Canada has been leading the global cannabis movement and this is a trend that we have been following for several years.
The Canadian cannabis industry represents a burgeoning opportunity and we are favorable on the growth prospects associated with this market. Over the next year, we expect to see Canada’s recreational cannabis market record massive growth especially after Health Canada approves the sale of cannabis oil products and cannabis infused products to this market.
When it comes to the Canadian cannabis industry, there is a lot to be excited about and one of the most significant trends has been the emergence of international cannabis markets. These international markets represent massive growth opportunities for Canadian cannabis producers and we are closely monitoring these emerging opportunities.
Although we are favorable on Canadian Licensed Producers (LPs), several of these companies have multi-billion-dollar valuations and we believe that selectivity is key when it comes to this sub-sector of the cannabis industry. In regards to Canadian LPs, we are favorable on companies that have significant catalysts for growth, a management team that is focused on creating value for shareholders, and an attractive valuation.
During the last year, we have seen significant consolidation in the Canadian cannabis industry and this is a trend that we expect to continue in the years ahead. When looking at this opportunity, we are targeting companies that look like an acquisition target as well as companies that are the acquirer.
Today, we want to highlight a Canadian LP that has been flying under the radar and that represents an attractive growth opportunity. The company, WeedMD Inc. (WMD: TSX Venture) (WDDMF: OTCQB) is trading at a significant discount to its peers and has significant catalysts for growth. The Canadian cannabis producer already has a significant footprint in Canada and is in the middle of a major expansion that is fully funded.
WeedMD: A Canadian Cannabis Leader to be Watching
During the last year, WeedMD has significantly advanced its fundamental story while de-risking its execution strategy. Last year, the company came under pressure after the merger agreement with Canadian cannabis retailer Hiku Brands was terminated. The decision to cancel this transaction had nothing to do with the business and was the result of Canopy Growth (WEED.TO) (CGC) overbidding on the Hiku asset. The share price weakness created a unique opportunity for investors and we found it to be a positive for WeedMD, which was awarded a $10 million break-up fee due to the failed agreement.
Following the termination of the acquisition agreement with Hiku, WeedMD came under pressure and we believe that this opportunity has been flying under the radar for some time now. Below, we have highlighted several reasons as to why we like the WeedMD story:
- A significant production footprint – The company is currently operating out of a 600,000 sq. ft. indoor facility and with over 130,000 sq. ft. licensed. WeedMD has fully funded 600,000 sq. ft. of indoor and greenhouse production as well as 100 acres of outdoor production bringing their potential output capacity to ~150,000 kg/annum by 2020.
- Secured strategic partners to support growth – WeedMD has multiple partnerships across the cannabis value chain (i.e. production, extraction, retail, technology, and distribution).
- Has an industry leading genetics library – The company has an industry leading genetics library with hundreds of unique strains. WeedMD has sold select genetics to international cannabis producers as well as Canadian LPs.
- Secured multiple distribution channels – WeedMD has secured Provincial agreements with Ontario, Saskatchewan, British Columbia, Nova Scotia, Manitoba, and Alberta. The company will have national distribution through its agreements with Shoppers Drug Mart, preferred suppliers, and significant direct-to-patient programs.
- Vertically integrated – WeedMD has a fully integrated platform for Canada’s medical and recreational markets. The company is focused on the development and production of value-added products and this represents an attractive opportunity.
- Capital Discipline – A key to the WeedMD model is to secure free optionality. Having raised very little capital company to other LPs, the company avoids dilutive transactions. It recently secured a non-dilutive $39M credit facility secured by its land and equipment from a major Canadian bank.
- Quality management – the WeedMD team was able to build one of the highest quality grow operations in Canada, did so in less time and with less capital, while focusing on building a long term business.
- Attractive Valuation – When compared to its peers, WeedMD is trading at a significant discount (1x 2020 Revenue) and we believe that this difference is transitory. The company has major catalysts for growth and has the ability to advance its story
WeedMD is Creating a Massive Platform for Growth
One of the reasons we like WeedMD is due to its existing and expanding cannabis operations. The company currently operates out of two licensed facilities in Ontario that have a combined footprint of 650,000 sq. ft of indoor grow with all of it producing by end of 2019 (50,000kg of indoor flower production). Both facilities are located on properties that offer significant room to expand and we are favorable on the growth prospects associated with the expansion opportunities.
The Canadian cannabis producer has fully funded its expansion that will increase its indoor production and also a future outdoor project adding 100 acres of outdoor production – potentially the first in Canada. Once this expansion is complete, WeedMD will be producing a significant amount cannabis with room to grow if successful – something not currently priced into the company.
The Aylmer facility is the smaller of the two facilities and is located on a 4 acre property and has a 26,000 sq. ft. production footprint. In April 2016, the facility was licensed by Health Canada to produce and sell cannabis (flower and oil) and to perform R&D and import/export cannabis.
The facility has a commercial extraction lab that has been producing high-quality cannabis extracts and we are favorable on this opportunity. WeedMD can expand this facility to support further large-scale extraction operations and increase the amount of revenue that can be generated out of the facility on an annual basis.
During the last year, one of the most exciting trends has been the increasing demand for cannabis oil, especially cannabis oil that is high in cannabidiol (CBD). This is a trend that we expect to become even more significant over the coming years as researchers learn more about the therapeutic value associated with cannabis. WeedMD intends to direct roughly half its future production to extraction adding significant margin expansion as it develops new higher priced products (more upside that is not currently priced in).
