Description

Short Canadian LPs versus US MSOs

Recommendation: Going long high quality US MSOs vs. short overpriced Canadian LPs

• Given the disconnect in relative valuation combined with superior growth prospects and catalysts on the horizon for the US sector, I advocate going long US Multistate Operators (MSOs) versus short Canadian Licensed Producers (LPs), utilizing a basket approach to better diversify risk 
• Long basket of US MSOs – specifically Curaleaf, Cresco and GreenThumb
• Short basket of Canadian LPs – specifically Aurora, Cronos and Tilray

Sector Outlook

• The Cannabis sector is proving itself as a real and growing sector
  • Unlike Bitcoin, Cannabis is tangible, and produces consumable products
•  These products have much greater potential market than most people think
• Cannabis and related products can be used not only for traditional medical needs such as seizures, glaucoma, multiple sclerosis, appetite & chronic pain issues in patients with cancer/AIDS (particularly as alternative to Opioids), but are also very effective treatments for less serious (and much more common) “lifestyle” issues.
• Certain strains dull the senses to promote relaxation which can help with insomnia, and anxiety.
• Other strains are more practical in terms of productivity and social settings (such as promoting interaction/creativity).
  • Contrary to the common stereotype, this ultimately allows users to be MORE functional.
• Displacing the illegal/black market proves underlying consumer demand exists
  • The global black market for cannabis is estimated to be ~$140-160B in market value, with the US black market believed to be ~$40B in market value
    • The legal market is only 1/10th the size of the illicit market
    • According to BDS Analytics, the total global legal market is currently ~$15b in 2019, up from ~$11b in 2018, and is expected to grow to over $40b by 2024.
• Over time, the legal market will not just displace the illicit market but also grow overall demand.
• The combined markets for both the US and global are expected to roughly double over the next ~10 years[1]
  • US Cannabis opportunity is estimated to be anywhere from $30-100b in the next 5-10yrs
•  For contrast, this compares to alcohol which is over $200b annual market in the US alone (~$1 trillion globally)
• Usage rates will increase as associated stigmas and other obstacles continue to erode[2]
  • In terms of penetration, the average patient penetration rate of all US states that allow medical marijuana is estimated ~2-2.5% vs. closer to ~4-5% in the higher use states.
  • ~9%–10% of the adult population in the US consumes cannabis at least monthly according to the National Survey on Drug Use and Health (2016)
    • According to a report[3] published in 2018 by Colorado’s Dept of Public Safety, 15.5% of adults reported marijuana use in the past 30 days, during 2017, compared to 13.6% of adults in 2014. In 2017, 7.6% of adults reported daily or near daily use, compared to 6% in 2014
    • Higher income segments of the population such as Baby boomers and Gen X will be next to join in, increasing both penetration rates and usage rates of legal cannabis
• Advances in technology make products more attractive to prospective users for both medicinal and recreational purposes as they increase feasibility and ease of use
• New products will not only generate increased interest and demand, but are also accretive to margins
• For instance, Vape is better than smoking in terms of both health and convenience, meanwhile edibles and beverages will further open the door to new users
• More advanced products and delivery systems such as transdermal (creams/patches) and sublingual are already being launched
• Micro-dosing is another important development
• CBD and other cannabinoids have great long term potential; see below for more detail on this.

   

• In terms of overall progress, Canada is ahead of the US at the moment, but the overall investment opportunity in the US is far more interesting.  The US market is already outpacing Canada in terms of sales and growth rates, and is poised to continue to accelerate[4]
• With a population of ~330m the US is 9-10x larger than Canada’s (~38m) and certain states such as California offer arguably greater potential than Canada and many other countries
  • Given CA’s population of nearly 40m and status as the 5th largest economy in the world, it has enormous potential. This also furthered by the fact that CA functions as a trend setter in terms of social/pop culture and Hollywood, etc.
  • The most recent data from BDS and Arcview expects that in 5 yrs, 13 US states will each be over the $1b in annual sales threshold (together making up ~$24b or ~80% of the estimated US legal market of $30b  in 2024)
  • Given CA’s population of nearly 40m and status as the  5th largest economy in the world, it has enormous potential. This also furthered by the fact that CA functions as a trend setter in terms of social/pop culture and Hollywood, etc.
    • CA alone is expected at $7.3b, followed by CO at $2b, FL at $1.9b, NY at $1.7b, MI at $1.5, AZ $1.5, NV $1.4, WA at ~$1.3, MA at $1.2b, IL at $1.1b, and NJ, OR and MD each at just over $1.0b

