By Ted Ohashi
- Marijuana stocks decline for a record setting eighth consecutive week……………….p1
- Delta 9 going public is a chance to explain how RTOs are done………………………..p2
- MedReleaf has a wild week………………………………………………………………………p3
- Canopy and MedReleaf trading compared…………………………………………………………p3
- Aurora establishes a position in Hemp Food and Fiber…………………………………..p4
- Cannabis Wheaton – a week to forget………………………………………………………….P4
- Aurora and Radient progress to the next stage…………………………………………….p5
- Peace Naturals explains the piperonyl butoxide contamination…………………………p6
- Liberals limit debate on The Cannabis Act………………………………………………….p6
- No new Licensed Producers approved this week…………………………………………..p7
- See our recent articles on Seeking Alpha
Is the MedReleaf IPO a Disaster Waiting to Happen? May 31, 2017
NXTTF – It’s Time to Fill Your Boots May 22, 2017
Under The Cannabis Act the Rich Get Richer May 4, 2017
Before You Can Sell LXRP High, You Must First Buy it Low March 17, 2017
Why Organigram Merits a ‘Must Buy” Rating March 8, 2017
How Attorney General Sessions can Derail the Marijuana Gravy Train February 27, 2017
High Growth Cannabis Company Trading Less Than One Times Sales February 20, 2017
Reassessing the Ever Changing Outlook for Canadian Cannabis Stocks January 30, 2017
Update: My Confidence in Buying Organigram is Affirmed January 20, 2017
Marijuana Stock Market Review & Outlook
Of course, there was plenty of uncertainty in the marijuana stocks to account for last week’s decline. First, there was the Cannabis Wheaton off-again, on-again financing that resulted in CBW appoint- ing a new CEO and Eight Capital shuffling their CEO down but not out and a new CEO up and in. By the end of the week, Mackie Research had slipped in to lead a new financing. (see Breaking & Corporte News below). Then there was the MedReleaf IPO that began trading by dropping from an underwritten price of $9.50 to a low of $6.81, a drop of 28.3% before rallying for two days before closing at $9.20 per share. We are advising a wait-and-see strategy as the volatility is still too ex- treme. (see Breaking & Corporate news below).
The Let’s Toke Business Licensed Producer Index posted a decline of -1.6% while the Let’s Toke Business Low-Priced Index dropped -1.5%.
At this point we are simply following the age old advice dating back to when stock quotes were printed on long strips of paper – ‘Don’t fight the tape.’ In other words, it is better to go with the flow. In looking at a ninth straight down week, we are into uncharted territory. But when the market turns from down to up, it will probably not be an explosive action. After extended corrections, and this would certainly fall into that category, the bottom will probably be formed quietly and cautiously. We expect there will be lots of time to take advantage of the change. In the meantime, stay on the sidelines. It’s still one of the best seats from which to see what’s going on.
Delta 9 Bio-Tech, one of the original thirteen Licensed Producers (LP) approved by Health Canada on March 18, 2014 and one of two LPs in Winnipeg, is going public via a Reverse Takeover (RTO). We thought this would be an excellent opportunity to describe this somewhat confusing process.
The story actually goes back to Verona Development Corp., a company engaged at an exploration stage in the acquisition and exploration for oil, gas and minerals. Verona was listed under the symbol VDC on the TSX Venture Exchange. The TSX Venture Exchange is owned by the TMX Group that also owns the Toronto Stock Exchange. Under this structure, the Toronto Stock Exchange is the senior equity market while the TSX Venture is the junior public venture capital market for emerging companies.
As Verona Development was unable to continue to meet the requirements of the TSX Venture Ex- change (indicating it was unsuccessful in its exploration activities) VDC was dropped down to the NEX Board on July 11, 2012 with VDC.H as its stock symbol. The “H” designates an NEX listing.
