German Cannabis Distributor Acquired by Leading Canadian Producer

Canopy Growth Corp (TWMJF) (CGC.TO) is going global…

This week, Canopy Growth Corp (TWMJF) (CGC.TO) reported an agreement to acquire MedCann GmbH Pharma and Nutraceuticals, a German-based pharmaceutical distributor that has placed Tweed-branded cannabis strains in German pharmacies. MedCann is federally licensed by the German Health Ministry to import, manufacture and distribute medical cannabis products.

Canopy Growth Corporation is the only publicly traded licensed Canadian medical cannabis producer on the TSX exchange (other LPs are on the TSX Venture Exchange) and we believe that the company is one of the best long-term cannabis investment opportunities.

Canopy Growth was Canada’s first publicly traded licensed medical cannabis producer and is a leading diversified producer of medical cannabis through its wholly owned subsidiaries Tweed, Bedrocan Canada and Tweed Farms.

Canopy Meets Germany’s Strict Standards

Although Germany permitted patient access to medical cannabis in 2005, domestic production does not currently exist.

MedCann is an attractive acquisition candidate and has already proven its ability to navigate Germany’s complex regulatory environment for importing and distributing cannabis. The company’s experienced management team has been able to establish itself as a leading cannabis importer and distributor within Germany, where the cannabis industry relies solely on imported products.

Canopy’s various production sites have a track record of producing consistent strains that yield reliable cannabinoid profiles harvest after harvest. This was an important aspect of the due diligence process as such consistency is a federal requirement for cannabis exports entering Germany. 

Tweed is capable of producing numerous stabilized strains and will position MedCann as a leader in this market.The acquisition is structured against certain licensing milestones that will move the company toward domestic production opportunities.

Second Quarter Shows Top-Line Growth and an Improved Balance Sheet

Canopy Growth reported impressive financial and operating results for the second quarter of the 2017 fiscal year. During the quarter, the total number of registered patients increased by 47% to over 24,400.

Recent license amendments increased production capacity to over 13,500 kilograms of dried cannabis and 6,700 kilograms of cannabis oil, representing over 7 million ml of finished cannabis oil.

The company reported a $5.4 million net income, on $8.5 million in revenue and this included a non-cash unrealized gain on changes in the fair value of biological assets of $16.1 million.

During the quarter, Canopy Growth sold more than one metric ton of medical cannabis (1,169 kilograms), representing an increase of 19% when compared the prior period and a 267% increase when compared to the same period last year. The company harvested 1,711 kilograms during the quarter

Year-to-date, Canopy Growth has recorded $1.5 million of net income, including a non-cash unrealized gain on changes in the fair value of biological assets of $22.8 million

The company’s cash position is strong and as of September 30th, Canopy reported to have $45.4 million in cash and cash equivalents, representing an increase of $30.0 million from March 31st.

The increase is attributable to combined net proceeds from the April 2016 and August 2016 bought deal offerings and the exercise of options and warrants together totaling $44.2 million partially offset by cash used to fund operations of $8.9 million and investments in facility enhancements totaling $8.7 million.

Launches Snoop Dogg Branded Medical Cannabis Strains

In early October, Canopy Growth’s Tweed subsidiary released a new product line under Snoop Dogg’s name called Leafs by Snoop.  Tweed just recently started offering the new product line to its registered patients.

Tweed and Snoop entered into a partnership earlier this year and the Tweed Shop is now home to the first three Canadian Leafs by Snoop varieties, Sunset, Ocean View and Palm Tree CBD. The product line will start with three types of flower cannabis strains and will expand over time. Leafs by Snoop will be a full spectrum offering of diverse strains including a high CBD option and mid to high-range THC options.

Aside from being a world-renowned rap superstar, Snoop Dogg is a very successful entrepreneur and a cannabis advocate. From starring in big screen box office hit movies to producing platinum record albums, a partnership with Snoop Dogg greatly increases Canopy Growth’s brand recognition which will help increase global market penetration.

The First of its Kind Facility

Canopy’s Tweed Inc. subsidiary recently received approval to begin using its new breeding area at 1 Hershey Drive in Smiths Falls, Ontario. This facility is the first of its kind in the cannabis industry and will position Tweed as the only licensed producer capable of breeding new products to specific cannabinoid profiles.

