Is MedMen Effectively Bankrupt?

Bottom Line: With a balance sheet that looks like MedMen ran out of cash in August, investors need to be asking themselves, is MedMen effectively bankrupt?

We went digging and discovered the truth. It’s not pretty….

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Cresco Repricing of Select has Implications for All Pending Cannabis Mergers

Bottom Line: We think the terms of this deal are now a benchmark other companies will be looking at closely as they decide if deals signed earlier in 2019 will go through and at what price.

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Why Green Growth Brands May Not Survive Through May

Bottom Line: Similar to the precarious situation MedMen finds itself in, Green Growth has borrowed too much and is struggling to find the cash to pay back loans coming due Nov. 15 and May 17. We lay out the challenges ahead and why the stock is worth 75% less than where it trades today, at best.

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Juul is Giving Vape Companies a Bad Name

Bottom Line: When the largest vape manufacturer in North America is allegedly willing to ship tainted products to consumers, should the industry be surprised customer trust is low. The industry has an image problem that needs fixing if it wants to see continued growth in higher margin cannabis oils.

mj - weed vaporizer  Read more»

Regulations Rarely Change Consumer Behaviour

Bottom Line: This article is a great example of how fluid consumer demand is. Regulations fail time and time again to change consumer’s behaviour (think prohibition). In the case of the black market, only free market forces will convert the majority of consumers to legal buyers. Marijuana products - vape - mj

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Mexicans Will Have to Wait a Bit Longer for Legalization

Bottom Line: Conflicting business and religious interests have pushed off the expected vote to legalize recreational cannabis in Mexico a bit longer. These delays are typical of what we will see in Europe and elsewhere as cannabis legalization marches forward.

Is marijuana legal in Mexico?

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AgraFlora Now a Major Supplier to Germany

Bottom Line: AgraFlora’s purchase of German distributor Farmako now make it a top 5 supplier to the German market. With the Canadian market oversupplied, having a distribution channel outside Canada is going to be crucial in 2020. The other major Canadian distributors are Aphria, Aurora, and Canopy Growth.

Source: AgraFlora

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U.S. Public Opinion of Cannabis Legalization is at a Tipping Point

Bottom Line: Slightly less than 50% of Republicans support cannabis legalization. Once a majority of Republican voters join the rest of the country in supporting legalization we will see opposition to legalization in the Senate fall away. We still think legalization is likely in the first year of the next Presidential term (2021).

Source: Gallup

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Aphria Receives Long Sought Cultivation License for Double Diamond Facility

Bottom Line: The Canadian cannabis market is about to get interesting. Aphria can now legally grow 255,000 kg a year at a cost below $2/gram all in putting it in the bottom 50% of cost structures across the industry. Growing costs are all important when judging potential profitability in the near term as wholesale prices adjust to compete with the black market.

Production Cost per Gram (as of October)

Source: SEDAR, Grizzle Estimates

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Weekly Marijuana Stock Performance

The cannabis sector gave back gains from the last few weeks falling by 6.7%. The U.S. MSOs outperformed Canadian names again, falling 4.5% compared to the LPs down 6.1%.

We’ve been watching the performance of the U.S. and Canadian stocks closely and U.S. stocks are definitely beginning to outperform their Canadian peers. Since the end of September, U.S. stocks are down 6.1% while the Canadian LPs are down 18%. Investors should begin building a long-term position in a basket of the top five U.S. operators.

An upcoming catalyst to watch is a UN meeting in March 2020 to potentially deschedule cannabis as a schedule 1 drug. If this goes through with America’s blessing it could set the wheels in motion for federal legalization sooner than later. The recent vaping crisis will also turn out to be positive for the legal industry as it will scare consumers away from black market vaping products.

The overall marijuana index underperformed the S&P and TSX by 8% and 7.8% this week and has underperformed by 49% and 43% YTD.

Source: New Cannabis Ventures

Market Outlook

There are now question marks whether increased sales from cannabis 2.0 products will lift the stocks. Capital markets are largely shut to cannabis companies right now which is a problem when the business models are built on rapid expansion and big deficits.

Price compression has arrived and will drive cannabis stocks lower over the next 6-12 months in our view without a new regulatory catalyst.

U.S. stocks will continue to outperform Canadian LPs from here in our view with more catalysts potentially on the horizon. At the first whiff of nationwide U.S. legalization, investors should pile into the largest MSOs and hold for the long term.

Canadian LPs are still stuck in a legal market growing slower than investors expected, making it hard to show the revenue growth embedded in their trading multiples. LPs are showing slow growth in 2019 and even with the 2020 rollout of edibles, vapes, and topicals growth is unlikely to exceed 150% in 2020. U.S. operators in comparison are growing revenue 150%-300% in 2019 and at similar rates or better in 2020.

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