NEX is a separate board of TSX Venture Exchange. It provides a trading forum for listed companies that have fallen below TSX Venture’s minimum listing standards. The idea is companies with low levels of business activity or have ceased active business will trade on the NEX board. In the investment business, we used to think of NEX as either the graveyard or a place you could find a company on life support and nurse it back to health. The latter was the case for Verona Development. We understand Anthony Jackson, a principal of BridgeMark Financial and Director of over a dozen junior companies some of which are dormant got involved in early 2016. In August 2016, Verona Development changed its name to SVT Capital. There was no consolidation of capital reported.
In early 2017, SVT Capital announced plans to acquire Delta 9 Bio-Tech in a transaction called a Re- verse Takeover, an RTO or the shell game. In this case, SVT is the shell company and Delta 9 is the target company. SVT has 5,470,480 shares outstanding and will issue 41,148,596 shares to Delta 9 shareholders. SVT Capital has also raised $3-million and will lend the proceeds to Delta 9 as a term of the agreement. On closing, the surviving company will change its name to Delta 9 Cannabis Inc.
Immediately after the acquisition is complete, the former Delta 9 shareholders will own 88.27% of Delta 9 and the former SVT Capital shareholders will own 11.73%, hence the term Reverse Takeover. Bill (father) and John (son) Arbuthnot, founders of Delta 9 will be the Directors of the resulting company and will be allowed to appoint two additional board members. SVT will be allowed to nominate one Director. Delta 9 will own and control the surviving public company which should then requalify for listing on the Toronto Venture Exchange. Considering the general terms of the arrangement, this appears to be a very fair deal for shareholders of both companies and should be completed in the fall of 2017.
This transaction appears to be a win-win for both investor groups. Shareholders of SVT Capital should see a handsome profit when trading begins as Delta 9. If you were a shareholder of Verona Develop- ment many years ago and did not sell, check your records. There is a chance that you are still an owner and have hit the jackpot. As a shareholder of Delta 9, going public should enable the company to grow more quickly. The Delta 9 business model is unique as it involves growing in containers and expansion has to do with buying, outfitting and stacking additional containers. And as we have said on many occasions, to simply grow marijuana is probably not a sustainable strategy. With the likelihood of many new licenses to be issued in the next year or two, you have to build up your advantage now.
Breaking & Corporate News
MedReleaf (TSX: LEAF) started trading and it was wild. On Wednesday June 7th, the stock traded as low as $6.81 before closing at $7.40, down -22.1% from the $9.50 IPO price. On Thursday the stock closed at $8.56 and by Friday’s close of $9.20 per share, the stock had recovered almost all of its loss.
On Thursday on Seeking Alpha (read all comments here) we said, “LEAF was underwritten at $9.50 and is now trading at around $7.25 which is down around 24%. Actually traded at a low of $6.81 per share, down 28%. As I tried to point out MedReleaf is an excellent company that did a terrible under- writing. I will now start to look at the company as a possible recommendation and current levels are probably okay to buy. BUT IT WOULD BE IMPRUDENT TO JUMP INTO SUCH A CHAOTIC MARKET AS LEAF THIS MORNING. STAY ON THE SIDELINES AND WAIT FOR COMMON SENSE TO RE- TURN TO THE MARKET.
So we think MedReleaf is an excellent company and the underwriting was terrible. We thought the shares were ‘okay to buy’ on Thursday but we anticipated some volatility in the short run so we advised waiting until things settle down. We are surprised how low the stock opened and how strongly it has come back so caution is still the order of the day.
Investors will soon begin to compare Canopy Growth (TSX: WEED) and MedReleaf (TSX: LEAF).
One argument will be the relative valuation, that is, which company is worth more. LEAF has only traded for a short period of time but here are a couple of observations:
(a) The LEAF IPO was announced on May 8, 2017 at an expected price of $9.50 to $10.50 per share. Since then, their stock is down -3.2% to -12.4% depending which of the two prices you choose. Since May 8th, WEED is down -10.8% so performance has been roughly similar.
(b) Since LEAF began trading the stock is down -3.2% while WEED shares are up +15.0%. Here the difference is greater but LEAF has only been trading for three days.
