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Capital Continues To Flow Into The Canadian Cannabis Sector To Drive Future Growth

May 6, 2020 • 7:58 AM EDT
4 MIN READ  •  By Michael Berger
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Although the landscape of the cannabis industry has changed, capital continues to flow into companies that’s are accessing the capital markets and this is a trend that our readers need to be aware of.

One of the major changes that we have seen in the cannabis sector is related to the capital  markets. In 2018, Canadian cannabis companies raised billions of capital and were quickly closing $100+ million private placements that were extremely oversubscribed. In 2019, capital continued to flow into the cannabis sector at a much slower pace and we noticed a significant slowdown in the back half of the year.

The drying up of the capital markets has put extreme pressure on the Canadian cannabis industry and companies have been forced to shutter operations. Several high-profile Canadian cannabis companies have filed for bankruptcy and this is a trend that our readers need to be aware of.

Going forward, we expect to see the Canadian cannabis industry continue to be capital constrained. So far this year, we have seen a further slowdown in the frequency, in the size, and in the type of capital that is being raised. Today, we want to highlight 3 Canadian cannabis companies that have been able to raise capital and believe that these are opportunities to be aware of.

Fire & Flower Raises $28 Million and Plans to Expand

Last week, Fire & Flower Holdings Corp. (FAF.TO) (FFLWF) reported to have closed a previously announced private placement offering and raised $28 million of aggregate gross proceeds. The completion of the private placement further strengthens the company’s balance sheet and puts the business in position to continue expanding its retail network across Canada .

Fire & Flower is a leading Canadian cannabis retailer with 45 operational locations across the provinces of Alberta, Saskatchewan, Manitoba, Ontario, and the Yukon territory. The company is well positioned to be a benefit from the legal cannabis movement in Canada and we are favorable on howo the story has advanced so far this year.

The Canadian cannabis retailer has been forced to change the setup of its operation so as to prevent the spread of COVID-19. The management team worked quickly to adapt to the new market environment, and we are favorable on this aspect of the story. Due to the management team’s quick thinking, the business will be less impacted by the pandemic.

When compared to other Canadian cannabis companies that are raising capital, Fire & Flower raised more capital than the average business. We find this to be significant and will monitor how the Canadian cannabis retailer is able to continue to drive the story forward. The recent trend has been mixed and to the downside and we will keep Fire & Flower on our radar.

Auxly Cannabis Raises $25 Million for Cannabis 2.0

Auxly Cannabis Group Inc. (XLY.V) (CBWTF) is a Canadian cannabis company that has benefited from institutional investors involved in the business. In late April, Auxly reported to have entered into an investment agreement with an institutional investor to provide it with access to additional capital. The agreement provides the company with the opportunity to sell up to $25,000,000 of unsecured convertible debentures on a private placement basis.

During the last year, we have been closely following Auxly and will be keeping an eye on how the management team is able to use the capital to advance the operation. The company intends to use the net proceeds to build on the launch of its cannabis 2.0 products through additional capacity and automation.

Cannabis 2.0 represents an attractive growth vertical in Canada and is an opportunity that we have been highly focused on. So far this year, Auxly has reported several significant developments and is an opportunity that we continue to follow. Although the company has been highly focused on execution, the recent trend has been negative, and we will continue to monitor how the story evolves from here.

HEXO Raises $45+ Million for Working Capital Purposes

HEXO Corp. (TSX: HEXO) (NYSE: HEXO) had been considered a leading play on the Canadian cannabis market and is a business that we have been following. Despite having a strategic relationship with Molson Coors, HEXO has been slow to execute and we will monitor how the management team is able to drive to story from here.

In mid-April, the Canadian cannabis producer reported to have closed a previously announced underwritten public offering of units and raised $46 million of total gross proceeds. HEXO expects to use the net proceeds for working capital and other general corporate purposes and we will monitor how the management team is able to execute.

During the last year, HEXO has been under considerable pressure and we have been cautious with the trend. When compared to its peers, the company has been slow to execute and this has been a dark spot for the business. We expect the capital that was raised to play an important role in HEXO’s ability to execute on previously announced initiatives and we will continue to monitor the opportunity from the sidelines.

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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