January 24, 2019

Alan Brochstein on Aurora Cannabis Inc (TSE:WEED) Debenture Deal and Market Update

Midas Letter
Midas Letter
Alan Brochstein on Aurora Cannabis Inc (TSE:WEED) Debenture Deal and Market Update

420Investor and New Cannabis Ventures Founder Alan Brochstein breaks down the latest market news. Brochstein shares his impressions of the recent Benzinga Cannabis Capital Conference in Miami. He notes that the conference showcased a broadening of institutional investor interest, as many different names are looking to deploy considerable financial resources into the space. Brochstein dissects the Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P) debenture deal. He raises some cautions about convertible debt, but highlights how often similar deals have been done in the cannabis space and with great success. Brochstein discusses the potential impact of mergers and acquisitions in the cannabis industry on the broader market and indicates that as long as cannabis M&A activity is accretive, the market should respond positively to such moves.


Brandon Colwell:   And we’re joined here today by Alan Brochstein of New Cannabis Ventures and 420Investor. My good sir, how are you doing today?

Alan Brochstein:   It’s good to be here, enjoying the holiday in the United States.

Brandon Colwell:   Yeah, you got a little bit of a day off. What is it, again? Is it Martin Luther King day, or?

Alan Brochstein:   It is, it’s Martin Luther King Jr. Day, one of my favourite people. I have to admit, I didn’t know that much about his life until more recently, but really an inspirational person.

Brandon Colwell:   Very much so.

Alan Brochstein:   I think he would have been in favour of legalization.

Brandon Colwell:   Well now it is we’re going to be talking about things from legalization on that day. We’re also here with Steve Misener – there’s going to be three of us today.

Steve Misener: Nice to see you again, Alan.

Alan Brochstein:   Good to see you again too, Steve.

Brandon Colwell:   So Alan, why don’t we start off with the fact that just over, I believe it was the weekend or last week, you were at Benzinga, a huge conference. How was that?

Alan Brochstein:   It was, you know, the bar was very high after the Toronto event last August, which many people said that was the best cannabis conference for investors yet, and it was even better this time. Maybe being in Miami helped, but I think there were about 700 people, some great companies both sides of the border, attendees from both sides of the border, and even beyond. I was standing there at a cocktail party listening to a deal get done between a Canadian clinic operator and a Brazilian company.

So just lots of stuff going on.

Steve Misener: Great networking at those conferences.

Brandon Colwell:   For sure.

Steve Misener: I know that with James you’ve spoken in previous recent interviews about trends for 2019, but each time you go to a conference, you’re picking up new information. What are you – did any trends kind of more solidify for you, Alan, this time, at the Miami conference?

Alan Brochstein:   So I think there was maybe a little bit more of an American flavour this time, and you know, at the time of the event in Toronto in August, you know, we had some American multi-state-operators or MSOs, but subsequent to the event, a whole bunch of them came public. So I think for a lot of people, including myself, this was a great opportunity to learn about some of these companies. And it’s really interesting, because if you go back a few years ago, the leaders in Canada were those that could raise capital; they were telling a story, kind of on the come, right, and raising capital. And those companies have done really well; those have actually become the leaders, partially because they were able to raise capital, and that helped define what was a leader.

Well, in the United States, these companies have a lot of revenue. They’re already up and running; it’s very different from the Canadian situation a couple of years ago. So I think a lot of people, including myself, at the conference had the chance to learn a little bit more about these companies, and maybe some of the differences as well as probably more similarities than the differences. But one of my favourite parts of the event was hosting a Town Hall panel with Acreage Holdings President George Allen, Trulieve CEO Kim Rivers, and Steve White, who’s the CEO of Harvest. And you know, for a lot of people this is really the first time to ever hear the voices of these people. And there haven’t been a ton of interviews – we’ve actually done a couple of interviews with them at New Cannabis Ventures, but you know, for a lot of people, it was really interesting.

And these companies, you know, they have different philosophies about capital allocation and about footprint and about the race to be dominant in the United States, and I think investors, you know, need to appreciate as we’ve been talking about, that the United States is a bigger and more promising market than Canada; it’s also a little riskier right now, because it’s federally legal, and I think investors are going to really benefit from getting to know the differences between these companies.

I wish I knew who the winners would be; there’s probably 10 to 12 companies that we’ll consider the winners, not all of them are public yet, some of them are, but I think that was one of the most important part of the conference.