This suggests the spread in valuations for the two companies from the time we were first aware that LEAF was going public has been roughly maintained. Generally speaking, LEAF shares will be consid- ered ‘unseasoned’ on the public markets for at least a few months. So until then, we cannot make a
sound decision on what investors think LEAF is really worth. But in the early going, it seems the market is giving the nod to a higher valuation for WEED
Aurora Cannabis (TSXV: ACB) and Hempco Food and Fiber (TSX-V: HEMP) announced Aurora will make an investment in HEMP for up to 19.9% ownership subject to necessary approvals and completion of due diligence. ACB will also obtain an option to acquire shares from the majority owners of Hempco that, upon exercise of the option, will bring Aurora’s total ownership interest in Hempco to 50.1%. The strategic rationale for ACB is that HEMP’s industrial hemp contains efficient extractable quantities of cannabidiol (CBD). ACB anticipates the regulations preventing industrial hemp producers from harvesting leaves, flowers and buds, will be revised to allow for the processing of CBDs.
Through its relationship with Radient Technologies (TSXV: RTI), the Company has access to an effi- cient, cost-effective, high-throughput methodology of producing CBD-based products at large scale thus providing the Company with a considerable competitive advantage in addressing this growing (see Breaking & Corporate News below).
ACB intends to negotiate the acquisition of up to 31,872,292 shares of HEMP from its two majority shareholders in conjunction with ACB’s participation in HEMP’s private placement. This may happen in up to three stages:
- ACB has agreed to loan Hempco $750,000 at an 8% interest rate;
units, priced at $0.3075 per unit, for total gross proceeds of $3.2 million.
majority owners to purchase up to 10,754,942 shares as follows:
- 5,377,471 shares at a price of $0.30 per share; and
- 5,377,471 shares subject to a minimum price of $0.45 and a maximum of $0.65 per share.
Following completion of all three stages ACB would own 50.1% of HEMP.
We would also remind readers that HEMP has an agreement with Lexaria (USOTC: LXRP). To the extent this agreement strengthens HEMP, it also reflects well on LXRP. (see Before You Can Sell LXRP High, You Must First Buy it Low)
It was a rollercoaster week for Cannabis Wheaton Income Corp. (TSXV: CBW) and Bay Street underwriters last week. It began as CBW, a cannabis streaming company, terminated the en- gagement letter with lead agents Eight Capital and Canaccord Genuity for an $80 million equity financing. The CBW business model is to make financial agreements with developing licensed or late stage applicants for licenses to grow in return for equity and/or a share of future production. CBW is patterned after the successful Silver Wheaton (USOTC: SLVWF) that provides financing to earlier stage mining companies in return for an equity stake and a share of future production.
CBW is headed by Chuck Rifici, the founding CEO of Tweed Marijuana now Canopy Growth (TSX: WEED). CBW went public in early May 2017 quickly becoming a darling of the investment community. The company went public through a Reverse Takeover transaction (RTO) with Knightswood Financial. Before the RTO was announced and completed, Knightswood shares rocketed from under $.10 per share to over $3.00 per share.
The reasons for the cancellation of the CBW offering are not entirely clear. But heads began rolling. First, CBW appointed advisory board member and industry expert Hugo Alves to the position of Presi- dent and Director of the Company. Alves is a corporate and commercial partner at the law firm Bennett
Jones LLP where he founded the Cannabis Group. Then CBW failed underwriter Eight Capital replaced its chief executive officer. Former CEO Mark Attanasio is now a managing director of investment bank- ing and is replaced by David Morrison, who will remain the head of equity sales and trading. When changes such as these are unexplained, it usually means there is more news to come.
CBW then announced an engagement letter with Mackie Research Capital to act as lead agent and sole bookrunner to sell by way of a best efforts, private placement a Special Warrants and Convertible Debenture Units offering to raise gross proceeds of up to $50 million or $57.5 million assuming a 15% overallotment is fully subscribed. Also announced was an institutional lead order of $25,000,000 ($28,750,000 including the overallotment) of the Convertible Debenture Units.
