What is CannTrust Worth?

Bottom Line: An interesting scenario analysis looking at the stock value of CannTrust if the company does or does not lose their license and also if lawsuits claw back money raised in a recent capital infusion.

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Cannabis Scorecard Summer 2019

Bottom Line: The scorecard is full of important charts and metrics, providing you with a quick way to judge which companies may be worth an investment and which are better left alone or shorted.

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Cannabis Sales in Canada Hit $1 Billion Annual Rate

Bottom Line: Retail sales were up 15% in May to $85 million which is now a $1 billion annual rate even though it took 7 months to get there. Legal sales are approaching 20% market share and should hit 40% with the rollout of edibles in December. Moving beyond 40% share will require more competitive prices based on recent consumer surveys.

Sales Per Capita by Province

Source: GlobalNews.Ca, Statistics Canada

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FDA Speeding up CBD Regulatory Process

Bottom Line: There is both public and political pressure on the FDA to open the CBD market up to consumers. The fact that the FDA is speeding up its decision-making process will allow U.S. stocks with CBD exposure to expand distribution and sales even more rapidly in 2020.

Source: FDA

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Aurora Cannabis Offers to Supply Italy for only C$2.50/gram

Bottom Line: Aurora is willing to sell cannabis to Italy at cost because it believes there is value in having a seat at the table. Italy will eventually legalize medical cannabis and Aurora is hoping the government contacts they build through this contract will translate to a big license win down the road. This is a very uncertain bet but one we are not surprised the management team made looking at their history of aggressive expansion.

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The First Micro-Cultivation License has Been Granted

Bottom Line: According to the first licensee, the whole process cost him C$700,000 including the greenhouse and took 55 days from application to approval. He should be able to output at least 315 kg a year making him about C$1 million a year in gross profit. It looks like braving the Health Canada approval process will be worth it for micro-cultivators.

cannabis / marijuana supply / greenhouses - mj

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German Cannabis Imports Growing Fast

Bottom Line: Data from the Health Ministry shows imports are running at 7,000 kg a year, already 7% of Canadian demand. At this pace demand will be up more than 150% in 2019. Germany remains the most attractive cannabis market outside North America.

Marijuana - Germany - MJ

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Cannabis Fund Raising Has Gotten Harder

Bottom Line: Flowr’s canceled equity offering is the first failed capital raise we have seen in the last two years for a company above $100 million market cap. The weak stock performance this summer is making it hard for all cannabis companies to raise money. They need markets to open back up in the fall to feed the ongoing losses from rapid expansion.

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Supreme Cannabis Capitalizing on Brand Advantage

Bottom Line: Supreme is already one of the most popular and best-reviewed cannabis brands in Canada and the decision to buy instead of build extraction assets, a medical brand and CBD distribution in Europe was a smart move. Supreme is now well-positioned to transition their branding success to vape pens, edibles, and topicals come December.

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Weekly Marijuana Stock Performance

Cannabis stocks recovered a bit from a terrible prior week. The index was up 1.5% with Canadian stocks up 1.1%, slightly higher than U.S. peers up 1%. We are still waiting for U.S. MSOs to begin outperforming their Canadian peers as they have much better growth prospects. Legislative change in Congress could be the catalyst.

From the peak in March, cannabis stocks are down 28%, but still 28% above the lows in December 2018. We expect U.S. stocks to outperform Canadian names the rest of the year with better regulatory catalysts and growth prospects. MSOs are now flat for the year while Canadian growers are up 16%, but this trend should reverse as we move through the rest of the year.

The overall marijuana index outperformed the S&P and TSX by 2.8% and 1.5% respectively.

Source: New Cannabis Ventures

Market Outlook

Stocks will remain seasonally weak as we go into the fall, but U.S. stocks have the benefit of some big regulatory catalysts potentially on the horizon this year.

Canadian LPs are still stuck in a stagnating legal market, making it hard to show the revenue growth investors are expecting. LPs are showing zero 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.

Longer-term, with the Canadian market legalized, we expect retail and wholesale price compression or unsold inventory from a legal oversupply by the end of 2019. Falling cannabis prices or an inability to sell all of what is grown will pressure producer stocks later in 2019 or early 2020. After a shakeout, the remaining stocks will be better positioned as long-term buying opportunities.

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