How Smaller LPs Can Be Profitable When Canada’s Hashish Market Consolidates – New Hashish Ventures

You are reading an issue of this week’s issue of New Cannabis Ventures’ weekly newsletter, which we’ve been publishing since October 2015. The newsletter contains unique insights to help our readers stay on top of things, as well as links to the week’s most important news.

Friends,

Canopy Growth took over the acquisition of Supreme Cannabis earlier this month and paid a sizeable 66% premium at the close of the previous day. The company cited Supreme’s premium brands and its success in the adult market as the motivation behind the $ 435 million all-stock deal. Our recent interview with CEO Beena Goldenberg captured the success she had in her brief tenure as CEO of Supreme.

Canopy’s move follows several similar acquisitions by its competitors. Aphria bought Broken Coast in 2018 and added a leading artisanal cannabis breeder. Vivo Cannabis bought Canna Farms later that year. Aurora bought Whistler Medical in early 2019. More recently, IM Cannabis announced the upcoming purchase of Highland Grow. All of these deals were based on the idea that over time, premium brands and products would resonate with customers and create profitable business. Another upcoming merger in Canada between HEXO Corp and Zenabis for $ 235 million in inventory was based on European expansion, cost synergies and economic capacity expansion. In addition, Valens recently acquired Edibles & Infusions Corporation from LP LYF Food Technologies and Organigram. Both transactions were aimed at capitalizing on the growth of the growing food market.

The Canadian market continues to grow, but few publicly traded companies appear to have been able to capitalize on its success. The structure of the market presents many potential challenges, as the LPs sell almost exclusively to provinces and, given the monopoly buyer, they have little pricing power. Overcapacities are another problem, as many LPs are overbuilt and currently do not use their facilities sufficiently. This week, Organigram reported an adjusted gross margin of -5%. Market share leader Aphria reported a gross margin of only 39% for cannabis. The company has too much inventory and too much capacity. That month, the company issued $ 53 million of shares to its joint venture partners at Aphria Diamond in an effort to improve the terms of the supply agreement. Aurora Cannabis has now rebuilt its large Aurora Sky facility and reduced production by 75% as the focus is on premium growing.

We have shared many times here that retailers and smaller LPs are likely to outperform the major Canadian LPs, especially after the ramp-up earlier this year. Quite simply, it’s a huge challenge for the big LPs to justify their market cap with everything they do in the Canadian market. The valuations are likely to require success in markets outside of Canada, either in the US or in Europe. Four months ago, we suggested that select smaller LPs be better positioned to expand the adult market in Canada. The recent acquisition of Canopy Growth undoubtedly confirmed that view. Supreme Cannabis has more than doubled, and Canopy Growth has been relatively unchanged since then:

We anticipate further consolidation could occur in Canada and have been encouraged to see tobacco giant BATS’s strategic investment in Organigram. While those able to figure out the next acquisition or strategic investment are likely to see good returns, we believe investors can thrive in the Canadian market without takeouts. Smaller, nimble, and focused LPs that can run on novel products or excel in the more profitable, premium tier of the flower and pre-roll market are likely to add value to their shareholders over time as the Canadian market evolves further developed.

Rubicon Organics uses its unique IP to grow high quality organic, sustainable and terpene-rich flowers. The company has extensive CPG innovation expertise to design and bring to market high-margin premium products and brands.

Familiarize yourself with the Rubicon Organics Investor Dashboard that we maintain for you as a customer of New Cannabis Ventures. Click the blue Follow Company button to stay updated on the progress.

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With best regards,

Alan & Joel

Alan Brochstein, CFA

Alan is based in Houston and leverages his experience as the founder of the online community 420 Investor, the first and largest due diligence platform focused on publicly traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan is always looking for new ways to connect the industry and fuel its sustainable growth. At New Cannabis Ventures he is responsible for content development and strategic alliances. Before focusing on the cannabis industry in early 2013, Alan worked as an independent research analyst in 1986 after having worked in research and portfolio management for over two decades. Alan is a prolific writer with over 650 articles published since 2007 on Seeking Alpha where he has 70,000 followers. He is a frequent speaker at industry conferences and a frequent source for media such as the NY Times, Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | E-mail

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In this article:

apha, Aphria, Charlotte’s Web, connected cannabis, cwbhf, CWEB, OGI, organizational chart, romj, romjf, Rubicon Organics, TILT, Tilt-Stocks, TLLTF, ugro, urban-gro, Valens, valens company, vlncf, vlns

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