Each Special Warrant will be offered at a price of $1.00 per Special Warrant for gross proceeds of up to $25,000,000. Each Special Warrant will entitle the holder to purchase one Common Share for $1.50 per share for two years. Each Convertible Debenture Unit will be offered at $1,000 for gross proceeds of up to $25,000,000, will pay 6% interest and will be exercisable into 500 common shares at $1.50 per share for two years. (read complete details here)
The stock closed the week at $1.02 in the session before the financing problem came to light. This was down sharply from the high of $3.20 per share on April 6 and April 7, 2017.
Aurora Cannabis (TSXV: ACB) and Radient Technologies (TSXV: RTI) have announced the com- pletion of the Joint Venture Research Activity that confirms the effectiveness of Radient’s MAPTM technology and related technologies for extracting cannabinoids from dried cannabis. The key findings were summarized as:
Consistently high extraction efficiencies of up to 98% were observed compared to 80 – 85% typical for conventional technologies;
Exceptionally short processing times of as little as five minutes were achieved, as compared to ap- proximately 6 hours for currently used commercial technologies;
Consistently high purity levels were observed for the extracts produced, at least on par with those achieved using conventional methods;
The research data indicate throughputs in excess of 1,500 kg per day can potentially be achieved using the MAPTM extractor, many times higher than what can be achieved using conventional methods; Replication of this technology in other jurisdictions on a larger or smaller scale is feasible;
Extract profiles obtained during the project show near full preservation of cannabinoid and terpene profiles in the extracts;
It was further reported the technology enables precise control of temperature and extraction time of continuously flowing material, both of which affect purity and extract profile. This careful control of ex- traction parameters and product quality is something that is impossible to achieve at large scale using conventional methods. Extremely high (quantitative) recovery of available cannabinoids is possible in extraction times that are shaved from hours to minutes.
Based on the positive results Radient and Aurora have agreed to negotiate an exclusive development and commercialization agreement for the use of the technology and to continue the exclusive Joint Venture for additional scientific Research and Development of cannabis and hemp products.
Readers may recall the item from Israel by a reader that was titled ‘A New Harvest for the Harvest Festival’ by Byben Fisher and includes comments from Dr. Tamir Gedo, CEO of Breath of Life Pharma. (see Let’s Toke Business June 2, 2017).
- Extracting the active pharmaceutical ingredient
Clearly Aurora and Radient are working to develop a technology that will give them a major advantage in step two, the extraction of the active pharmaceutical ingredient. This is one reason we have favored Radient for our reader’s portfolios. This technology will give Aurora an important leg up as well.
Peace Naturals, owned by Cronos Group (TSXV: MJN), has reported on its investigation follow- ing the detection of piperonyl butoxide during unannounced inspections (see Let’s Toke Busi- ness May 5, 2017). As originally suspected, it appears there was cross-contamination from a sanitation protocol used to clean grow rooms after harvests. Peace Naturals reports this protocol was changed when management introduced an improved methodology under new ownership.
The Liberal government is limiting debate on the Cannabis Act. In the U.S. there is a process called filibuster when politicians can, under certain circumstances, talk endlessly and in the process delay or block a vote on an issue. In Canada, the government can simply limit the House of Commons debate on an act such as the Cannabis Act. On June 6, 2017 debate on Bill C-45 (The Cannabis Act) the House approved limiting debate to not more than five additional hours by a vote of 163 to 113.
With a majority, the Liberal government can move the C-45 through the House of Commons fairly quickly. If there are problems, it will likely occur at the Senate that must approve a bill before it becomes law. The non-Liberal government appointments in the Senate must decide which fight to pick. For ex- ample, in passing the assisted dying legislation, there were issues the Senate might have raised but they decided to live to fight another day. Cannabis was an important plank in the opposition election platform but it is a matter that 68% of Canadians support.
If non-Liberal senators choose to fight The Cannabis Act, passage can be delayed until after the sum- mer break. The senators should think carefully about choosing to fight an action that 68% of Canadians favor. As we said in the January 20, 2017 letter “It would be best if all of this is completed before the Federal parliament summer break which is usually July and August.” That is still our view.