• Both countries are also far more advanced than the rest of the world in terms of cannabis.
• Europe is touted by many Canadian LPs however despite its large population; Europe is likely to grow much slower than the US due to a variety of factors ranging from macro issues such as regulations, demographics and economics, to more nuanced issues including consumer behaviors and product/brand development in the European CPG space.
  • Canopy’s recent results may already illustrate this as international volumes disappointed.
    • Mgmt attributed this Canadian supply issues and the decision to focus on domestic marketshare, but that seems somewhat suspect given the relative delta in ASPs (Canadian ASPs per gram were ~C$7-8 vs. +C$13 for international)
  • Europe also faces competition from exports from a variety of other regions, including low cost exporters in Latin America and even Africa (Lesotho)
• While skeptics think full legalization is still years away, public support has continued to increase. More importantly, there are other near term regulatory catalysts, including numerous pieces of proposed federal legislation that would help the industry achieve more legitimacy and secure better access to banking and capital etc.
• In the US, cannabis is legalized for medical use in over 30 states and for recreational use in 10 states (increasing to 12 including IL and NY), plus DC, and opinion polls indicate increasing broad support for legalizing marijuana over the last few years
• Gallup indicating that ~65% are in favor of Federal legalization (up from ~50% in 2010-2011 and ~60% in 2015) and includes ~75% of Democrats, 55% of republicans and ~70% of independents.
  • Support is consistent across geographic regions of the US, but varies somewhat by age with 75% of those age 18-34 in favor, as well as a majority of those 35-54 and over 55 also in favor (at ~65% and ~55% respectively)
• The most notable examples of regulatory catalysts for US MSOs are the ‘Secure And Fair Enforcement’ (SAFE) Banking Act and the ‘Strengthening the Tenth Amendment Through Entrusting States’ (STATES) Act.
  • Currently US based businesses that touch the plant are effectively banned by most banks, as the cost and compliance with existing AML laws makes them not worth the headache and cost for a FDIC insured bank.
  • Cannabis transactions are currently defined as illegal under federal money-laundering rules. In 2014, the DOJ issued a memo deeming that issues related to this with legal state businesses would be a low priority, and FINCEN also issued guidance related to these accounts.
    • Still for financial institutions willing to engage these clients, the guidance requires extremely burdensome due diligence requirements in terms of tracing the flow of cash both into, and out of the client’s business, verifying compliance with state laws and filing numerous Suspicious Activity Reports (SARs) with FINCEN.
  • This creates both operational and financial issues for these businesses as they are forced to typically utilize an inefficient cash only model that has increased costs or pay higher fees to local banks and credit unions that are willing to take the risk.
    • Further they are prevented from obtaining to credit and face obstacles with other transactions such as real estate and insurance. 
• The STATES Act would not legalize Cannabis on a federal level but would clarify the Federal Govt’s position that each state can regulate the industry without concern for federal interference.
• The STATES Act would also alleviate taxation issues[5] and improve access to financial services
• Investors believe that short of full legalization this act would resolve a key obstacle that currently prevents both institutional capital and further M&A.
• Removing Marijuana from the DEA’s Ultra Restrictive Schedule I Category is expected to take a bit longer, but this opens the door for a more widespread research and scientific studies
  • Further progress may be achieved with action from either the executive or judiciary branch[6]
• CBD[7] via Hemp extracts and other non-psychoactive cannabinoids[8] are expected to add another $3-5b over the near/medium term and $5-15b longer term to the US market
  • Most CPG companies are waiting for guidance from the FDA and several big box retailers have already announced plans to launch offerings or disclosed that are already exploring options related to the CBD opportunity.
• Given this growth profile and the recent pullback, US MSOs make for a very opportune investment
• The sector should continue to be volatile near term, but over the longer term has great potential and thus makes sense from the long side
  • Investors should focus should be on companies with best balance sheets who are poised to be world leaders in knowledge, technology and brands
• US names have the most upside given the lack of institutional involvement as most institutions investors are still prohibited from investing in the sector, especially in the names with domestic plant touching assets
• Given they operate in only fully legal markets, Canadian LPs not only benefit from being able to solicit investments and partnerships with large CPG companies,  they also benefit greatly from investment by large institutional investors (Vanguard, Morgan Stanley, JPM and others)
  • However this also means that they can’t go directly into the US under the existing legal framework, or they risk losing their current institutional support (given listing requirements with the TSX/NYSE) as well as partnerships with public multinational CPG companies.
• Once these obstacles disappear, US MSOs will benefit from a wider investor base and a lower cost of capital
• Although Canadian LPs continue to trade at a premium to their US counterparts, acquisitions of the larger MSOs seem less and less likely given the current dynamic[9]
• CAD LPs’ ability to acquire larger higher quality US assets continues to dwindle as US MSOs grow in size/market cap and as investors are increasingly aware of this disparity in relative valuation.
• Stock based deals are much less attractive except for the largest and most high quality LPs.
• Cash deals also face obstacles given many CAD LPs have exhausted their cash by ramping build outs to increase capacity ahead of the recreational market over the past year or so, and the availability of debt financing is still nowhere as robust as other sectors.

