Navigate the fast-moving cannabis sector with 420 Investor, a premium service that sends real-time alerts and explanations of the news below and much more.

Summary

• Capital raising and M&A remained on the front-burner.
• Michigan December cannabis sales rebounded sharply.
• Health Canada added 5 new licenses.
• 420 Investor model portfolios kept up with a roaring market.

Review

M&A continues to be a big theme as we start the year. Four large MSOs sold stock, three without warrants and all at small discounts to the recent closing prices. Michigan December cannabis sales bounced back from weak November results, with the state generating total cannabis sales of $985 million in the year.

Health Canada data suggested that the dried flower inventory overhang got a bit worse in October. Health Canada added 2 new licenses this week, leaving the total, including the expired license of Toronto Research Chemicals, the suspended license of Ten-10 Ventures and the revoked licenses of BC Tweed (2), FV Pharma and Zenalytics Laboratories, at 576, which excludes the revoked licenses of Agrima, Alberta Green Biotech, Bloomera, Hexo’s 4th site, Maricann’s 2nd site, Medican Organic’s 2nd site and a small processing facility that belonged to Canopy Growth, the expired license of Evergreen Medicinals, two transferred licenses held formerly by James Wagner, a license previously held by Total Cannabis Solutions and the voluntarily cancelled license of Avalite Sciences.

During the week, I shared these insights with subscribers at 420 Investor:

• Doubling Down on the California Thesis
• Cannabis Sub-Sector Review – 01/08/21
• Model Portfolio Composition 01/08/21

I also introduced a new resource tool:

• Ancillary Companies Market Caps

Here are some of this week’s highlights for 420 Investor Focus List names:

• ACB inked a deal for Great North Distributors (Southern Glazer’s Wine & Spirits)to be its exclusive distributor for adult-use products in Canada
• APHA reported revenue of C$160.5 million, with adjusted EBITDA of C$12.6 million. Cannabis revenue advanced 7% sequentially to C$67.9 million, with over C$5 million from exports to Europe and Israel.
• CCHWF closed its C$150 million equity offering, with underwriters exercising the overallotment option. It received its provisional license for adult-use sales in downtown Boston
• CGC upped its exposure to TerrAscend to 20% by acquiring an option for $10.5 million to acquire 1.07 million shares conditional on a “triggering event”
• CRLBF filed a Form 40-F ahead of transitioning to SEC filing. The company sold US$125 million in shares (at C$16)after announcing a $213 million stock-based acquisition of publicly traded Florida operator Bluma Wellness.
• CURLF closed a $50 million debt facility (three years, 10.25%). It closed its C$317 million equity sale, with the underwriters exercising the overallotment option.
• CWBHF secured two U.S. utility patents for hemp strains
• GNLN announced the dismissal of a shareholder class action lawsuit
• GRWG pre-announced Q4 ahead of expectations at $57 million, with same-store sales up 63% and raised its 2021 outlook
• GWPH pre-announced Q4 revenue ahead of expectations at $148 million, with Epidiolex accounting for $144 million.
• KSHB slightly missed fiscal Q1 revenue expectations due to the timing of shipments to customers slipping from November to December, but it boosted its FY21 revenue forecast by $10 million to $130-160 million.
• OGI named its first American director to its board. The company missed revenue and EBITDA expectations for its fiscal Q1, reporting sales of C$19.3 million.
• SBVCF issued additional shares through a private placement, raising $34.5 million. It closed the deal, with about $150 million of redemptions, suggesting a closing cash balance of $381 million.
• SMG saw its long-time CFO depart
• TCNNF opened two dispensaries in Florida, giving it 72 in the state
• TRSSF completed an expansion in New Jersey. The company raised C$224 million, with 80% from four institutional investors, including Wasatch Global.
• VFF sold $135 million of shares at $12.40. It introduced a high-THC vape cartridge.

The Global Cannabis Stock Index continued its torrid rally, increasing 13.9% to 60.79:

The index, which lost 34.1% in 2019 and lost 54.9% in 2018 after gaining 91.8% in 2017 and 88.8% in 2016, was up 5.2% in 2020. It has gained 36.9% in 2021 thus far. The index currently includes 38 stocks and ended 2020 at 44.39:

Model Portfolios

420 Investor offers three model portfolios for subscribers, including two that are long-term focused and fully invested with a goal of beating the Global Cannabis Stock Index: 420 Opportunity and 420 Quality. 420 Opportunity ended the week valued at $145,179, up 17.6%. The model portfolio, up 37.8% in 2021, gained 35.6% in 2020 and has increased 190.4% since April 2014. 420 Quality ended the week at $217,087, up 12.3% for the week and now 34.4% in 2021, and it gained 42.8% in 2020. The model was launched in March 2017 targeting long-term investors seeking to invest in leading cannabis stocks with low portfolio turnover and has gained 334.2% since inception compared to the 24.8% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $372,506, up 17.6%. The model portfolio gained 52.7% in 2020 and is up 47.6 in 2021, and the return since inception in late 2013 has been 3625%.

Outlook

After a strong rally to begin 2019, the cannabis sector experienced a sharp decline over the next year to unprecedented levels due to several negative developments, including the CannTrust fraud, the surprise termination of Bruce Linton as CEO of Canopy Growth, a disappointing roll-out of legalization in Canada, regulatory confusion in the U.S. regarding CBD and a slow roll-out of legalization in California, the vaping crisis and then financial turmoil and market disruptions due to the COVID-19 pandemic. The sector saw capital available to fund expansion dry up, a situation that continues to leave companies operating with negative cash flow severely challenged, as the availability is limited to stronger operators.