No new approvals this week. There are 45 Licensed Producers: 27 Cultivation & Sale, 16 Cultivation and 2 Sale Only. Eight producers were licensed in 2016 and eight so far in 2017. The pace of approvals is about double last year’s pace. No changes to the list of Fresh Marijuana & Oil producers. There are 22 LPs approved: 19 as Production & Sale, 2 approved for Production and 1 approved as Sale Only. A new category “Sale of Starting Materials” has been added. Nine LPs are approved to sell starting ma- terials: 7 approved to sell plants and 2 approved to sell seeds.
Licensed producers by province are Ontario (26), British Columbia (10), Manitoba (2), Saskatchewan (2), Alberta (2), New Brunswick (1), Prince Edward Island (1) and Quebec (1).
|Producer||Prov||Dried Marijuana||Fresh Mari & Oil||Sale Start Mat|
|1. 7 Acres||ON||Cultivation|
|2. ABcann Medicinals||ON||Cultivation & Sale|
|3. A.B. Laboratories||ON||Cultivation|
|4. Acreage Pharms||AB||Cultivation|
|5. Agripharm Corp.||ON||Cultivation & Sale||Production & Sale|
|6. Aphria||ON||Cultivation & Sale||Production & Sale|
|7. Aurora Cannabis Enter||AB||Cultivation & Sale||Production & Sale|
|8. Bedrocan Canada||ON ON||Sale|
|9. Bedrocan Canada 2nd site||Cultivation & Sale||Production & Sale|
|11. Broken Coast Cannabis||BC||Cultivation & Sale||Production & Sale|
|12. Canada’s Island Garden||PEI||Cultivation & Sale|
|13. Canna Farms Ltd||BC||Cultivation & Sale||Production & Sale||Plants|
|14. CanniMed Ltd||SK||Sale||Sale|
|15. CannTrust||ON||Cultivation & Sale||Production & Sale||Seeds|
|16. DelShen Therapeutics||ON||Cultivation|
|17. Delta 9 Bio-Tech||MB||Cultivation & Sale|
|18. Emblem Cannabis Corp||ON||Cultivation & Sale||Production|
|19. Emerald Health Bot||BC||Cultivation & Sale||Production & Sale|
|20. Evergreen Medicinal||BC||Cultivation|
|21. First Access Medical (Blv)||ON||Cultivation|
|22. Green Relief||ON||Cultivation|
|23. Hemisphere Pharma||ON||Cultivation|
|24. Hydropothicair/Hydro||QC||Cultivation & Sale||Production|
|25. In the Zone||BC||Cultivation & Sale|
|26. James E Wagner Cult||ON||Cultivation|
|27. Maricann, Inc.||ON||Cultivation & Sale||Production & Sale||Plants|
|28. MedReleaf Corp||ON ON||Cultivation & Sale Cultivation||Production & Sale|
|29. MedReleaf 2nd site|
|30. Mettrum Ltd.||ON||Cultivation & Sale||Production & Sale|
|31. Mettrum Bennett||ON||Cultivation & Sale||Production & Sale|
|32. Natural Med||ON||Cultivation|
|33. Organigram Inc.||NB||Cultivation & Sale||Production & Sale|
|34. Peace Naturals Project||ON||Cultivation & Sale||Production & Sale|
|35. Prairie Plant Systems||SK||Cultivation||Production|
|36. RedeCan Pharm||ON||Cultivation & Sale|
|37. THC Biomed||BC||Cultivation $ Sale||Production & Sale||Plants|
|38. Green Organic Dutchman||ON||Cultivation & Sale|
|39. Tantalus Pharma||BC||Cultivation|
|40. Tilray||BC||Cultivation & Sale||Production & Sale|
|41. Tweed Inc.||ON||Cultivation & Sale||Production & Sale||Seeds|
|42. Tweed Farms||ON||Cultivation & Sale|
|43. United Greeneries||BC||Cultivation|
|45. Whistler Medical Mari||BC||Cultivation & Sale||Production & Sale||Plants|