Steve Misener: I think another interesting trend at each of these conferences, the big Vegas conference in November and beyond, I think another interesting trend is not just the issuer side and all the innovations and new direction that the companies themselves are going in the space, but is the attendees on the investment side as the investor interest broadens where maybe there’s always been a lot of investor interest from a lot of quarters, but some certain segments of the more traditional investment pools of capital have been slower players for obvious reasons: history, etcetera, associated with the space. And I think the broadening of the investor interest is interesting to watch as the as the attendance kind of complexion changes and broadens over each conference as well. Did you notice some of that in addition?

Alan Brochstein:   Oh, for sure. This was indeed the case. So I’m always amazed at these people that come up to me and they tell me what they’re doing; I’ve never heard of them before. There was one example of a – I don’t think they’re a REIT, but a real estate lender, and she said they have $1.5 billion to deploy into the space. I’m like, Do you mean that’s how big your company is? She goes, No, that’s how much we have for the cannabis space, and they’re just getting started. So that was an eye opener to me.

So I also ran into somebody from Benchmark, and I think Benchmark may have already have started to cover the space; you know, on this side of the border we don’t have a lot of coverage from analysts, and Benchmark is like the middle tier – I hope I’m not insulting them, but you know, they’re not Merrill Lynch, I think they’re the middle tier, you know, similar to most of the investment banks covering the LPs, and they seem to be moving forward, rolling out coverage. And it’s a little bit different here, because in Canada obviously they’re going for banking fees and they can’t really do that, so maybe they’re taking a longer term view, but, you know, I remember from my past life, Benchmark covers, you know, mid-cap and small-cap companies and did a good job. So it was kind of exciting to see them.

And there were a lot of examples of people like that at the conference: more ETFs coming, for instance, speaking to some people about what’s going on there. So yeah, it’s a good observation; it wasn’t just the company side; some very interesting investors there, as well.

Steve Misener: Terrific.

Brandon Colwell:   Yeah, and I love the point that you were saying earlier: I mean, up until what, six months ago, we knew cannabis companies in the United States were obviously there, and they ere getting a lot of revenue. But I think this last half-year and your ranking system on New Cannabis Ventures, you can go right on there and you can see it really coming to fruition, it’s amazing how many of these cannabis companies that not many people were talking about earlier, you said some of them – True Leaf, Curaleaf – they’re having some significant revenues coming in quarterly that are upwards of $20 million, $25 million USD. It’ll be really interesting as you start seeing, you know, maybe states start opening up, or we start loosing a little bit on legalization in the United States, but just in general, as they continue to grow in Nevada and California and states like that, it truly is remarkable how big of a marketplace that they are in, and I don’t really think that investors have clued into that.

Like I know you have, other investors are starting to loosen capital over there, I think people are still giving them, I don’t know, the second look, or not giving the second look. Why do you think that is? Why do you think that we can see, look at the revenue that they’re making in California and it’s massive -why aren’t we looking there yet?

Alan Brochstein:   Yeah, well, so I think you’re right. Once I started putting that up on the ranking page, it was kind of an eye-opener just to see these big numbers, but what’s even bigger than what’s being reported now are the projected numbers, and I think a lot of people think they’re bogus. And I’m trying to wrap my head around how realistic these projections are; some people say they’re a little aggressive, and they may be, but they are very big numbers. And I think right now when people are looking for revenue growth, there’s some low-hanging fruit. It’s pretty obvious that Canopy, Aurora, CannTrust, Aphria, OrganiGram, these ones that are operating in Canada that have kind of a hockey stick here as Canada’s legal revenues or adult use revenues kick in, kind of obvious.

But maybe it’s not so easy to visualize that in the United States, and you know, take, for example, I’ll pick a good one: Harvest, which they’ve gotten almost all their revenue from the Arizona market and south of Maryland. And now they have Massachusetts coming on, and they have Pennsylvania coming on. So for a lot of these companies, they actually have good visibility into store openings. What they don’t know is exactly how those stores will do.

So I think, yeah, I mean, investors, I’ve learned this; you know, we’re still a retail-oriented market, there aren’t a lot of analysts out there putting projections on the US, the companies are issuing some guidance though, and I think investors are going to be slow to get on board. They’re going to want to see the prints, and I think right now maybe they’re distracted a little bit by some of the big numbers coming in Canada in the very short term.

Steve Misener: Alan, another trend that we’re seeing evolving now is the, a number of companies are coming with debt offerings as opposed to equity offerings. Now that may be easily reflective of the correction in share prices in the broader markets and in the cannabis space that we saw at the end of the year, recently, but we are seeing more debt deals come to market. Would you care to give your views on that?

