth of the European medical market, Canadian LP Aurora has continued to power forward with another corporate acquisition. This time, the firm is medical cannabis firm MedReleaf (TSE:LEAF). The price? $3.2 billion in stock.

Aurora shareholders will now own 61% of MedReleaf.

The firm has also, of course, solidified its place as a global leader in the cannabis space with production capacity of over 570,000 kilos of cannabis a year.This purchase will absolutely ensure that the company is in a strong position

According to a statement by chief executive Terry Booth, “Our complementary assets, strategic synergies and strong market positioning will provide us with critical mass and an excellent product portfolio in preparation for the adult consumer use market in Canada.”

It also does a bit more than that.

With the German cultivation bid in what appears to be at least a three to six month delay, exports, including from Canada, are the only real way into Europe’s largest cannabis market. And Aurora, with it’s on the ground partner, Pedianos, isright in the middle of it. This purchase will absolutely ensure that the company is in a strong position as the next level of cannabis reform begins to unfold particularly in Europe.

Cannabis Is SO Expensive!

In fact, per this report just produced by one of the leading German public health insurers, Aurora, via Pedianos, and MedCann (the company that became both Spektrum Cannabis and bought out by Canopy Canada), appear to be the two Canadian LPs supplying the vast majority of all reimbursed medical cannabis to German patients. Further the vast majority of product is still coming from Canada – not the satellite grow or production facilities now being built in Portugal (Tilray), Denmark (Aurora and Canopy), Spain (Canopy) or anywhere else in Europe where legal cultivations are being established.

Techniker Krankenkasse report
“The Cannabis Report” produced by Techniker Krankenkasse (TK) and the University of Bremen, p.20

However, this also makes for an expensive product here in Germany, land of the generic drug (and where most of them can be bought by consumers, with a prescription, at a regular pharmacy for about $12). In fact, this report was produced in part to underscore the still-evolving medical position on the use of medical cannabis and its efficacy. This highlights how much Germany’s import policy is now costing even public insurers.

What is even more intriguing about the TK report is that the Germans are clearly moving into new research territory. Sure AIDS, chronic pain and muscle spasms (in particular MS) are conditions for which the drug is increasingly being prescribed, but so is ADD. And research studies are now mushrooming around the country.

The Germans have engaged on the medical cannabis efficacy question. And while it is still unclear what doses and of what kind of cannabinoid, have yet to be standardized into protocols, such conversations are well on their way.

And Aurora is also, of course, right in the middle of them.

Another Aurora Acquisition

Given the importance and size of the German market, in particular, it is also no surprise to see another strategic Aurora acquisition coming less than a week after the announcement of this report in Berlin. Specifically, Aurora has also just sunk another 1 million in an investment in CTT– an Ontario-based firm leading the development of thin film wafers that can provide dose specific, smoke free delivery of medical cannabinoids.

The Teutonic cannabis market is clearly in the company’s sights. Not to mention absolutely driving investment and positioning strategy both at home and abroad.