Capitalize On Cannabis Report - 07/25/20

Summary

• The FDA issued draft guidelines on cannabis research and also sent some CBD enforcement guidelines to the White House.
• aThere was good news for both Nevada and Ohio.
• Health Canada added 7 new licenses, bringing the total to 436.
• The three 420 Investor model portfolios have returned -1.5% to +15.3% in 2020, outpacing the market, which has lost 26.4% as measured by the Global Cannabis Stock Index.

Review

The FDA issued draft guidance on cannabis research and apparently also shared some guidelines regarding CBD enforcement with the White House. Nevada ended its license transfer freeze. Ohio released sales data indicating that the program's growth has accelerated sharply.

Canadian retail sales of cannabis expanded 117% in May from a year ago and up 4% from April, according to Statistics Canada. Ontario ended curbside pickup and delivery. Health Canada added 7 new licenses this week, leaving the total, including a suspended license of CannTrust, at 436, which excludes the revoked licenses of Agrima, Alberta Green Biotech, Bloomera, Medican Organic's 2nd site and a small processing facility that belonged to Canopy Growth, the expired license of Evergreen Medicinals and the voluntarily cancelled license of Avalite Sciences.

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

Cannabis Sub-Sector Review - 07/17/20​

Earnings Previews for the Week Ending 07/31/20

A Look at Some Emerging MSOs

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

• CRON reported in an SEC filing that the CEO of Redwood (Lord Jones) has departed with severance
• CURLF closed an upsized C$34 million private placement of its stock and closed its acquisition of Grassroots Cannabis
• FFLWF received Approval in Principle from British Columbia, a step that gets them closer to open their two initial stores in Vancouver. The company also announced its intent to restructure the strategic investment of Couche-Tard, including the lowering of warrant exercise prices as well asthe convertible debt conversion price.
• IIPR executed a sale-leaseback with Columbia Care in New Jersey, making an investment of $14 million.
• KERN exercised its option to acquire the remaining 20% of solo sciences
• NDVAF amended its license with Bhang, terminating the joint venture and putting in place a royalty payment instead
• OGI announced the departure of Ray Gracewood, SVP of Marketing and Communications. It reported Q3 revenue of C$18 million, which was net of C$3 million in returns, with an operating loss that included C$66 million write-downs and charges.
• TCNNF opened its 53rd Florida dispensary
• TLRY amended its licensing agreement with IntelGenx regarding its VersaFilm to make it non-exclusive for CBD

The Global Cannabis Stock Index ended a streak of three straight weekly gains, decreasing 1.5% during the week to 30.58:

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, is down 27.5% thus far in 2020. It currently includes 37 stocks and ended 2018 at 42.20:

Model Portfolios

420 Opportunity ended the week valued at $72,128, down 5.8%. The model portfolio has lost 7.2% year-to-date and has increased 44.3% since April 2014. 420 Quality ended the week at $109,862, down 5.0% for the week, and it has lost 2.9% 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 119.7% since inception compared to the 62.2% decrease in the index. Flying High ended the week valued at $175,344, down 7.9%. The year-to-date gain has been 6.1%, while the return since inception in late 2013 has been 1653%.

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 due to the COVID-19 pandemic, which could add additional cost burden to operators. The sector has seen capital available to fund expansion dry up, a situation that will leave companies operating with negative cash flow severely challenged.

I believe stocks overreacted and put in a bottom in March, and they are now poised to benefit from a perception that the industry will hold up better than most in a weak environment, 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. The rising tide, though, will not lift all boats.

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. The implementations in California and Massachusetts for adult-use have been disappointing but are likely 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 New Jersey will vote on legalization in November, and it is very likely that Arizona voters will do the same. 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.

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., managing through the COVID-19 crisis, steps to enable cannabis research, FDA push-back towards the CBD from industrial hemp industry, the roll out of MMJ in 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 recent MMJ implementations in Arkansas, Michigan, Missouri, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas and Utah, possible legalization via the legislatures in CT, FL, MD, MN, NH, NM, NY, PA and RI and implementation of potential commercial programs in ME and VT. The 2020 elections could start to get a lot of attention later this year, with Arizona and New Jersey at the top of the list, and ballot initiatives are already approved in MS and SD for medical cannabis and SD for adult-use. MT could see ballot initiatives for both medical and adult-use. At the federal level, investor sentiment could brighten if the Democrats are able to recapture control of the Senate.

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

Curaleaf Closes Grassroots Cannabis Acquisition

Fire & Flower Proposes Amendments to Couche-Tard Strategic Investment

Organigram Q3 Revenue Declines 27% to $18 Million

PLUS Puts Product and Profitability First While Slashing Its Burn Rate

Red White & Bloom to Acquire Platinum Vape for $35 Million

This Cannabis Software Company Is Quietly Supporting the Leading Operators

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