Don't blink, or you might miss the incredible growth and shifting legal landscape of the marijuana industry.
According to cannabis research firm ArcView, legal weed sales in North America catapulted higher by 33% in 2017, and they're on track to grow by an average of 28% per year through 2021, leading to nearly $25 billion in annual sales.
A big part of that growth will come from our neighbor to the north which, by the passage of the Cannabis Act (officially bill C-45), becomes the first industrialized country in the world to green-light the sale of cannabis to adults. All told, this could add $5 billion in yearly sales, on top of what the Canadian industry is already generating from domestic medical weed sales and exports to foreign countries where medicinal cannabis has been legalized.
Marijuana companies push to uplist and go public
These big dollar signs have Wall Street and investors very intrigued, which is a big reason marijuana stock valuations have headed through the roof. It's also the basis of why Canadian-listed pot stocks are looking to uplist to more reputable exchanges, and why U.S.-based pot companies are looking to Canada to go public.
This year alone, we've witnessed two Canadian marijuana stocks uplist their shares from the over-the-counter (OTC) exchange to more reputable exchanges in the United States. It all began with Cronos Group in late February, which listed its shares on the Nasdaq.
Not long thereafter, the largest marijuana stock in the world by market cap, Canopy Growth Corporation (NYSE:CGC), uplisted to the New York Stock Exchange. Both Cronos Group and Canopy Growth believe that by listing their shares on these prestigious exchanges, they'll attract more investors, improve liquidity, and perhaps gain validity from Wall Street institutions.
Even more recently – as in just over a week ago – grower, processor, and medical cannabis researcher Tilray (NASDAQ:TLRY) became the first Canadian pot stock to go the initial public offering (IPO) route via a U.S. exchange (the Nasdaq). On an intraday basis, shares of Tilray doubled from its listing price of $17 on Thursday, July 19, to $34.10 on Monday, July 23, before finally cooling off a bit.
On the flipside, U.S.-based MedMen Enterprises (NASDAQOTH:MMNFF), a company with 16 higher-end retail dispensaries in three states, used a reverse merger to list its shares on the Canadian Securities Exchange (CSE) back in May. The Toronto Stock Exchange bars U.S. companies from listing their securities on the exchange, which makes the CSE a viable and popular alternative for U.S. pot companies looking to list their shares in a less-cannabis-hostile market environment. MedMen was the largest U.S.-based listing to ever hit the CSE.
Two more U.S. weed companies are looking north
Now, following in the footsteps of MedMen Enterprises, and having witnessed the recent success of Tilray's IPO, two more companies want to join the party.
As reported by Investor's Business Daily, Acreage Holdings and LivWell are next in line to seek a Canadian listing via a reverse merger – i.e., a quick way for private companies to bypass the lengthy process associated with a traditional IPO and go public by seeking out and acquiring a majority stake in a publicly listed shell company. As public companies on the CSE, raising capital should be considerably easier. In fact, I can't think of a bought-deal offering from a pot stock in Canada that didn't get every cent the offering company was seeking.
The first company, Acreage Holdings, has been in the news before. The company, which has cultivation, processing, and dispensing operations in 13 U.S. states, made headlines back in April when former House Speaker John Boehner agreed to join its board of advisors. Boehner, who at one time called himself "unalterably opposed" to decriminalizing marijuana, clearly offered a different take based on the following tweet in April:
I'm joining the board of #AcreageHoldings because my thinking on cannabis has evolved. I'm convinced de-scheduling the drug is needed so we can do research, help our veterans, and reverse the opioid epidemic ravaging our communities. @AcreageCannabis https://t.co/f5i9KcQD0W— John Boehner (@SpeakerBoehner) April 11, 2018
In addition to Boehner, former Massachusetts Gov. Bill Weld is also on Acreage Holdings' board of advisors.
Acreage Holdings' debut on the CSE, which is slated for some time in the third quarter, is likely to be met with great anticipation following the closing of $119 million in private funding this past week – the largest in U.S. cannabis history. Acreage plans to use this capital to acquire "additional licenses, brands, and other properties to increase its reach, breadth of offerings and depth of management team."
As for LivWell, it's planning a reverse takeover of investment company Target Capital, which will allow it access to the CSE. LivWell recently acquired 51st Parallel, an Alberta-based pre-production applicant to become a licensed producer, and took a 12% stake in GCH. Interestingly, GCH is the company that owns singer Willie Nelson's cannabis brands. This stake, therefore, gives LivWell the rights to Willie Nelson's Reserve marijuana brand.
The important thing to remember
While it's clear that pot-stock fever is still high among investors, it's important to keep in mind that going public or uplisting from the OTC exchange usually provides only a short-term pop in valuation. Sure, it might improve liquidity and/or access to capital, but it doesn't change the underlying fundamentals of a business or its long-term outlook.
In other words, when we look at companies like Cronos Group, Canopy Growth Corporation, Tilray, and MedMen Enterprises, we have to take into account the whole picture, and not just a short snippet of that future, such as an uplisting or IPO. Challenges lie ahead for all four of these companies, even with the short-term pop they received following their uplisting or IPO.
For instance, none of these four companies has, as of yet, consistently produced profits. In fact, Canopy Growth, which is reinvesting its operating cash flow back into the business, may not even be profitable in fiscal 2019, despite triple-digit sales growth. Other popular recent issues, Tilray and MedMen, are expected to spend a lot of their new-found capital on expansion in the quarters that lie ahead, suggesting that more losses are imminent.
Until we see a considerable bottom-line turnaround in these pot stocks, the buzz surrounding uplistings and IPOs is simply white noise.