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The Meteoric Rise of Canada’s Legal Cannabis Industry

While the US boasts the largest economy and stock market in the world, with giants Apple, Netflix and Google, Canada offers the largest cannabis companies for now.

To be sure, US cannabis companies such as MedMen Enterprises Inc. and Terra Tech Corp. have been expanding quickly. But Canada’s Tilray Inc., Canopy Growth Corp., Aurora Cannabis Inc., Aphria Inc., Cronos Group Inc. and others have bulked up significantly. The leading Canadian company, British Columbia-based Tilray, is currently valued at $14.4 billion.

With adult-use sales scheduled to begin in Canada on October 17, the spigot of capital has opened as investors pour money into the nation’s top pot stocks. The total cannabis market in Canada, including medical and recreational products, may yield up to $5.4 billion (C$7.2 billion) in sales next year, according to estimates from Deloitte.

With an eye on this growth, financiers and executives have been eager to offer investors new options. Tilray’s shares jumped 30% in their stock market debut on the NASDAQ on July 19, giving the company a total market value of $2.7 billion at the time. It’s a rich price tag for a business on track to earn just $80 million this year.

But that’s the kind of valuation pot stocks have been receiving as investors rush in with an eye on huge growth. In the last year, Canopy Growth shares have risen from $8 to its current $53. The company now lists its shares on the New York Stock Exchange after trading on the Toronto Stock Exchange (TSE). Tilray’s stock has leapt to an incredible $221 after the announcement that the company would be providing cannabis for research purposes in the US. Aurora Cannabis stock has tripled to $9 and Green Organic Dutchman Holdings Ltd. stock also doubled to $6 since its shares went on the TSE in May.

Eager to get on the bandwagon, US-based cannabis companies have been listing on the Canadian Securities Exchange (CSE) as well. MedMen (MMEN:CN) started trading in May. Acreage Holdings, another US cannabis company, plans to list its shares on the CSE in the next few months.

GreenWave Advisors’ Matt Karnes

Beware of Reverse Mergers and Risky Businesses

These and other companies get listed through reverse mergers involving a shell company that already has public stock that’s trading. Matt Karnes, founder of GreenWave Advisors and a former Wall Street analyst, says companies that go public in Canada through reverse mergers may pose an additional layer of risk because the process avoids many of the traditional disclosure requirements to guide investors.

“They’re not subject to normal filings, so it’s a bit like getting in through the back door,” he tells Freedom Leaf. “It’s riskier because the companies are not subject to the same scrutiny. The traditional public filing process is a lot more rigorous than a reverse merger. That’s where the difference is. But once the company is established, additional disclosures are often made.”

Investors should remain cautious about reverse mergers, Karnes explains, “because it’s so easy to do, there are some shady characters claiming they have cannabis businesses. It’s slowly going away though, as investors weed them out.»

MATT KARNES: “Some of the prices are rather steep. You’re really betting on the future.»

Canada is the top choice for pot investing in the midst of the legal adult-use market about to take off nationally. “Any young industry is going to present challenges and some volatility,” he points out. “There may be an oversupply at some point, since there are a lot of growers. You’re not going to need all these producers, so that’s a big risk.”

Larger companies such as Canopy Growth and Aphria are seeking sales outside Canada in the US and other countries. “The bigger players are teed up for international opportunities,” Karnes says. “Canada will be able to export its products. It’s well positioned for the recreational market.”

Another challenge for investors is to avoid overpaying for a stock, given the lofty valuations that may deflate at some point. “You have to determine the intrinsic value of the stock based on growth prospects for the company,” he states. “Some of the prices are rather steep. You’re really betting on the future.”

Quadron Cannatech’s Rosy Mondin at ICBC Vancouver in June (photo by Matt Emrich)

Optimism in the Great White North

Among Canadian companies, Vancouver-based cannabis extractor Quadron Cannatech Corp. (QCC:CN) has the distinction of hiring the first female cannabis CEO, Rosy Mondin, among companies on the CSE. She may also be the first pot stock CEO in the world (MPX Bioceutical has a female chief operating officer, but not a CEO).

“We’re the first G7 country to legalize adult-use cannabis,” Mondin boasts. “Canada already has a robust medical-use market. BC Bud is an internationally known strain, similar to the reputation of the varieties in Northern California. That’s one reason why Canada is such a big deal in the space.”

Quadron Cannatech’s business model is similar to the wine industry. With wine, consumers don’t usually follow the grower of the grapes, but the brands that are created from the grapes. The same may happen with cannabis.

ROSY MONDIN: «The amount the industry is going to evolve come October and thereafter is huge.»

“Entrepreneurs and investors have been jumping into the space because we’re developing a new commercialized industry,” Mondin comments. “It’s a very exciting business. Cultivation has been the first one out of the gate, attracting substantial investment dollars. But in 2014, my business partners and I entered the extraction market. We saw the future of cannabis moving toward oils. At the time, it was difficult to communicate the enormity of the cannabis concentrates market. People thought we had feet growing out our heads as not many were thinking about concentrating cannabis into a value-added product.”

With 113 licensed medical-cannabis producers (LPs), the Canadian industry has already come a long way, and adult-use sales are just around the corner. “This is an industry that, until recently, even the government licensed producers were having difficulty obtaining banking services, and institutional lending was virtually non-existent,” she says. “It’s not a great commercialized environment yet. However, as legalization progresses with the establishment of the regulatory framework, we’re seeing more business sectors coming into this space.

“If you think about all the segments that are needed to service the legalized cannabis industry, the amount the industry is going to evolve come October and thereafter is huge,” Mondin predicts. “People are not really grasping the scope of it and how immature it is right now.”

Expect Growing Pains

Quadron Cannatech president Leo Chamberland thinks many companies in the cannabis space will not succeed. Larger firms like Canopy Growth will likely survive, but he expects the industry “will face consolidation and severe adjustments to valuations” that will likely leave smaller players vulnerable.

Entrepreneurs need to have some kind of track record and not just a compelling story behind their businesses. With cultivation in the spotlight, everyone claims they’re the best farmers, but that may not guarantee success.

“Very few can do it on a large, commercial scale,” Chamberland says. “Do they have the management skills? Have they done this before? You may be able to grow the best weed, but it’s a business and it has to work like that.”

Despite these hurdles, the country known for hockey and maple syrup will continue to get behind cannabis. “People are excited to invest in the sector,” Chamberland adds. “It’s not very often that something like this happens. Cannabis has been around for a long time. It’s known. It’s tangible.”

The leaf on the Canadian flag may be cannabis after all.

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