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A Series of Unintended Consequences

Originally posted October 16th, 2020 by Goblue

 

Canada delays 2.0 offerings for a year after legalization.

LP’s have to find someway to monetize their trim by-product which can range but is approximately 30% of a harvest at the big LPs.

LP’s engage in Biomass Boomerangs ($ACB $RTI) or Biomass Swaps ($CRON with an unnamed extractor. They have agreements with $LABS $CANN but the latter wasn’t taking inventory in early 2019) with extractors. Selling their trim to extractor and then buying back bulk extracts. This inflates both the LP and extractor sales making them more appealing to investors.

Some LPs disclose their full Biomass Swaps ($APHA $VFF). Others LPs did not disclose this sales fluffing. I don’t think we have seen one extractor admit to doing this. Other than RTI who were forced by accounting requirements to disclose the ACB Boomerang on March 31, 2020 financial statements. Why they didn’t disclose in their June 2019, Sept 2019, or December 2019 financial statements the “significant influence” ACB had over them is a question they should be asked.

The sale price of the Trim is inflated as is the repurchase price of the extract. This model extends to the LPs growing outdoor flower.

Think of the Biomass Swap transaction as you trading in your used car for a brand new car. The car dealer (extractor) doesn’t take a penny off the MSRP but offers you (LP) $5,000 more on your trade-in than what it’s worth. The LP, without a trade-in, could have bought the car at MSRP less $5,000. Now the LP has sold their product for $5,000 higher than market price and bought back into inventory a new car that was overvalued by $5,000.

The LP has fabricated a sale and the extractor has increased their sale revenues.

Potential Outdoor License growers see the price LP’s are getting for wholesale trim, extract and outdoor flower and plan to plant huge crops in 2020.

When over a year worth of extract grade oil has been delivered back to the LPs and 2.0 ramp is slow, the extractor sales volumes plummet (as does their stock price but not their executive compensation) as LPs have no need for more bulk extract.

LP’s who fluffed their sales with Biomass Boomerangs and Swaps sales fall off sizeably when their fabricated wholesale revenue falls off and their stock prices fall.

Outdoor growers, using these unknowingly fluffed wholesale transactions from 2019 as a proxy for revenue per gram in their business plans, plant their fields in May/June 2020.

Croptober 2020 is harvested.

Now we wait to see if the outdoor growers can sell their Biomass into a supply chain that is fully constipated presently with a year’s worth of raw extract product. The large LPs still have full vaults of trim and extract grade flower and produce more every harvest. The outdoor growers looking to wholesale Biomass has to compete with these natural byproducts.

How many outdoor growers business models will work with a glutted bulk extract market? How many will survive to harvest 2021?

I am hoping several will path their product into their own saleable formats and are not counting on wholesale revenue to breakeven.

That decision to delay 2.0 products until a year after legalization sure had some unintended consequences.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has a position in Aphria and will not start one or divest in the next five days. The author has no position in any of the other mentioned companies and will not start one or divest in the next five days.