US MSOs

• In the US, the largest MSO’s are rapidly expanding their footprints to cover the lion’s share of the legalized market both in terms of population and states/geographic areas
  • Despite having significantly more room for growth, MSOs currently trade a substantial discount to their Canadian LP counterparts.
  • The Average FD Market Cap/2020 Sales for Large US MSO’s ~4.5x, vs. ~14x avg for Large CAD LPs
  • This gap is even wider between the top-quality US MSOs and the most overpriced CAD LPs
    • The Average FD Market Cap/2020 Sales for CURA, CL and GTII is ~5.3x vs. ~25x for ACB, CRON and TLRY
    • On an FD EV/EBITDA for 2021, CURA, CL and GTII together average ~12x vs. ~42x for ACB, CRON and TLRY
  • MSOs also have more positive catalysts on the horizon in terms of friendlier regulation and increased access to capital
• The most probable path for regulatory developments likely involves the passage of the SAFE Banking act in the near term, followed by the STATES Act in months or a year later.
  • Marijuana’s removal from the DEA’s Schedule I category seems a little further out.
• CAD LPs meanwhile face some relatively restrictive regulations, for instance the recent Health Canada (HC) announcement regarding finalized regulations of edibles which limited THC dosing. This will likely make the edibles category somewhat less attractive to both consumers and manufacturers given it increases costs and has a more limited appeal in terms of products etc.
• Key specific risk here is that US MSOs could potentially lose access to capital markets if regulatory or listing requirements changed.

• Curaleaf is an example of a top quality Multi State Operator (MSO), similar to a US version of Canopy, given its strong footprint and high quality management/sponsor (Boris Jordan)
• Cura’s recent acquisition of Select will position the PF company as one of the dominant leaders in the US in terms of scale (both in terms of revenues and operational footprint) and brands
• For Q1’19 PF Revenue was ~$300m on an annual run rate basis vs. MMEN at ~$230m (including Pharmacann), Harvest at $204m (including Verano), GTII at $190m and Cresco at ~$140m (excluding Origin house)
• The deal combines CURA’s strong eastern presence[10] with Select’s Western presence[11] and presents an opportunity for synergies given the overlap of CURA’s production facilities in CA, NV and AZ with Select’s footprint. CURA’s Mgmt expects to be able to reduce Select's input costs by 50%, and reduce processing costs by 25%.
  • The combined company will have over 1m sq feet of production and operational space.
• In terms of brands, Select is estimated to have ~$270m in cumulative retail sales per BDS analytics data. The nearest competitor Slang Worldwide (SLNG CN) had ~$185m in cumulative sales for its vape product. BDS data shows most of other significant US cannabis brands being in the range of ~$50m.  Further, Select’s network includes ~900 retail locations.
  • CURA also was the first of the US MSOs to launch a CBD strategy and sign with a major national distributor (CVS). It has a skincare line and a pet oriented product (named ‘Bido’)
  • Balance sheet is solid with $172.6m of cash as of Q1’19 and total debt (ex-leases) of $86m[12]
• Given the above, CURA is a long at ~C$9-11 (~US$3.8-4b market cap) and a short C$14-15 (~$US6b market cap) depending on market conditions and view of market.

