The froth of US legalization (and Democrats taking control of the Senate) has spilled over into Canada’s legal cannabis industry, with prices generally moving up in response. It’s been buoyant for some (and painfully stagnant for others).
In testing that claim, I came across an ‘index’ for Canadian weed companies. There’s also a US and a ‘combined’ North American index (as well as a raft of others for different sectors). The company who puts it out is called ManifestSeven, which claims to be a provider of logistics for cannabis (they’re listed too…I’ll have a look at the financials…perhaps there’s something to learn about CA’s market). I can’t warrant the data, but it does look slick. Manifest7 doesn’t publish methodology (that’s always a red flag, prima facie).
<A widely recognized index is extremely valuable: it is a measuring stick (like the DJIA), but it can also form the basis of contractual pricing (think LIBOR or WTI)….notwithstanding some <ahem> hiccups. The definition of an index (how its’ calculated) should be transparent and clear. I’ve spent many an hour in my professional life going through index definitions. They arise from participants desiring particular price mechanisms to be published…sometimes defined by region or delivery periods. And actively traded around. If you want to see where this can go, natural gas indices are a good example….there’s several dozen defined in that link. In 20 years, I suspect weed will look similar. We’ll check back then ;)>.
So, stock prices are moving, interest in a particular sector rises, and implies its’ probably a good time for companies to tap that interest….. and go raise some cash via an equity issue. Lately, they’re coming hot and heavy.
Sundial ($SNDL) has been merciless. We looked at their best efforts raise offering pre-funded warrants, it came in fully subscribed. And…..they’ve dropped another raise – just announced this morning – that’s priced $0.25 higher than the one of just a few days ago. Looking to capture recent interest in their stock (and perhaps trying to light up a rumoured WSB effect) – man, they’re really at it.
This is a helluva play: if fully subscribed, they’ll have $615MM in cash and 1.5B shares outstanding (I don’t know where that cash number comes from. Adding up the raises and last financials….I get half that. Yet, there it is in the presser). I expect them to go shopping (that isn’t much of a guess, they said they are), but for what? GoBlue and I chatted this morning about their prospects. The US? Not without a change in law. Europe? Significant revenue incitation is a ways off. Perhaps a company fairly downrange, like a Flowr/Terrace or a Materia? Meh, the first is a quasi-institutional financial play (read complex); the latter having all the horsepower and cache of a fat lady riding a moped on an Interstate.
That leaves Canada. With that kind of cash (cash!)….and the state that many ‘mid’ assets are in, $SNDL could buy $FIRE & $OGI & $WMD……and toss 48North ($NRTH) on a keychain for kicks. There’s some exaggeration there….but in all seriousness…not very much.
$SNDL’s shameless about their intent, and signalled they’ll do it how they want….even if the Zenabis ($ZENA) stunt they pulled blew up on them. Maybe they’ll be that aggressive again. Either or….$SNDL’s got a fuse burning.
Speaking of Supreme Cannabis ($FIRE), they just raised as well…pretty much to stay alive. The overnight raise closed, fully subscribed. This is a ‘good’ – as while it wasn’t a bought deal – there was demand for the equity.
High Tide ($HITI) went to the well just yesterday, this time with a bought deal…which coincided with a trading halt. That halt indicates there’s news coming. Since the raise was already priced…it implies they’re going to make an announcement of some sort…likely an acquisition. Hence the raise, right?
Heritage Cannabis ($CANN) is an over-pumped bag of rocks that I love to use for illustration. I follow some of its’ dedicated internet channels to get a look into the retail mindset. Many of those poor buggers have no idea about much of anything, but can recite promotional material verbatim. The psychology around it fascinates me. $CANN went to market yesterday on an ‘overnight’ best-efforts basis. There’s air-quotes there for a reason. The news release takes advantage of knowledge gaps the reader may have, this one is easy to dissect:
- The ‘overnight’ component actually drags on until the close expected on……February 17th. They halted this morning (following last night’s news), I expect the halt is due to pricing the offer. ‘Overnight’s’ are typically priced apriori (that’s why they’re an overnight). Unlike $FIRE and $SNDL, $CANN didn’t, so, it’ll have to before trading can commence.