A Company with Significant and Visible Growth Potential
The Strathroy facility is significantly larger and is located on a 98 acre property that is owned by WeedMD. On the property, there is a 616,000 sq. ft. greenhouse, 100,000 sq. ft. of ancillary space, and 50 acres of workable outdoor cultivation space. The facility has state-of-the-art infrastructure and ample power to support further expansions. Earlier this month, WeedMD further expanded its reach by closing on the acquisition of an additional 60 acres of land located adjacent to its 98-acre property in Strathroy.
Currently, 10 grow rooms (total of 110,000 sq. ft.) have been licensed by Health Canada and are operational. Later this year, an additional 420,000 sq. ft. of greenhouse space as well as 27 acres of outdoor production are expected to come online – a major milestone for the Canadian cannabis producer. If operational, the company will be exiting 2019 at ~75,000 KGs of production. We see this approval as a key catalyst for WeedMD. Once WeedMD is operating at full capacity, the company will be generating massive revenues and have done so on one of the smallest budgets and fastest timelines compared with other Canadian LPs.
When looking at WeedMD, we see a Canadian cannabis producer that represents a multi-faceted growth story that has been nothing short of an execution story. While it has shown an high level of operational excellence, it has also been able to execute on its downstream distribution channels as well as making key partnerships to further the WeedMD story.
Secured Significant Distribution in Canada and Abroad
Despite its size, WeedMD has one of the most impressive lists of Canadian distribution channels amongst LPs. On the Provincial level, the company has been an all-star and has secured agreements with Ontario, Saskatchewan, British Columbia, Nova Scotia, Manitoba, and Alberta with plans to enter Quebec once its production profile increases later this year. This is a significant step for most LPs and shows its dominance in Canada’s recreational cannabis market.
One of the interesting ways that WeedMD has been able to differentiate itself is in relationship with seniors and long-term care providers. The company is the only LP to establish multiple preferred supplier agreements with long-term care providers and we find these relationships to be significant given Canada’s aging demographic. WeedMD also has a supply agreement with Shoppers Drug Mart, Canada’s largest retail pharmacy chain, and we expect this relationship to be a major value driver in future quarters as well as highlighting WeedMD’s legitimacy as a producer.
When it comes to the international cannabis opportunity, WeedMD has been a first-mover. The company was the first LP to sell and export genetics to Australia and is one of the only to sell and export genetics to Israel. WeedMD will be rolling out an international cannabis strategy which should act as another catalyst for the company.
The company also a partnership with Phivida, a California cannabis beverage maker, to begin producing their line of beverage products in Canada. We expect as October 17th, 2019 comes closer and a new set of rules are lined out for edibles and beverages in Canada that WeedMD will be able to explore this more deeply.
Highly Focused on the Canadian Cannabis Retail Market
The opening of Canada’s recreational cannabis market was a major development that created several significant opportunities for companies. One of the most exciting opportunities is related to the ownership of one of only 25 cannabis retail stores in Ontario which WeedMD was able to secure through its Pioneer Cannabis joint venture.
In early 2019, WeedMD formed a relationship with Pita Pit and launched Pioneer Cannabis Corp., a franchisee platforming providing future cannabis retailers with a variety of services including identifying locations, regulatory assistance, payment systems, marketing services, educational programs, and more. Pioneer brings an opportunity to entrepreneurs that are interested in entering the cannabis industry, but who lack the financial backing or the operational experience to own a retail cannabis store.
Pita Pit represents a strategic partner for WeedMD that was low cost and not capital intensive. Pita Pit has more than 600 stores worldwide, with 225 of them being located in Canada. The company understands the retail landscape giving WeedMD a strong partner for the future. According to the agreement, WeedMD owns 9.9% of Pioneer (the province maximum) with an option to increase its ownership stake. We believe that significant synergies can be found through the relationship of a vertically integrated retailer and producer.
An Opportunity that is Flying Under the Radar
One of the biggest potential catalysts for the Canadian cannabis producer will be the development and sale of high-margin derivative products. WeedMD plans to target domestic and international opportunities when it comes to this side of the business and we are favorable on this focus. We expect the company to make a major announcement regarding its extraction plans, allowing it to extract high quantities of cannabis in house for future products / off take agreements.
The WeedMD will always be hedged with a strong support from their medical cannabis users. This the beginning WeedMD has been patient focused. There are major medical cannabis markets popping up all over the world which WeedMD has ability to capitalize on. The company maintains world-class library of medical cannabis genetics and that will hold increasing value as the world rolls out new grow operations and other companies realize not all cannabis is created equal. Companies that want access to high end genetics will have partners like WeedMD, another significant opportunity.
During the last year, WeedMD has significantly advanced its fundamental story and we are favorable on its growth prospects. When compared to its peers, the company has an attractive valuation for state-of-the-art cultivation facility, first mover outdoor potential, large distribution network and many options for growth in retail, technology and international expansion. We believe that this opportunity has been flying under the radar for too long and is due to re-rate.
To learn more about this burgeoning Canadian cannabis producer, please email firstname.lastname@example.org.
Pursuant to an agreement between StoneBridge Partners LLC and WeedMD Inc. we have been hired for a period of 180 days beginning April 22, 2019 and ending October 22, 2019 to publicly disseminate information about (WMD) including on the Website and other media including Facebook and Twitter. We are being paid $6,000 per month (WMD) for or were paid “ZERO” shares of unrestricted or restricted common shares. We own zero (0) shares of (WMD), which we purchased in the open market. We plan to sell the “ZERO” shares of (WMD) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (WMD) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.