• Other quality MSOs include Cresco Labs and GreenThumb, which both trade just over ~5x ‘20e Sales
• Cresco Labs (CL CN) is a MSO based in Chicago that began trading in December. The company enjoys a wide reach with its brands as their strategy is to focus on the 10-15 most populous states.
• Cresco is poised to expand once pending deals are closed and IL goes recreational
• Cresco also has strong positioning in young but desirable markets like IL and PA
• In April Cresco announced what was the largest acquisition of a public company operating in the US cannabis sector to date, agreeing to buy Origin House (formerly known as CannaRoyalty) in an all-stock transaction valued at $825 million.
• The Origin House acquisition will give them a strong position in California, where Origin operates as a distributor, manufacturer, cultivator and branding company.
• Cresco already has a formidable presence in CA in terms of retail partners
• Origin will also add significantly to Cresco’s proprietary brands
• Separate from Origin House, CL is also adding assets in NY, MA and FL

• GreenThumb (GTII CN) is another MSO based in Chicago, with wholesale and retail operations in IL, MD, MA, NV and PA. Along with wholesale activities in NV, CA, CO, and CT
• GTII is growing its footprint key states of CA, FL and IL, along with PA and OH.
• Its Q1’19 results were solid, coming in ahead of consensus on topline while showing good cost controls (SG&A was relatively stable QoQ despite the growth). This coupled with Mgmt commentary about remaining disciplined with acquisitions was commendable.
  • Longer term Mgmt is focused on the CPG brand side of the business.
    • Legacy GTII retail brand is ‘RISE’, and the company recently closed its acquisition in Nevada for Integral Associates (Essence Brand) which operates 3 stores in metro Las Vegas
    • Essence also gives GTII some CA retail exposure via retail licenses in Hollywood and Pasadena CA.

       

  • GTII closed on its acquisition of CBD Brand ‘Beboe’ during Q1

CAD LPs

• On the short side, the best opportunities are Canadian Licensed Producers (LPs) that are overvalued relative to both their Canadian peers and US MSOs
  • While the overall sector is overpriced relative to the US given the reasons mentioned above, Aurora Cronos and Tilray stand out as the most overvalued relative to both their Canadian Peers and especially versus US MSOs

• Aurora
• Despite its market share as the #2 in Canada, ACB has plenty of negatives and its incredibly hard to see past the relative valuation vs. US MSOs
  • On a sales to fully diluted market cap basis Aurora trades at ~13x 2020 revenue vs. US MSO’s which average ~4.5x
• Aurora has the weakest Mgmt of all large CAD LPs
  • Subject of a short report by Citron earlier this year
• Unlike other CAD LPs, ACB has yet to form any meaningful partnerships with either CPG or Pharma Companies
• The rumored deal with Coca Cola never came to fruition
  • ACB is seemingly underprepared regarding potential future beverage offerings.
• Subsequently Aurora reached a deal with Nelson Peltz to serve as a strategic advisor in exchange for options in ACB
• Although Peltz is highly regarded, and may indeed add value, the structure of the arrangement is in his favor and besides reputation he has little skin in the game (i.e. heads he wins, tails ACB loses)
  • It’s been over 3 months since Peltz partnership, with no results yet reported
• Aurora’s shares have trended back down toward to their levels prior to the KO deal headlines and will likely fall below C$8 unless an attractive deal is made
• As stated above, this seems unlikely given ACB’s trading history and current market cap
  • ACB’s market cap of ~US$7b likely rules out CURA and Cresco. GreenThumb is also probably too much of stretch at ~$2-3b (without accounting for a premium), leaving (maybe) only Harvest, MMEN and TRUL.
• ACB will likely soon have to raise additional capital for infrastructure investments that Mgmt is currently planning in Canada (as it continues to ramp supply and prepares for the launch of edibles and other derivative products,) along with associated increases in working capital and the continued international expansion
• Given this need, Aurora’s plans are particularly sensitive to its share price and capital markets conditions.
• The company currently has a base shelf prospectus of $750 and $400m in “at the market” equity distribution[13]

