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Capitalize On Cannabis Report - 08/31/19

|Includes: CURLF, CVSI, ELLXF, EMHTF, GTBIF, HRVSF, ITHUF, LHSIF, MDCL, ORHOF, TILT Holdings Inc. (SVVTF), TLRY, TRSSF
Summary

Earnings Season came to an end, with several large MSOs posting big revenue and improved operating metrics.

The DEA is promising to move forward on expanding the number of cultivators allowed to produce product for medical cannabis research.

Health Canada reported growing sales and inventory and also boosted the number of licenses by 2 to 220.

The three 420 Investor model portfolios are up 7-22% in 2019 despite the 1% decline in the Global Cannabis Stock Index.

Review

The cannabis sector saw the end of earnings season. The DEA announced it is "moving forward" on facilitating and expanding scientific and medical research for cannabis after a very long delay. It will be proposing new regulations to govern growers for research purposes. Health Canada reported June supply and demand data, with inventory climbing rapidly. It added another 2 license holders, bringing the total, excluding revoked licenses, to 220.

During the week, I published the third of three feature articles for the September edition of the 420 Investor Newsletter:

Pursuing Long-Term Investing in Cannabis with Less Trading

I also published my monthly column on Forbes.com:

This Cannabis-Focused Company Is Up +124% In 2019 With More Gains Likely Ahead

Here are some of this week's highlights for Focus List names:

  • CVSI added a new independent director with extensive public company board experience
  • ELLXF signed a distribution agreement covering Belgium and Luxembourg
  • GTBIF closed its acquisition of Fiorello Pharmaceuticals, one of the 10 New York medical cannabis license holders. It reported a very strong Q2, with revenue of $44.7 million more than 10% above expectations and adjusted EBITDA at $5.0 million. The company launched a pro bono license application assistance program to help social equity applicants in Illinois.
  • HRVSF will be introducing the California brand, Cookies, in its Arizona operations
  • ITHUF reported Q2 sales of $19.2 million with 52.4% gross margin
  • LHSIF opened its 17th Florida dispensary
  • MDCL pending acquisition MedPharm will be granted a DEA license to grow medical cannabis for research purposes
  • ORHOF grew Q2 revenue to $21.4 million but saw a very large operating loss despite improved gross margin
  • TLRY announced the acquisition of Alberta retailer Four20 for C$70 million (and up to C$110 million with performance milestones).
  • TRSSF received $31.5 million from the early exercise of warrants by JW Asset Management. It announced the acquisition of 49.9% of State Flower, a premium cultivator in California for $2.85 million.

The Global Cannabis Stock Index fell again this week, decreasing 2.6% to 63.40: 

The index, down 1.0% so far in 2019, lost 54.9% in 2018 after gaining 91.8% in 2017 and 88.8% in 2016. It currently includes 52 stocks and ended 2018 at 64.02:

Model Portfolios

420 Opportunity ended the week valued at $100,783, down 3.3%. The model portfolio has gained 6.5% year-to-date and has increased 102% since April 2014. 420 Quality ended the week at $136,264 down 1.3%, and has increased 14.5% year-to-date. This model portfolio was launched in March 2017 targeting long-term investors seeking to invest in leading cannabis stocks with low portfolio turnover and has gained 172.5% since inception compared to the 21.6% decrease in the index. Flying High ended the week valued at $196,542, down 1.3%. The year-to-date gain has been 21.8%, while the return since inception in late 2013 has been 1865%.

Outlook

The cannabis sector is seeing rapidly improving quality due to new entrants and some of the older names executing. Valuations generally remain cautionary, and fundamentals are questionable for most of the over 800 companies in the sector. While the sector has been volatile and has declined since early 2018, the longer-term trend since early 2016 has been bullish. There are some catalysts ahead, including the changes ahead due to hemp legalization, progress in the Canadian legalization that commenced October 17th and is set to include a broader set of products later this year and in German MMJ as well as the continued roll-out of the implementations in California and Massachusetts for adult-use as well as medical cannabis in several other states. The demise of the Cole Memo had left a big overhang in the U.S. market, but I believe this is now behind us and advocate a more aggressive approach for investors with respect to legitimate U.S. companies. A major change has been the stepped up pace at which higher quality U.S. operators are going public via the CSE in Canada. Consolidation within both Canada and the U.S. will continue, but the Canopy deal with Acreage paves the way for potentially more cross-border consolidation. Finally, expect to see more of the Canadian LPs list on major U.S. exchanges.

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., insight into the President's plans regarding the federal view on state-legal cannabis (especially in light of the apparent deal with Senator Cory Gardner and the introduction in the Senate of Strengthening the Tenth Amendment Entrusting States (STATES) Act ), better clarity from the federal government for banks and cannabis research, FDA pushback towards the CBD from industrial hemp industry, the GW Pharma launch of Epidiolex, the inclusion of a broader range of extracts in Health Canada's ACMPR program and its continued growth in patient enrollment, the rollout of MMJ in Denmark, Germany, Mexico and in Australia as well as continued advances in South America, progress with respect to the new legal cannabis implementations in CA, IL, MA and MI, and the new MMJ implementations in Arkansas, Florida, Maryland, Michigan, Ohio, North Dakota, Oklahoma, Pennsylvania, Texas and Utah possible legalization via the legislatures in CT, MD, MN, NH, NJ, NM, NY and RI and implementation of potential commercial programs in ME and VT. The 2020 elections will start to get a lot of attention later this year as well.

Here are some of the most interesting stories we published on New Cannabis Ventures this week:

After Breakout Quarter, GTI Looks to Scale and Optimize Its 12-State Footprint

Assessing Different Types of Cannabis License Denial Challenges

Curaleaf Q2 Revenue Grows 231% to $48.5 Million

Emerald Health to Sell $25 Million $2 Convertible Notes with 12.5 Million $2 Warrants

Green Thumb Industries (GTI) Triples Revenue to $44.7 Million and Reports $5.0 Million in Adjusted Operating EBITDA in Second Quarter 2019

Grenco Science Raises Growth Capital After 8 Years as an Early Mover in Cannabis Vaporization Technology

Hound Labs Raises $30 Million to Support Commercial Development of Combined Cannabis and Alcohol Breathalyzer

iAnthus Q2 Revenue Doubles Sequentially to $19.2 Million

JW Asset Injects $31.5 Million Into TerrAscend Through Warrant Exercise

Leading Publicly Traded Cannabis Companies Post Strong Revenue Growth in June Quarter

Origin House Revenue Increases 91% Sequentially to C$21.4 Million

Planet 13 Nevada Cannabis Sales Grow 275% to $16.5 Million in Second Quarter

Tilray to Acquire Alberta Cannabis Retailer for $70 Million in Stock with Additional Earnouts

TILT Holdings Reports Q2 Revenue of $39 Million and Pre-Announces July Revenue of $15 Million

Resources:

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: At New Cannabis Ventures, we work with several publicly-traded companies, including 48North, Aurora Cannabis, Canopy Growth, Charlotte's Web, Cresco Labs, DionyMed Brands, Fire & Flower, GABY Inc., Green Growth Brands, Harvest One, iAnthus Capital, INDIVA, KushCo Holdings, Liberty Health Sciences, Medicine Man Technologies, MediPharm Labs, MPX International, Organigram, Plus Products, Supreme Cannabis, TerrAscend, TILT Holdings, Vireo Health and VIVO Cannabis, providing each of them with Investor Dashboards. Please see our disclaimer for more detail:
www.newcannabisventures.com/disclaimer/