The following is an excerpt from Green II: Spreading Like Kudzu, the inside story of the first German cannabis cultvation bid
It was very hard to miss by the third month of the year that cannabis public company math was very strange.
If not literally, did not add up.
There had been rumblings, in truth, in the European market since the events of October in 2018 when all of the major public Canadian cannabis companies descended, in mass, for a secret meeting in Germany with Health Minister Jens Spahn in Frankfurt.
But such realities were not just confined to Europe.
For all the projections and excitement, everywhere, this was an industry still under siege.
Forget the “new cannavistas” of the European continent. Solid resistance to the cannabis revolution even in “traditional” if not “established” markets was seen everywhere. For example, even in California, the granddaddy of “medical reform,” the vast majority of municipal jurisdictions had so far managed to ban the industry outright even post “recreational” legalization at the state level.1
So no matter the good news and all the massive investments flowing into the industry, if not public offerings on the New York Stock Exchange and new countries conquered by “first imports,” there were just too many questions about what was really going on behind the press releases and company shows of strength. In Canada and in Europe – if not U.S. markets beyond that. Indeed, the idea that the stock prices of most of the high fliers (Aurora, Canopy Growth and Tilray in particular) were “overinflated” was gaining in popularity in the blogosphere.
But where to look for evidence if not hard proof? Analysts with “other” market experience were hard to understand – or did not seem to understand market dynamics. They expressed their doubts, sure enough, but also were motivated less by truth than perception (the idea that drives all short sellers). Evidence was also (not unsurprisingly) largely absent in the company communications about quarterly success stories – except, naturally, when one knew where and how to read between the lines.
Such mandatory reporting, by contrast, was easy to find. For example, Canopy’s press release about its third quarter reporting (released on February 14, 2019) had, on its face, posted numbers that were impressive indeed.2
But what did “record-breaking” sales really mean in a world just opening to the possibilities of legal if not accurately tracked product if not driven by high costs (not to mention outrageous instances of price-gouging) on just about every front? Not to mention every jurisdiction. And what were the real details behind the numbers?
Those, certainly in both Canada and even more opaquely in Europe (which was a big part of the problem) were all out confusing. Furthermore during the last quarter alone, there had been many acquisitions – mostly by stock swaps, and this was a trend that had continued pretty much in a straight line since the beginning of the Canadian market.3 Namely, those who had gone public, played the PR game well and had managed to capitalize on retail investment and as of 2018, sin industry money, were in a position to buy out – or merge out the competition. The latter being the preferred option in a world where cash was king and did not flow equally to all at the table.4
Further, those who seemed to be making actual investments on the European side of the equation, were not rewarded equally. Why, in truth, would Tilray’s stock literally fly to hundreds of dollars for skipping out of the German bid altogether (to establish operations in Portugal), while Wayland was forced to sell itself to ICC after having its stock price continue to stay in single digits for being the only Canadian cannabis company to actually establish cultivation operations in country before the awarding of the much-stalled bid?
Labor costs notwithstanding, this was an interesting statement of the market itself, and the predilections if not predictions of those who actually were driving it. Particularly the month before the lawsuit against the German cultivation bid would (it was widely expected) be finally settled.
For this reason, valuations and stock prices if not the value of companies themselves were an increasingly hot topic this month, beyond the required quarterly reporting and moving news events beyond that.
As a result, March was when the rubber began to hit the road – although in truth “Judgement Day” at least for this year, did not come until late summer.5 And those companies who had been “playing the game” – were as a direct result – most in the cross hairs of the forces moving this spring. And that had magnified impact too.
All the large Canadian cannabis companies, by now at least, were very good at moving in a herd-like fashion. On just about everything. Here are just a few examples. Going public, early and where if not how. Buying patient numbers by merging with other companies short of cash. Expanding into new European, Australian and South African countries for patients and cultivation. Looking to cigarette and alcohol companies for expansion capital. Listing on the NYSE (or in Cronos and Tilray’s case the NASDAQ) after getting onto the TSX or another Canadian exchange first.