• Cronos looks extremely overvalued even relative to industry leader Canopy Growth
• On a sales to FD market cap basis, Cronos trades at an eye watering ~50x 2020 sales of US$130m vs. rest of CAD LPs Avg of ~14x (note, peer Avg ex-Cronos is ~9x, w/Canopy at ~17x and Tilray at ~13x) and vs. US MSO avg of ~4.5x (with higher quality CURA, CL and GTII at ~5.0-5.5x)
  • For perspective Cronos’s EV is larger than TLRY despite being half the size in terms of revenues
  • Recall, as stated above CURA is already at ~US$300m run rate as of Q1’19 while the other large US MSOs are also above this level.
• Even the rosiest projected sales estimate for 2023 still translates to a ~10x sales/mkt cap multiple given Cronos’ current price
• Hard to justify this valuation just because of Altria’s involvement
  • Altria can be just as much of a liability as an asset for Cronos given the stigma around tobacco stocks and related obstacles for investors that have ESG limitations.[14]
    • Even the JUUL investment by Altria can be a double edged sword given the scrutiny this product invites due to its popularity among underage/minors
      • This has increasingly weighed on Altria’s shares recently (with MO shares down to levels not seen since 2015) and likely crimps Mgmt’s ability for a full takeout
• Cronos’ Mgmt has been flagged for mishaps before (several product recalls 2015, 2017 and 2018)

• Tilray is overpriced as well, particularly as its CEO recent scaled back expectations about the timeline for reaching profitability
  • On a sales to FD market cap basis Tilray trades at 13x ‘2020 sales, vs. the CAD LP peer Avg (ex-Cronos) of ~9x.
    • On an EBITDA basis, TLRY is even more expensive relative to its peers
  • Earlier this month, TLRY said it no longer expects to reach positive EBITDA by YE’19, but now expects to achieve this for at least another year (by 2020 at the earliest)
    • Tilray does not give specific guidance but implied targets of 3-4x 2018 sales of $43 imply 2019 revenue of ~$140-170m vs. current consensus of ~$180m.
    • Mgmt’s LT margin targets of >50% gross margin and >25% EBITDA margin also seem overly optimistic, given their gross margins trail the peer average over recent Qs and especially after considering the updated expectations mentioned above
    • Tilray’s Mgmt has been criticized for its under capacity, particularly after Mgmt incorrectly predicted the near term oversupply[15]

       

  • The days of Short squeezes are long gone as there is much more float available and the hype is gone
    • Tilray shares won’t be approaching $100 and certainly not $200 anytime soon.
  • The recently proposed merger between Tilray and its largest holder, Privateer, boosted TLRY’s share price as it removes the threat of these shares flooding the market over the summer, but Privateer’s 75m shares (77% of TLRY shares OS) still remain an overhang in the medium term.[16]
    • The deal allows for marketed offerings and/or block trades to institutional/strategic investors during year one, with the approval of TLRY. The remaining shares are subject to a staggered release during the 2nd year.
      • Privateer’s shares could still come out maybe through a reverse merger
  • Partnership with Novartis’ Sandoz Canada seems to lack much notable progress[17]
    • Bulls argue that this partnership should give Tilray an advantage in terms of capturing market share in the new medical markets, yet comments from Novartis’ CEO last month downplayed this business, as he noted that cannabis is not a focus for the company. 
    • Further give the Sandoz division has been a pain point for Novartis as it faces continued difficulties, and could be divested or split-off from Novartis (thus losing part of the name appeal)
      • The unit has been the subject of rumors and speculation that it might be sold off as NVS has divested other units and numerous assets (including some from within Sandoz) over recent Qs.

• Note we are more hesitant to short Canopy at current levels
  • Canopy is not only the most liquid, but also (by far) the highest quality CAD LP given its head start, smart mgmt, partnership with Constellation Brands (STZ) and the Acreage deal[18]
  • Canopy might become a short candidate above C$60-70 depending on view of market and conditions (translates to market cap of ~US$16-18b)

Risks

• US MSOs lose access to capital markets (due to regulatory or listing requirements)
• Aurora secures a meaningful strategic partnership with a large CPG (or Alcohol) Company
• Takeout of Cronos by Altria
• Tilray experiences reflexive short squeeze physiology