The breeding complex was designed to isolate pollen and male plants from the remainder of the facility. This facility will allow Tweed to launch two projects core to its vision of offering Canadians the largest variety of strains and consumption methods in the sector.

Tweed can also now begin to breed new varieties uniquely available in the Canadian regulated market. The company can also begin large-scale production of seeds for the legal Canadian market. In addition, Tweed had three more rooms approved as Schedule 3 rooms- a room where cannabis can be present. These rooms will make the overall product lifecycle more efficient.

Tweed previously projected 30 indoor flowering rooms in the 168,000 square foot licensed production area at its Smiths Falls facility. Based on the updated construction plans that will employ multi-level construction, the company is now targeting 39 similarly sized growing rooms, 12 of which are approved and operational with another 12 under construction targeting completion in the first half of calendar year 2017.

Across its three licensed production sites, Canopy subsidiaries are now licensed for 13,500 kg of dried cannabis production and 6,700 kg of cannabis oil production, representing over 7 million ml of finished cannabis oil.

Partnership Focused on Expanding and Increasing Market Share is Working

Last month, in an effort to further increase production capacity and expand its geographic footprint, Canopy Growth entered into a memorandum of understanding with the Goldman Group.

Under the agreed upon growth strategy, the Goldman Group plans to acquire new properties across Canada for the design and/or build out of new production facilities.

Through its affiliates, the Goldman Group owns approximately 3.8% of the outstanding shares of Canopy Growth and is the landlord of Bedrocan Canada’s properties.

Makes Strategic Acquisitions in the Quebec Region

Canopy Growth should see strong inorganic growth through the acquisition of Vert Médical, a Quebec -based ACMPR applicant. Canopy also acquired the lease and the right to acquire 90 acres of land and a 7,000 square foot indoor growing and office facility located in Saint-Lucien, Quebec.

Through its subsidiaries, Canopy has made several key investments in the Quebec province including funding for the Quebec Cannabis Registry, which gathers information on the demographic profiles of patients who use medical cannabis, the medical purpose for which they use it and at what dosage while tracking the effectiveness and safety of cannabis used in the management of symptoms associated with particular health conditions.

Its Tweed subsidiary also hired Adam Greenblatt as its Head of Quebec Engagement. Greenblatt is a pioneer in the cannabis community in Quebec and a co‑founder of Santé Cannabis, Quebec’s first and largest cannabinoid clinic.

In consideration for the acquired shares in Vert Médical, Canopy Growth will assume and immediately pay debt of approximately $500,000. In addition, Canopy Growth will issue up to 294,900 common shares if and when specific licensing and capacity expansion related milestones are achieved. Canopy Growth issued 58,978 common shares upon closing the acquisition.

Diversifies Holdings with the Acquisition of a Hemp-Focused Business

In conjunction with the Vert Medical acquisition, Canopy Growth also acquired a majority ownership stake of Quebec-based Groupe Hemp Inc. We are favorable on this acquisition as it strategically diversifies Canopy’s business in a distinct but complementary market.

Groupe Hemp is licensed by Health Canada to cultivate hemp and extract oil from hemp seeds. The company has developed a variety of brands, digital properties and hemp products ranging from skincare to pet care with a global market expansion strategy starting right at home in Quebec.

In consideration for the acquired shares in Groupe Hemp, Canopy Growth will issue 258,037 shares. Of the issued shares, 50% will be issued when the deal closes and the remainder will be issued by April 1, 2017. Canopy will also pay $300,000 when the deal closes and it will assume Groupe Hemp’s debt of approximately $276,000.

Outlook is Bright but Clouds Surround LPs

We favorable on Canopy Growth and we continue to view the company as one of the most attractive cannabis investments available. The company is well capitalized and led by a management team that continues to impress investors.

Although the shares have fallen a significant amount from its November highs, CGC.TO has bounced off its lows and the shares are trending higher. The company is still at risk due to the clouds surround the Veteran overpricing issue (as reported by Vice News) and we continue to monitor trading closely.

Cannabis investors should keep an eye on Canopy Growth as we expect to see the company benefit off positive legalization trends in Canada. 

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Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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