Examine the strategic activities of most of the Canadian high fliers over the years 2014 – 2019 and they all had a very similar pattern. And for a very simple reason. Such tactics worked fabulously at first. But when criticism about the lack of value creation or association began to surface in the fall of 2018, it quickly spread beyond just one firm. In fact, the impact of the Aphria short seller report actually affected all Canadian public companies in this space because of suspicions that this kind of creative accountancy was industry (or at least Canadian industry) wide. This is not a new issue – nor was this limited even to “potential bid winners” but rather all the higher profile companies now circling European sales.6
Nor was it in truth, much of a surprise, after a solid summer of scandals later this year, that pot stock prices took a hard tumble. Again.7
Yet for all the criticism that this part of the industry has endured (and there have been periods of stock slumps – including in the second quarter of FY 2018, when the short seller report on Aphria caused all the public Canadian companies to lose value, at least temporarily, this part of the “industry” does know how to do one thing extremely well.
That is not necessarily grow great weed.8
What they do know how to do is play financial games, concoct great PR, and time acquisitions or announce other significant developments with remarkably propitious adroitness. Such activities have, in turn, a predictable bounce effect on stock prices – just as bad news has the predictable, opposite effect. It was entirely possible to be justifiably bearish for the short term, no matter how bright the near future almost certainly was. And that too, had and continues to have, a buoyancy effect, no matter how bad the news was and still of course, can be.9
Certain parts of the industry, and certainly the people in it who know how to play the game, is still remarkably cloaked in Teflon.
For example, Tilray, just the year before, had timed its IPO on the NASDAQ during the summer of 2018, almost exactly the same date as Canada was supposed to start its recreational market (which was subsequently delayed until the fall).10 That fall, in October, several days after the German cannabis cultivation bid was supposed to close (but was delayed by yet another lawsuit), and right as Canada actually did launch its recreational market, Aurora went public in New York too, albeit on the NYSE.11
Here was the reality about the industry to date that this perspective also exposed. Investors could only hope to make a profit on their pot stocks if they shorted them (betted against the market or arbitraged the volatility of the entire industry) rather than holding on to them. This created, by definition, a highly fluid situation based on stock churn rather than real value. And a truism of this kind of market is that what goes up must come down.
The giant exception, as the biggest Canadian producers and those who made their livings promoting Canadian public company stocks hoped they could maintain, was (theoretically) a market where greater legalization was always just right around the corner. Extracting short term value, including that which would otherwise go to those who thought they were making a longer term, infrastructure investment, became the name of the game.
But those are just the generalities of market trends. What is the story behind the numbers? If not the companies that produced them?
Here is a brief history of one of them.
Canopy Growth, by its founding name, Tweed, was born in 2013 and went public in Canada on the Toronto Stock Exchange (TSX) on April 6, 2014, with a stock price of CA$6.17. Less than four months later, the stock was hovering around one third of that at $2 per share. Right around the same time, not coincidentally, that Chuck Rifici, the co-founder of the company, (with Bruce Linton, still the CEO) was fired by the board.
In September, 2015, the company renamed itself Canopy Growth.
The company served 8,000 patients as of December 31, 2015. And two quarters later, by June 30, 2016, the company posted revenue of a whopping $6,984. That is in Canadian dollars.
Even by itself this is a shocking revelation. What is even more gob smacking is that less than six months later, by the end of 2016, Canopy had subsequently “bought” two more companies – one in Canada and one in Germany – and mostly with stock. Indeed, merely five weeks after that revenue announcement (of less than CA$10,000) the company announced its first overseas expansion, exporting to a German-based start-up called MedCann GmbH, located just outside of Frankfurt. In other words, the firm it would “purchase” a mere half year later.12
By mid August, for the first time since going public, company stock hit $3 per share.