- It’s pricier than either the $HITI and $FIRE raises, in having to offer a full warrant with the unit (the other two, half warrants).
- And speaking of pricy, it comes with a 7% cash commission on gross. Woot!
- Broker warrants will be granted (also at 7% of the uptake). I haven’t seen those used in a couple of years. And they are for an entire unit, not simply a warrant on a share. The exercisability of the units match the tenor of the underlying warrants – so – the broker warrants are an option on an option…and hold more extrinsic value than what’s being sold to everyone else. Way cute.
- The funds are said to be intended for: “…purchase (of) additional biomass, packaging materials and equipment, product development….”. Meaning – the raise is needed to fund operations. It means they can’t get credit from suppliers, and that their debt facility with Trichome Financial ($TFC) is tapped out. Or perhaps $TFC just said ‘no’.
- $CANN’s products have been shipping – but to Alberta and BC and MAN (MAN is marketed at the store level, BC with it’s vape tax, and AB….a price seeking market). They’re absorbing Premium 5 (unable to go it alone….Premium 5 walked into $CANN in exchange for paper. This, despite relatively good looking sales they initiated as an early mover in the hydrocarbon segment (there was little competition then, that’s changing), and more product (75 SKUs) going into those provinces. That’s expensive. They’ve finally landed oil in Ontario, but no vapes (ONT is ‘full’ apparently, needing to blow out existing SKU’s before they add incremental ones. Costs will span Q1 and Q2 – which – I expect to show negative gross margin in the first, perhaps both. G&A is going to be inelegant.
- The timing of this raise – 2 weeks in front of Q4 F2020 financials – means $CANN CEO Clint ‘The Bagmaker’ Sharples wanted to get it done before they dropped. He’d had problems with initial product shipments during the 4th quarter, as well as getting stung by mislabelled product. Reminiscent of $AH – where cash was demanded by debenture holders (rather than a reprice) prior to incoming financials – ‘The Bagmaker’ won’t be able to do much showing a picture of a full diaper to prospective shareholders.
So much about $CANN just keeps on giving, at least in terms of educational tools. They’ve been ‘2 quarters out’ for 2 years now, and they play it very effectively.
Aurora Cannabis ($ACB) continues to show an amazing resilience (and commitment from investors) in being able to raise, landing a bought deal in for $125MM USD. They’re pretty straight up about it, committing to swap debt for equity – and that seems to have worked. Survival of the asset being CEO Miguel Martin’s prime objective, and the timing is as good as it has been for awhile. Half warrants of 3 yrs and 20% premium to issue isn’t as expensive as those that strike near the money (like $HITI).
Auxly ($XLY) is in this bunch as well, seeing them execute a bought deal with 3 year half warrants – and a strike relatively near the money as well. This raise is distinguishable in being designated for use as ‘working capital’. One could argue this raise is to fund ‘operations’ as well – and it may be a bad sign. They’d already swapped out some pricier money for cheaper paper in November to fund working capital as well. It’s a bad sign if they aren’t getting returns in cashflow. It’s a more positive sign if their operations are ramping – and they simply need more to bridge cashflow. I see heightened risk in the company in this raise in any event.
The US firms are going full tilt in raising as well, and they might have a longer runway – given positive moves by the Democrats. It’ll still have to go through the arcane and time-consuming process of legislative change…which will bring potential regulatory meteor strikes, and reconcile positions by the FDA, USDA, DEA, and a whack of likely state objections.
Even so, compare Canada with an overnight raise done just a couple of weeks ago by Ayr Strategies ($AYR.A). Straight up at market, they pulled in $158MM CAD with no warrants. Or Curaleaf’s ($CURA) similar (but bigger bang) at $276MM less than a month ago.
Good times are here again. At least for the time being.
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 holds no position in any of the equities listed, but for a contingent interest in $AYR.A.