Comps

[1] Per BAML and BDS, Cannabis’ total addressable market (TAM) for legal + illicit cannabis is estimated at $166b globally, growing to $265b by 2032.  The US at 34% of global cannabis TAM, followed by Europe 25%, Asia 21%, Africa 9%, Latin America 6%, Canada 3% and Oceania 2%. Barclays estimates that global cannabis figure could increase to $272b by 2028 (Barclay’s European Consumer Staples Report, Sept 2018). Cowen analysts estimate the U.S. market opportunity is valued at ~$40-50b currently and expect it to grow to $80b by 2030 (assuming national availability)

[2] Recent legislation passed in NYC and several other cities and states bars employers from testing for marijuana. This will likely reverberate through numerous industries that once barred job applicants from using marijuana (for instance the financial services market), while over the longer term a full legalization on the federal level will also lead to workplace safety rules being rationalized. Recall marijuana was scapegoated during Reagan’s ‘War on Drugs’ following a spat of high-profile rail and truck accidents. This led to regulations that increased testing requirements in businesses that deal with Government contracts or in fields such as transportation/construction/etc. The impact of cannabis on safety is likely exaggerated, as unlike alcohol, proving causation in such scenarios is much harder (since marijuana remains in a user’s blood long after the “high” has worn off). Scientific studies into the impact of cannabis on safety have been stymied, as congress barred agencies such as the NHTSA from expending funds on this type of research.

[3] “Impacts of Marijuana Legalization in Colorado,” published by the Division of Criminal Justice within the state of Colorado’s Department of Public Safety, October 2018.

[4] The legal Canadian Rec market is estimated to be C$1b in 2019 (Canadian medical sales were C$600m in 2018) and is expected to grow to C$12b by 2025 according to Cowen. US state licensed sales were ~$7b in 2018

[5] Under section 280E of the US federal tax code, the only expenses plant-touching marijuana businesses can deduct for tax purposes are the cost of goods sold, which essentially results in cannabis businesses being taxed at the gross margin level

[6] Even without congressional action, a recent lawsuit against the DEA may force the federal bureaucracy to reschedule marijuana down from a schedule 1 drug (which is the most restrictive category alongside the likes of heroin and meth) toward at least a schedule 2 (which is a category for drugs that have high potential for abuse but some beneficial uses, and includes the strongest opioids and cocaine) if not further de-scheduled toward a 3 or 4 (less addictive categories that include sleep aids and benzodiazepines such as Ambien and Xanax, etc). The DEA recently re-scheduled CBD to schedule 5 following its approval of Epidiolex, which effectively “admits” that cannabis related products have true medical use.

[7] CBD is a non-psychoactive cannabinoid found in cannabis, and it is often taken to treat anxiety, inflammation and arthritis (think alternative to Aleve or Ibuprofen). According to a 2017 report by the World Health Organization, it hasn’t exhibited any potential for abuse or dependence, and there is no evidence of any public health-related problems associated with its use. Preliminary studies indicate CBD’s effectiveness in reducing anxiety, while several clinical trials are underway to test CBD’s ability to treat several ailments and symptoms, such as how it affects mood and the impact on nausea associated with chemo. Other even data suggests potential with GI disorders and opioid addiction withdrawal. Note, FDA regulations do not allow CBD-infused foods or beverages to enter interstate commerce, nor does it allow CBD to be marketed as a dietary supplement. This is expected to change near term as recent hearings are being conducted on the topic and CBD is already utilized as the API in FDA approved drugs such as Epidiolex (approved to treat rare forms of seizures in children). Almost 7% of Americans polled in January by Cowen & Co. reported using CBD as a supplement. The European Food Safety Authority considers it a novel food, meaning the agency has to perform a safety risk assessment of any product containing CBD before it can be sold in the EU.

[8] Besides THC and CBD, the cannabis plant contains over 100 other chemical compounds known as ‘Cannabinoids’  Other popular cannabinoids such as cannabinol (CBN), cannabigerol (CBG), cannabichromene (CBC) and Cannabidiolic acid (CBDA), which have a range of potential therapeutic applications such as helping with sleep, inflammation/pain mgmt. and anxiety, but do not get the user high like with THC. Less common cannabinoids like cannabicyclol (CBL), cannabivarin (CBV), cannabichromevarin (CBCV), cannabielsoin (CBE), and cannabitriol (CBT) are generally found in trace amounts of the cannabis plant, and their medical value has not been studied in any form to this point. R&D into virtually all of these has been obstructed by cannabis’ schedule 1 rating.