Indeed, three months later, in November, a month before Canopy began to announce its new corporate purchases, the company stock had tripled in value, to a new high of $9.2, as of the 13th of the month only to drop back to $7.75 per share a week later. And while this may not seem like “massive” movement to those who invest in blue-chip stocks, for a so far “pink sheet” or “penny- stock” industry if not company, these are impressive gains indeed. Not to mention allowed Canopy to do what they did next.
A week after that, on November 28, 2016, Canopy announced that it was buying the German MedCann (by press release only). And three days after that, after its share price hit a new high of $11.80, on December 1, the company told the world what the price it was paying for Mettrum (the Canadian acquisition) actually would be.
CA$430 million. But paid in Canopy shares.
Just over a week later, Canopy shares declined again, to $7.5 per share, by December 11. The next day, as described in its own corporate report, Canopy bought MedCann GmbH, in a purchase also described in its report as not a “significant acquisition.”13 MedCann’s founders got 1 million shares of Canopy stock, the transfer of which was to vest over the next two years.
This is how to look at this kind of math if not logic beyond that: By the end of 2016, Canopy had acquired 29,000 Canadian registered patients (or 21,000 more than it had at the end of December the previous year). It did so by literally moving paper (via the Mettrum purchase) and posted a net loss of $3.3 million. Yet by the end of January 2017, literally one month later, Canopy stock was up again, hitting $8 per share on January 29. Two days later, Canopy finalized its purchase of Mettrum.
This is how the event was described in the corporate report.
“Mettrum, with its unique color-based strength and dosage system, the Mettrum Spectrum, its robust online physician portal, significant investment in medical research and multiple production facilities, is the leading natural health brand in the Canadian medical cannabis market. Brought under the Canopy umbrella on February 1, 2017, Mettrum is a perfect complement to Canopy Growth’s existing brand portfolio by occupying the natural health and wellness space in between the lifestyle and pure medical plays.”14
By February 5, Canopy’s stock hit $9.4 per share.
Four days later, on February 9, the Mettrum pesticide scandal finally broke.15 Yet the news barely dented the stock price, which actually posted a 20 cent increase, going to $9.6 on February 12. Indeed, on February 14, in a fitting Valentines Day “love letter,” the company issued a press release that began “increased demand drives double digit quarterly sales growth…strong product availability subsequent to quarter end enabled major milestone of first million dollar sales day” and boasted about not only its acquisitions, but increase in sales during the third quarter of its fiscal year ending in December 2016.16 And, even more intriguingly, wrote about a “net income” of $3 million on total revenue of $9.8 million.
The news apparently, made no difference overseas either. On June 5, 2017, Canopy Growth’s German subsidiary, the now renamed Spectrum Cannabis submitted a response to the German government’s Request for Proposals from parties interested in obtaining one of up to 10 licenses to produce medical marijuana in Germany. Just over a week later, on June 19, Canopy announced the birth of its new “medical” brand (namely a strange hybrid of Spectrum and the former MedCann).17
Skip forward a year to August 2018, and the company was clearly losing money, no matter its aspirations in the German market, or its expansions to Denmark at the beginning of 2018.18 Canopy reported earnings per share at a whopping negative $1.576.19 Yet the share price continued on a one way “up” projectory until late in the month. Investors, including the first “institutional” one – Constellation Brands – signed up to invest, by the end of October of the same year, a total whopping $5.3 billion.
Canopy stock jumped accordingly, no matter the dismal news about its EPS earnings, and by late August 2018 had hit an all time stock high of $51.3.20 Bruce Linton was feted as a wunderkind – even winning a Canadian award for his business acumen by the end of year.21 Not even the story of “crop failure” (resulting in the destruction of plants no matter the real reason) in its new British Columbia facility did little to aver investors.
Indeed by October 14, 2018 the stock was still at $46.85 per share.22
Presumably, to take advantage of prevailing winds if not the change in prescription designation in the UK, Canopy also announced their expansion to Britain (which did not happen, in truth until much later in 2019). As of January 3, 2019, however, Canopy stock was $28 per share. By January 14, with the news that the company now planned to invest $150 million into the New York State hemp market, the share price had bounced back upwards almost another $20 per share – to $42. The company also released early good news. By the end of the 4th quarter of 2018 (March 2019), Canopy released a statement that it “expected” to post revenue of $300 million.
