During the last year, we have seen companies come under pressure both before and after ahead of a lockup expiration. These expirations are related to previously issued shares from before or after the initial public offering (IPO) that are now able to be sold on the public market.
Although many investors tend to associate lockup expirations with potential periods of weakness for a company, that is not always the case. On several occasions, we have seen a company’ stock price sells off ahead of a lockup expiration and then rally post-lockup. We believe that our readers need to be aware of this possibility to avoid making a rushed decision.
The cannabis sector has a mind of its own when it comes to lockup expirations and we have seen companies record volatile movements both to the upside and the downside after one. During the last year, cannabis investors have become much more aware of this and many stocks have been punished for having too large of a lockup expiration. Some companies have taken action ahead of the pending lockup and we have generally seen a more favorable response from the market when this happens.
Today, we want discuss the lockup expiration theme in more detail and highlight 3 companies that have been impacted by it. These companies have taken different avenues when it comes to handling the situation and we believe that our readers need to be aware of this. Going forward, we expect to see an increase in the number of lockup expirations and there has never been a better time to become more familiar with the subject matter.
Tilray’s Largest Investor Agrees to Extend the Lockup
Although Tilray Inc. (TLRY) has come remarkably off its highs from late 2018, we are favorable on the way the company handled the massive lockup expiration it is facing. Last year, Tilray signed a definitive agreement to extend the lock-up it has with its largest shareholder, Privateer Holdings. The agreement provides for the distribution of 77% of Tilray shares to Privateer equity holders over two years.
Tilray was originally incubated and financed by Privateer as one of its wholly owned operating subsidiaries before closing a Series A funding round in early 2018. The only assets that Privateer holds are the 75 million shares of Tilray. The firm previously distributed its ownership of its three other operating subsidiaries that are unrelated to Tilray to Privateer stockholders and we find this to be significant.
A few years ago, Privateer received a lot of attention from the cannabis sector after a fund that Peter Thiel is a partner of made a large investment in the cannabis venture capital firm. We are impressed with the way the Privateer team has been able to handle the volatility associated with Tilray and this is an opportunity that we will continue to closely follow.
Over the next year, we expect Tilray to record strong growth and will monitor how the management team is able to bring the company down a path of profitability. When it comes to Tilray, we are most excited about its leverage to emerging international markets and expect this aspect of the story to serve as a major growth driver in the years to come.
Jushi is Growing Through Investments and Acquisitions
During the last year, we have seen a shift in interest and have noticed larger capital flows entering the US cannabis market. This represent a change from the prior year where Canada was the largest beneficiary of the cannabis movements. Although we are bullish on the Canadian cannabis market, we believe that the US represents a more attractive long-term opportunity and want to highlight a company that has been capitalizing on it.
The company, Jushi Holdings Inc. (JUSH.CN) (JUSHF) has been nothing short of an execution story when it comes to the US market and we are favorable on the growth prospects associated with the assets it owns. Through a series of investments and acquisitions, the company has significantly enhanced its leverage to the US market and has been focused on penetrating burgeoning state markets.
When you analyze the growth profile associated with the assets that were acquired by Jushi, there is a lot to be bullish on. From Virginia to Pennsylvania, the company is levered to some of the most exciting cannabis markets that are not saturated. We find this to be significant due to the long-term growth prospects associated with these state markets and believe that the management team has had its finger on the pulse of the market.
The cannabis industry is still in its infancy and a majority of investments and acquisitions are paid for in stock. If companies were spending cash on these opportunities, there would not be any resources to execute on the acquisition or investment and this is a trend that is not expected to change in the near future. Jushi has completed its investment and acquisitions for mostly stock and we are favorable on the structure of the transactions.
When it comes to Jushi, we believe that the business made accretive acquisitions and would prefer to see stock issued to complete the transaction. Many investors do not feel the same way and are concerned by the overhang associated with the stock issuances.
During the last quarter, Jushi has been under considerable pressure and this is a trend that we continue to follow. During this time, the US cannabis company was able to significantly enhance its growth and this is an opportunity that caught our attention. We believe that Jushi is flying under the radar and has an attractive risk-reward profile.
1933 Industries is a High Growth Story that is Trading for a Discount
Another reason for a company to issue additional stock would be to pay the employees and this is a common theme for any early stage company. One of the main reasons why people work at startups is due to the potential to earn equity which could be worth significantly more money if the business is successful. Through this form of compensation, employees are more vested in the success of the business and we are favorable on this compensation method.
Of course, there are companies that take the stock compensation route too far and issue millions worth of stock to members of the management team and the board of directors. We have seen several cases of this in the cannabis sector and many of these companies were punished by the market for even attempting to pull something like that off.
1933 Industries (TGIF.CN) (TGIFF) is an example of a company that has been unnecessarily punished for issuing bonuses to employees in the form of stock compensation. During a time where it is tougher for companies to access capital, we prefer to see employees get compensated with stock and stock options.
When compared to its peers, 1933 Industries has done a great job at managing cash flows and forecasting future capital requirements. The company’s recent move into a much larger cultivation facility is expected to substantially increase production capacity and have a positive impact on cash flow. We are bullish on the growth prospects associated with the facility as well as the California focused joint venture agreement.
1933 Industries has been nothing short of an execution story and it has visible catalysts for growth. Over the next year, we expect to see a change in the market’s perception of 1933 Industries and believe that it is an opportunity that is flying under the radar. Once the Nevada facility is fully operational and the California relationship is generating revenues, we expect to see a re-rating on the opportunity as broker-dealers realize that they are missing out on something huge.
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