Alan Brochstein: Yeah, you know, I’ve kind of, I’ve watched this play out for a while. There’s always been the convertible debt deals; the terms are getting better. There’s also obviously some fixed-debt deals as well. And it’s interesting to hear like Cam Battley talk about their perspective on the debt versus to hear some bearish perspective, oh, it’s dilution – Aurora pitched this as, we look at this as low-cost financing. And I was kind of critical of the Canopy Growth convertible debt deal when it came out, I guess, early in the summer, because if you do the math, you know, they’re giving away a very expensive call option. But they also have the ability to repay in cash in both those cases.

So I think it reflects the maturation of the market, and we’re actually seeing some debt deals get done in the United States, interestingly. It’s not bank debt, necessarily – well, it’s not bank debt.

So I think this is a positive for the overall market – it’s nice to have these different capital structures. I would say, you know, the convertible debt is not new at all. For some companies, it’s been a way of selling forward equity, and it’s worked out because the market has moved in the right direction. I always caution people at 420Investor to be just a little bit concerned, because, like, for instance, I was looking at Organigram, which is one of my favourite companies, I’ll say, and it was looking at it near year-end with the depressed price and I’m thinking to myself, wow, I really have to think about this convertible debt, because unlike the Aurora deal that had a five year term from last week, I think that one matures in less than a year or something like that. Soon it’ll be within a year. So it becomes a little bit risky. And the risk isn’t necessarily insurmountable, but you know, let’s just make up a hypothetical: let’s just say that Organigram was chugging along and then the microbutanol issue were to hit; then that could be problematic. So I think it’s when unexpected things happen that it might hurt some of these debt issuers.

You know, the equity holders like it, because especially the straight debt – it’s not dilutive, right? But at the same time, it’s very dilutive in a downside scenario, because you risk, as an equity holder, having your company stolen from you by the debt holders in certain scenarios.

So I don’t want to alarm people, but it is something – there’s no free money, that’s the point I would make. And while it’s good to see this playing out, it can also be risky, it can cause some churn in the stocks. Supreme has been a big issuer of convertible notes over time and it’s paid some off and issued new ones, and it’s worked out really well. I’ve actually had some debates historically with John Fowler about it, and you know, it’s worked out. No doubt, it’s worked out, but you can imagine kind of a price it may have taken on the stock, it’s kept that stock less volatile, sorry, less volatile, more stable is what I wanted to say, as there’s been this churn of the convertible notes converting out.

So I think there’s pros and cons and everybody just needs to realize there’s no free money.

Brandon Colwell:   And on that note as well, I know you follow Organigram very, very closely, you have a relationship with their management team. I think it was early today there was something coming out saying that the class action suit wasn’t going to move forward. It’s been almost two years now, and you know, they’ve already suffered their share price coming down, it’s recouped very nicely since then – I believe they actually just got their organics certification back, or at least the first steps of that. Do you think there’s still much in that lawsuit, still? Do you think there’s something that investors should be a little bit worried about, or do you think it’s smoke and mirrors t this point?

Alan Brochstein:   Yeah, I don’t know. Honestly, my understanding of Canadian law is, it’s not like the US. If this were in the US, I’d be really worried, right, because what state is it in, what’s the jury like, and all that. But my understanding is in Canada, it’s not the same thing, and they have their regulator on their side, which I think makes it really difficult.

So if I understand the issue correctly, it’s more about was it fair that they were not giving their money back and they were just given credits. So I think from an investor standpoint, this can be quantified and yeah, it would stink to lose $4 million or whatever the number was – I don’t remember off the top of my head, but I think that might be it – but it’s not the end of the world. They have, you know, tens if not more than a hundred million of cash. Some of it’s committed, but I don’t really think it’s really an issue, but I’m not an expert in the laws. But my understanding of class action lawsuits in Canada is they’re not like the are here.

Brandon Colwell:   No, nowhere near it, and it’s been dealt, we actually saw some Twitter posts saying man, things really run slow in Canada when it comes to this kind of stuff.

But I was also reading the news and I think they said their insurance covers their legal costs, and possibly even if there’s any type of settlement afterwards it covers a large part of that as well. That was the first time I actually read that, I didn’t know that personally, so that’s good to read as well if you’re an Organigram investor.

Steve Misener: Yeah, for sure.

Brandon Colwell:   And if you don’t mind, I’d actually like to go back on something, because Steve had a great question right afterwards: you were talking about low-hanging fruit. What’s your exposure into looking into C21 investments, CXXI? I find it really interesting right now that in Canadian dollars, their market cap is around $40 million or $42 million, but they just acquired those two companies in Nevada with like $23 million USD in their 12-month trailing revenue, and they’ve got two more apparently coming up. Is this one of those examples of a company that nobody’s paying attention to, but they should be?