There were clearly many strange things about all of these numbers.23 Including the reality, certainly to those in the German market who were still struggling to get access, why legal cannabis prices had actually gone UP after legalization. Indeed Canopy appeared to be one of the culprits for that increase – selling medical cannabis into the German market, according to its own corporate report, for CA$13.35 per gram for all of 2018.24
And then there were other questions – none of which were answered by the end of even this year. Analysts were beginning to wonder indeed where the “value” if not beef really was in this burger.25 Everywhere.
Canopy’s contortions did not however, go unnoticed. For all of the puffery and corporate preening, the company consistently lost ground across Europe (to Tilray and Aurora as well as others, not necessarily of Canadian extraction). By as early as the fall of 2018, Canopy even appeared to be out of the running for the German cultivation bid.
This seemed to be borne out by not only by the destruction of plants at its British Columbia facility but also its strategic purchase of German vape maker Storz and Bickel. Not to mention their purchase of the largest producer of dronabinol in Germany by the following spring. And further, announced the latter just as the finalists for the bid were made public by the German government.
These kinds of corporate buyouts – particularly of established German companies, do not happen overnight.
By the summer of 2019, indeed, a mere three months later, this house of cards could not sustain itself. Bruce Linton was ousted as CEO of the company.
In truth, far beyond the corporate twists and turns at Canopy Corporate, it was not just the politics if not increasingly complex details of establishing the day-to-day operations of all of these expat cannabis adventures and explorations in the name of constant expansion that were getting a bit too complex to handle. Even in Canada, there were massive supply chain problems as the provinces themselves struggled to define the scope of the new recreational market. Among other things now front and center – and in truth not solved to this day? Taming the online beast, and where offline, how or what dispensaries could be privatized and licensed or run under government auspices.
In the United States, where the Canadian cannabis companies like Canopy, were also now clearly expanding after going public, the overall legalization conversation was changing, but still hampered by the lack of federal reform. California as of this month, had an estimated state-wide “footprint” that reached less than 25% of the state’s population.
And in Europe? Regulatory issues including actually entering not only the market but sales channels via subsidized prescription posed huge new challenges that at least the Canadians repeatedly fell short of and on in any way that was sustainable. Including paths to financing.
In such an environment beyond picking on the statements or failings of any one company, what was real, what was fabricated, and what was clearly in development, felt like it was unfair. If not worth at least a second look, some patience with the obvious anomalies and a little time.
The reality was that the entire industry faced headwinds. And standing up to them took at least lots of cash if not exactly guts at this point. In truth, no matter the individual contortions of Canopy corporate in this case, it was also obvious what a legal and financial stranglehold if not mess had been made of the entire affair by top people in governments themselves. Not to mention how out of touch with real life if not business reality legislators themselves have become.
No matter the failings, on any side, this is what progress if not revolution looks like.
It was also easy, just about everywhere in new markets, to see the potential. Even in places where the going was clearly going to be tough. Everything from GMP and labor law regulations to privacy also threatened to strangle if not seriously impede an industry that in truth had been also highly adept at finding loopholes to thrive as legalization dawned.
Yet was the building of the railroads, for example, any less daunted by any greater challenges? From supply chain issues to Indian attacks? Or was Rome constructed in a day, much less the Empire beyond that established in a matter of a few years?
What this month, in truth established, was that the industry, for all its pitfalls, flameouts, mistakes and errors of judgement, had become legitimized if not totally legitimate. The building of the individual companies on the indexes, and those yet to list or even be formed was the topic of the day.
And no short term stock analysis, up, down or sideways, would ever be able to take an accurate real time snap shot of that. Much less a revolution that was finding ways to enter new places, new markets and new conversations. One way or the other.