[9] M&A activity began in late 2015, when Canopy Growth (then known as Tweed) acquired Bedrocan Cannabis, marking the first merger among publicly traded LPs. Cross border transactions, particularly from Canada into the US have proved difficult. Canopy’s deal to acquire Acreage was the first large cross border acquisition but employed a very unique structure to satisfy listing requirements. Prior to this deal the trend was in the opposite direction as CAD LPs looked to shed US assets or restructure ownership to satisfy concerns over listing requirements (for example Aphria and Liberty Health Sciences).

[10] Curaleaf has strong positions in high barrier states on the East coast, namely FL, MD, NY and MA, along with CT, NJ, and ME. The company is in the process of acquiring licenses in PA and OH. See link for PF footprint. https://d1io3yog0oux5.cloudfront.net/_12849f23e1be9c9b73c4e153741a3157/curaleaf/db/295/2345/pdf/Piper+Jaffray+Investor+Presentation_Final+-+Copy+-+Copy+%281%29.pdf

[11] Select has a strong presence in CA, NV, OR and AZ. Select’s products have #1 market share positions in CA, OR and NV, and a #2 position in AZ. It also has a presence in Michigan and plans to expand into Colorado in 2019.

[12] Total debt of $128m including leases. Note, CURA has used some of this cash to fund further acquisitions recently including $18m cash for Emerald dispensary in AZ, $20m (w/$5m cash upfront and further breakdown not disclosed) for cultivation & processing licenses in Ohio and the $70m (including $25m cash) deal for NV assets (Acres) announced in March. 

[13] On May 15th Aurora entered into a sales agreement whereby the selling agents will sell up to US$400m of Aurora shares at the market from time to time at Aurora’s discretion over a period of 25 months

[14] Meanwhile the current trend in the industry is to adopt an ESG friendly framework that will address issues ranging from greenhouses gas emissions to product safety to ethical conduct, in hopes that it will attract even more ESG conscious investors such as pension funds and other global institutional investors (the majority of which are now including ESG criteria in their investment decisions, according to EY). Some participants also believe that another benefit may be getting regulators to trust the industry more and take a lighter touch in the future.

[15] In Mid-May, Tilray said it now doesn’t expect the Canadian market to see a balance in supply and demand for another 1.5-2yrs, vs. its prior prediction of 1.5yrs made in March

[16] For the first year after the merger closes, the 75 million shares currently held by Privateer will only be released to institutional investors or large companies looking to make a strategic investment in the industry, and then only at the discretion of Tilray. In the second year, the remaining shares will be subject to a staggered release.

[17] Tilray has had a partnership with the Canadian unit of Novartis’ Generics drug subsidiary Sandoz. Tilray and Sandoz Canada have been working together since March 2018 and extended this partnership last December.

[18] Recall, On April 18, Canopy and Acreage entered an agreement that grants Canopy the right to acquire 100% of Acreage, with a requirement to do so once cannabis production and sale become federally legal in the US, subject to approval of shareholders in each company. Canopy paid $300m upfront and will exchange 0.5818 shares for each Acreage share. In the interim, Acreage will continue to be run independently of Canopy, and can continue to conduct acquisitions, but will benefit from a zero fee brand/IP licensing agreement[18] with Canopy. Canopy also has further optionality via its 27% stake in Canopy Rivers, exchangeable shares in TerrAscend, and warrants in Cannabis Branding focused Slang Worldwide (SLNG CN).

Catalyst

• Federal Legalization

• STATES Act

• SAFE (Banking) Act

• Tax Changes (Section 280e)

• Under section 280E of the US federal tax code, the only expenses plant-touching marijuana businesses can deduct for tax purposes are the cost of goods sold, which essentially results in cannabis businesses being taxed at the gross margin level

• Relaxed Listing Requirements for NYSE and TSX

• Legalization by other countries, particularly Mexico

• As seen by Canada’s legalization, legalization of marijuana by neighboring or other developed countries puts increased pressure on US politicians to act.

• Mexico seems to be next in line after a controversial supreme court decision last year which effectively struck down prohibitions on recreational cannabis coupled with the new President who supports full legalization