Alan Brochstein:   Okay, well, I’m going to confess: I’m not paying that much attention to it, so you caught me on that one. I’m well aware of it, and I know they had an LOI to do something in Europe and that kind of went away. Honestly, you know, I follow the market full time, I know you pay attention to this almost full time if not full time – it is really difficult to stay on top of all these companies. You know, I’ve noticed a few of them coming out with very low market caps. I don’t want to let a diamond in the rough escape, so I’m definitely cognizant of the potential of that.

C21 is not alone. There’s some other ones that have revenue, low market caps and have done some acquisitions or are expanding into multiple states as well. So I think this is a great opportunity for investors in general, not necessarily in C21 because I can’t really say, because there is a lot that’s falling between the cracks right now. And so there really could be – one that jumped out at me, Planet 13, had caught my attention, and I was kind of aware of some of the positives, and maybe one big negative about it, and the stock went from below a dollar, and the day that it was below a dollar, was the day that they announced their revenue a few quarters ago, I think. And I had to add it to my list that New Cannabis Ventures – they made the list. And sure enough, the stock took off it was at like 200 percent or something like that.

So it kind of tells you that you can do your work on these companies, get to know them, and maybe when they show up on other people’s radar, you’ll get that big run. And I think the thing that’s going to put them on people’s radar is the revenue generation, not so much doing an acquisition. We’ve seen a lot of companies make these announcements about these deals, and then you look at their financials one or two quarters later and the deal’s closed and it’s just not that material in terms of what’s going on.

So to the extent C21, for example, is able to convert the deals that they’ve done into revenue, let’s say of $5 million a quarter or more, that’ll capture people’s attention, that’s worth your time looking into that.

Brandon Colwell:   I agree. I started realizing how many companies were coming in this. I used to know all of them. And now someone is like ‘have you heard this before?’ No, I haven’t. it’s funny, this company, actually, I found out four or five days ago, somebody just randomly put into one of our chat rooms, and I saw and I’m like okay, so I’m looking into it. So it’s out there, I agree. It’s getting harder and harder though, because there’s so many of them, so it’s getting that much more important to find the good ones which, on your platform, I know, you do all the time.

Alan Brochstein:   I’ll admit, I may miss something. It’s very likely, I would say, not only possible, it’s likely. It’s getting more and more difficult; I’ve hired someone to help me, and hopefully there’ll be more of that, but there are a lot of public companies, probably way too many, but some of them, I’m sure, are better than we think, and a lot of them are probably worse than we expect.

Steve Misener: It’s a good example, though, gentlemen, that doing your homework and finding fundamental value, regardless of the sector, can reward good dividends on any stock picking.

Brandon Colwell:   Yeah, for sure. I couldn’t agree more. And you know what? It’s one of those times. We’re going through, it wouldn’t say a slow period; January’s been pretty nice to see things start coming back together, in January with the indices as well, just the overall market, but I think there’s more of these. There’s more of these in the roughs, and I think a lot of them, right now, are in the United States, because there’s just not enough eyes looking over there. So I know you shift your folks – you folks have been there for a long time but really started pounding that hammer as of late, but I think that’s correct, because I think there’s a lot of companies around, what do you mean this company’s doing $20 million in revenue a quarter, and it came out of nowhere? So I’m looking forward to finding more of these – hopefully before everyone else.

Alan Brochstein:   So a company like C21 or one like that, one of these diamonds in the rough, there’s not only the exit strategy of other people learning about it, I mean, there’s a voracious appetite for M&A here. So to the extent that somebody can put together a portfolio of assets that appeals to another strategic buyer. So there’s a quick strategy, and that’ll be interesting, too, and I think when we start to see some of that, people will spend some more time on some of these smaller, less-known companies as well.

Brandon Colwell:   And that’s a great point as well, because they’re going to start looking for people to start swallowing up, so they can grow faster, faster, faster, sort of an ACB model or Aurora model where they’re out there and that’s exactly what they’re saying they’re going to do. They’re going to out there, they’re going to grow through M&A, and still you have to comment, it’s exciting. There’s a lot of companies out there; we have to hopefully find them before everyone else does.

Steve Misener: As long as the M&A strategies are accretive, and we have had an adjustment in some of the stock values; both the target companies are cheaper but also the potential aquisitors’ share prices are at pullback a little, so as long as it’s accretive, the market will like it.

Brandon Colwell:   Yeah, absolutely. Well, Alan, always a pleasure; I’ve watched your work, read your stuff for about a year and a half, two years now, always a lot of good information there. I appreciate very much all of our visitors right now. You can go to Newventures.com and see all the work that’s going on down there as well and 420Investor as well.

Alan Brochstein:   Thanks for having me on, guys. Enjoy the rest of the week.

Steve Misener: Nice to see you, Alan.

Brandon Colwell:   Take care.


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