During the last month, the cannabis sector has been trending higher and these movements have caught the attention of the mainstream media. We have been closely monitoring this trend and have been keeping an eye on the companies that have not benefited from the recent rally.
Today, we have issued an update on a Canopy Growth (WEED.TO, CGC.US) and Canopy Rivers (RIV.V) portfolio company, LiveWell Canada (LVWL.V), which has been nothing short of an execution story during the last quarter. The company completed the initial phase of its cannabis greenhouse facility for licensing and also made a number of exciting announcements that position it to be a leading global player, in the cannabidiol (CBD) from hemp space.
The Global CBD Opportunity
CBD is the same molecule whether you get it from cannabis or hemp, however getting it from hemp is much cheaper and hemp has larger global potential due to less stringent regulations than cannabis. The CBD opportunity is massive and has been gaining significant attention recently as regulations regarding hemp and CBD are quickly relaxing globally. Brightfield Group just increased its estimate of the size of the US market to $22B by 2022, but the global market is multiples larger than this.
Several European counties have already legalized hemp and in north America, 2018 seems to be the year of legalization with Canada legalizing hemp next month and the US expected to pass the 2018 Farm Bill in the next few weeks. The World Health Organization also recommended that CBD be descheduled across 194 nations. These regulatory changes could pave the way for CBD to become a legal natural supplement globally. This is not lost on the big CPG companies who are actively exploring opportunities to create new products simply by adding CBD to products they already sell.
These changes combined with increased awareness of the dangers of opioids and other medications have resulted in demand for CBD products to explode, as people realize the health benefits associated with CBD in assisting with pain, inflammation, mood, and various other ailments. The best part is, CBD has all these benefits yet it is not psychoactive, meaning it does not get you high!
For the past several years, LiveWell has been quietly building a platform to capitalize on this opportunity which it has recently unveiled. The company is an early mover in the CBD market and this is just starting to pay off.
The LiveWell CBD from Hemp Opportunity
LiveWell announced a major milestone by signing its first CBD supply agreement in Brazil, the largest country in South America and the 8th largest global economy. The agreement is for at least 5,000 kilograms a year at US$7,000 per kilogram over the next 12 months (US$35m revenue). This is the largest CBD supply agreement we’ve seen from any company to date. We are favorable on this agreement which contains annual renewals for up to five years
The agreements represent 20% of the initial expected CBD supply to be extracted from the industrial hemp biomass secured by LiveWell. The company is in active discussions regarding the balance of its CBD supply for 2019 and we expect to hear more announcements soon.
Last month, LiveWell secured 1,000 acres of Canadian industrial hemp biomass for the purpose of extracting and producing cannabinoids (including CBD). Using current extraction technology licensed to LiveWell, the company anticipates extracting 25,000 kg of CBD isolate. At the estimated market value of this product, LiveWell trades at approximately 1x 2019 revenue.
This was a very strategic purchase and it is already paying dividends to the company. As part of the agreement, LiveWell has an option to buy an additional 1,000 acres of Canadian hemp biomass and we expect to see this option exercised.
Completes the Initial Phase of the Artiva Facility
Earlier this month, LiveWell announced the completion of the initial phase of the Artiva facility in Ottawa for licensing. In cooperation with its partners Canopy Growth and Canopy Rivers, the company has prepared its Confirmation of Readiness (COR) package for submission to Health Canada to demonstrate its compliance with the ACMPR security requirements for the purposes of obtaining a production license.
The relationship with Canopy Growth and Canopy Rivers is significant and we are favorable on how the teams add value to LiveWell. Upon receipt of its production license, the company plans to immediately begin the next phase of expansion at the site. LiveWell anticipates being ready to begin production once the production license has been granted.
The Artiva facility is strategically located in Ottawa, Ontario and is located on a property that sits on 100 acres of land with 540,000 square feet of existing greenhouses and 200,000 square feet of hot houses. The location provides significant room to expand and we expect it to be a major value driver for the business.
A Well Capitalized Growth Story
LiveWell is well capitalized and well positioned to execute on the previously announced initiatives. In early September, the Canadian cannabis producer completed a $5 million non-brokered private placement at $1.25 a unit. We are favorable on the raise as it strengthens the balance sheet and the company intends to use the net proceeds for working capital and general corporate purposes.
An Underappreciated Opportunity
LiveWell Canada possesses the traits of an attractive cannabis and hemp CBD company. The company is led by a world class management team, has been executing on previously announced initiatives, has raised capital to strengthen its balance sheet and has secured among the best strategic partners in Canopy Growth and Canopy Rivers.
Although the company has been executing, the shares have not responded to the fundamental value that has been created. It is the only public company in the Canopy portfolio that has yet to make a significant move. We believe that the company is flying under the radar and find the risk-reward scenario to be extremely compelling at these levels.
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