Capital Continues to Pour into Cannabis

03/24/2016 9:35 am EST

Focus: STOCKS

Michael Berger

President & Founder, Technical420.com

After the largest medical marijuana producer in Canada raised more than $10 million through an investment bank, Michael Berger, President of Technical420.com, highlights the company’s recent developments and growth potential.

As 2016 continues to unfold, Canopy Growth Corporation (CGC.V) (TWMJF: OTC) has continued to prove itself as the leader in the Canadian medical marijuana industry.

Investment Thesis

We view Canopy as the top investment in the Canadian cannabis industry due to the following reasons: 1) The company continues to increase market share through organic and inorganic growth initiatives, 2) Expect to see continued top-line and bottom-line growth on a quarter-over-quarter basis for all of 2016 and 2017, 3) CGC continues to enter into partnerships and make acquisitions that will prove to be accretive, 4) The company is led by a management team who continues to execute on initiatives and create value for shareholders, and 5) CGC is levered to the cannabis market in a country that is leading the cannabis reform movement at the federal level.

Raised $10 Million in Capital for Working Capital Purposes

After the market closed on Tuesday, Canopy announced that they entered into a letter of engagement with Dundee Securities Ltd. on behalf of a syndicate of underwriters under which the underwriters have agreed to purchase 4,350,000 common shares at $2.30 per share.

The deal was done on a bought deal basis which means that the underwrites committed to buy all of the shares offered. This offering will generate $10,005,000 in total gross proceeds and Canopy agreed to grant an over-allotment option to purchase up to an additional 652,500 shares at $2.30 per share.

The closing date of the offering is scheduled to be on or about April 15, 2016. CGC plans to use the net proceeds for capital expenditures and for working capital and general corporate purposes.

Continues to Increase Market Share in Canada

During 2015, Canopy was able to increase market share through the completion of several accretive acquisitions. The most significant acquisition during 2015 was that of Bedrocan Cannabis Corp which closed in late August 2015. The acquisition successfully combined the two largest Canadian medical cannabis producers and created a conglomerate in the Canadian medical cannabis industry.

The first priority for the newly combined company was to integrate its clients and build on the unique strengths of each brand. At the time of the acquisition, Canopy and Bedrocan had approximately 5,600 active and registered patients. By February 25, 2016, the conference call following the release of its financial results (third quarter of fiscal year 2016) CGC had more than 10,000 registered patients.

In late 2015, Canopy also completed the acquisition of MedCannAccess (“MCA”) in an all-equity transaction. Through this acquisition, the company is able to offer in-person client services through MCA’s network of community engagement centers. This acquisition makes them the first licensed producer in Canada to offer in-person services. The company currently has three community engagement centers in southern Ontario (Etobicoke, Hamilton and Guelph).

As part of the MCA acquisition, Canopy also acquired a 33% stake in CannScience Innovations Inc., a Toronto drug development company and a library of proprietary genetics produced by Humber Valley Seeds. CannScience conducts extract research and is focused on delivering standardized metered dosing in a range of alternate delivery methods. These acquisitions will improve Canopy’s product offerings and create opportunities for breeding and product development.

Expect to See Continued Top-Line and Bottom-Line Growth

In late February, Canopy released its financial results for the third quarter of fiscal year 2015. During that quarter, the company generated $3.5 million in revenue, 41% more than the previous quarter and 400% higher than the same period last year. CGC has seen its margins continue to improve on a quarter-over-quarter basis and the company has not only seen an increase in the number of grams sold but the average cost per gram has also decreased.

  • In the third quarter, Canopy sold 462,000 grams at an average price of $7.34 per gram.
  • In the second quarter, 319,000 grams were sold at an average price of $7.54 per gram
  • In the first quarter, 216,000 grams were sold at an average price of $7.74 per gram
  • In the same period last year, 87,000 grams were sold at an average price of $7 .04 per gram

During the third quarter, Canopy reported a $3.3 million net loss which is higher than the $2.6 million net loss during the same period last year. During the nine-month period which ended on December 31st, the company reported $1.6 million in net income.

As of December 31st, Canopy had $19.7 million in cash and cash equivalents. This is $1.7 million lower than what they had as of March 31, 2015.

Expect to see Continued Revenue and Income Growth

During the last six months, Canopy’s subsidiaries have continued to receive license approvals and extensions from Health Canada. For this reason, we expect to see the CGC continue to report improving revenue and income as the company expands its product line and more facilities come on-line.

Through its subsidiaries, CGC has over 500,000 square feet of licensed cannabis production space and is approved to produce and sell a total of 5740 kg of dried cannabis products, the highest total in the industry.

Outlook

Once Canada legalizes recreational cannabis at the Federal level, the company will have a first mover advantage on an industry poised to see significant growth. During the last month, CGC and TWMJF have seen its share price fall by more than 19% and 14%, respectively.

The main difference between CGC and TWMJF is where they trade. CGC trades on the Canadian Venture Exchange while TWMJF trades on the over-the-counter (OTC) exchange in the United States. Although we see upside potential in both CGC and TWMJF, we are more favorable on CGC due to the narrower spread and better liquidity.

Over the next quarter, we expect to see the company continue to grow as they execute on its business plan. During the last year, CGC has completed several acquisitions which will prove to be accretive to the bottom-line. The company has benefited from making acquisitions that vertically integrated the company. As the business matures, we expect to see CGC’s management find new ways to lower costs while enhancing its product.

By Michael Berger, President of Technical420.com

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