After the stocks overreacted and put in a bottom in March, they are now benefiting from a perception that the industry offers strong growth prospects, something that wasn’t clear then. A big change has been that the pandemic has caused many regulators to permit previously prohibited types of retail activities, like curbside pickup and delivery. The legal market is rapidly capitalizing on becoming even more convenient than the illicit market, with the ability to order online. High unemployment and large deficits will likely spur state legalization efforts as well as more favorable regulatory control at the local level. Access to capital is now improving quickly.

There are some potential catalysts ahead, including the FDA providing clarity on CBD, progress in the Canadian legalization that commenced in October 2018 and is beginning to include a broader set of products and the continued growth in German MMJ and other international markets that have been slow to develop. The implementations in California and Massachusetts for adult-use have been disappointing but are beginning to show great improvement. Michigan legalized in December and Illinois legalized in January, and these markets are showing strong growth that could encourage other states to legalize. Voters in Arizona, Montana, South Dakota and New Jersey all approved adult-use legalization in November.

The big themes ahead are likely to be continued cross-industry investment into the sector and more consolidation in Canada and in the U.S., potential federal regulatory reform (SAFE Banking Act and other more comprehensive legislation, which could eliminate 280E taxation and enable trading on higher exchanges for MSOs as well as the broad usage of credit cards for cannabis purchases), steps to enable cannabis research, the roll out of MMJ in Germany, Mexico and in Australia as well as continued advances in South America and potential adult-use legalization in Israel and Mexico, new legal cannabis implementations in AZ, MT, NJ and SD, and MMJ implementations in Virginia and soon Mississippi and West Virginia, possible legalization via the legislatures in CT, FL, MD, MN, NH, NM, NY, PA and RI and implementation of the VT commercial program in 2022.

Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.

Friends,

On Friday, Tilray stock traded $2 billion in shares, one of the highest single-day dollar volumes we have ever observed in the cannabis sector. To put things in perspective, the stock currently has a market cap of $2.6 billion based on the shares outstanding. Volumes across all cannabis stocks have exploded in general in this rally, reflecting growing demand ever since the Democrats gained control of the Senate, but 77% turnover in Tilray shares (even higher when considering the float) is rather extreme. Clearly, traders chasing higher prices and not investors are calling the shots in this stock, and we think the traders are making a $800 million mistake.

In December, Tilray agreed to merge with Aphria. While Aphria is acquiring Tilray, Tilray will be the surviving company. Specifically, each share of Aphria will be converted into 0.8381 shares of Tilray. Tilray shot up on the news of the deal on the first day, reflecting the premium it is receiving. On 12/15, the day before the deal was announced, Aphria closed at $8.12, and Tilray closed at $7.87. Since then, Tilray has substantially outperformed Aphria:

At the closing prices of $19.70 for Tilray and $12.42 for Aphria, Aphria is trading at .6305 times the price of Tilray, far below the .8381 exchange ratio. We have been watching the ratio deteriorate steadily since the deal was announced and are shocked. Rather than Aphria trading at a discount to the ratio, it should be trading at a premium in our view, as Tilray is the company being acquired and at most risk if the deal weren’t to close as expected in late Q1 or early Q2.

We reached out in December to Aphria to better understand why the market was placing a premium to the merger transaction, and the company couldn’t explain it. An analyst asked on Aphria’s earnings call this week as well, but there is no clear explanation. We believe that there are some theoretical possibilities that might explain this situation, including another buyer of Tilray stepping in or Aphria being willing to pay more, but both of these seem implausible. The real reason, in our view, is market inefficiency, as it is expensive to short Tilray into the close. We expect that once the traders move on, investors will realize $800 million dollars will have been left on the table.

An owner of Tilray today can sell a share at $19.70 and buy 1.1932 shares of Aphria at $12.42 ($14.82 total cost). At closing, he or she will get back 1 share of Tilray (1.1932 shares times .8381 exchange ratio).

In other words, you can get 32.9% more for your shares effectively by selling today and replacing with Aphria stock than by holding until the closing.

There are 162.4 million shares and in-the-money warrants and options for Tilray. Multiplied by $4.88 per share, this discrepancy is worth $792 million.

Traders could certainly push this relationship even further beyond the irrational levels today, and there are the unlikely events of a higher bid for Tilray from Aphria or another company. Of course, if the merger fails, the sale of Tilray and purchase of Aphria would likely work out even better than expected. To us, this seems like a great way to exploit the exuberance of traders.

KushCo Holdings, a premier provider of ancillary products and services to the legal cannabis and CBD industries, recently reported $26.8 million revenue and positive adjusted EBITDA for the second consecutive quarter in fiscal Q1 2021. The company has shown that doubling down on its efforts to expand its business with leading MSOs and LPs is paying off. KushCo has increased its year-end guidance as the company moves towards achieving its new vision.

Get up to speed by visiting the KushCo Holdings Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.

New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

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Use the suite of professionally managed NCV Cannabis Stock Indices to monitor the performance of publicly-traded cannabis companies within the day or over longer time-frames. In addition to the comprehensive Global Cannabis Stock Index, we offer a family of indices to track Canadian licensed producers as well as the American Cannabis Operator Index.

View the Public Cannabis Company Revenue & Income Tracker, which ranks the top revenue producing cannabis stocks that generate industry sales of more than US$12.5M per quarter.

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Discover upcoming new listings with the curated Cannabis Stock IPOs and New Issues Tracker.

Sincerely,

Alan & Joel

Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email