Cannabis CliffsNotes: CannTrust Holdings, Heritage Cannabis, CV Sciences

Benjamin A. Smith
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Below are the companies — CannTrust HoldingsHeritage Cannabis and CV Sciences — which have associated stories and narratives we’re focusing on this week.

CannTrust Holdings

CannTrust Holdings signaled to investors that its capital structure may expand precipitously in the coming months. Without issuing an official presser, the company announced a $700 million short form base shelf prospectus (BSP) after the bell on Friday. The would-be offering is valid for a 25-month period from March 1st, 2019, and may deploy in various forms including straight share issuance, warrants or convertible debt securities.

As a reminder, a base shelf prospectus is similar to a short-form prospectus (SFP), modified in accordance with National Instrument 44-102 Shelf Distributions. This offering allows companies to access the capital markets quickly as requirements arise. Particulars of the offering may be omitted, provided it’s included in a supplementary document that is filed and delivered when the actual distribution of securities occurs.

And if history is any guide, CannTrust might be expanding its cap table sooner rather than later.

For example, Hexo Corp. registered its first preliminary prospectus supplement—filed and delivered once the actual distribution of securities occurs—only five weeks after its amended and restated BSP was filed on December 14, 2018 (originally announced on November 9, 2019). On February 1, 2017, Emerald Health Therapeutics announced a $10 million bought deal was taken down by Dundee Capital Partners pursuant to the filing of a shelf prospectus supplement announced three weeks earlier (January 12, 2017). And on October 18th, MYM Nutriceuticals announced that it has established an at-the-market equity distribution program of up to $13.4 million pursuant to the company’s $50M short form BSP announced only one week earlier (October 9, 2018).

In other words, cannabis companies have a history of raising capital shortly after individual BSPs are filed.

So what might CannTrust be thinking with this particular shelf prospectus? Obviously, the company’s Pelham facility expansion—approved by local City Council in January—springs to mind. But that’s only a 118,000 sq. ft. expansion, and CannTrust’s current cash balance of $86.31 million (as of Sep. 30/18)—excluding $9.23M in proceeds received from Breakthru Beverage Group on October 17, 2018—more than covers intermittent construction costs.

While this is pure speculation, I posit CannTrust Holdings may be looking at more robust asset purchases abroad. A cursory look at the company’s corporate structure reveals a very limited international presence relative to its peer group. For a $1.3 billion (undiluted) company that is now dual-listed on the New York Stock Exchange, a couple of passive-control investments internationally—and none in LATAM—appear rather gaunt on the balance sheet.

(Source: Preliminary Short Form Base Shelf Prospectus, SEDAR)

Only time can reveal what the company’s true intentions hold. CannTrust Holdings did finish Friday’s after-hours session ↓4.56%—not an unusual reaction—as investors anticipate that dilutive share capital deployment may be approaching. It’s a narrative we’ll continue to follow as the weeks pass.

Heritage Cannabis

Heritage Cannabis CEO Clint Sharples has been presaging the event for awhile, and on Friday it finally arrived. The company’s 75% owned subsidiary PhyeinMed Inc. officially received their processing and medical sales license from Health Canada, which gives them the “all clear” to start extracting more than 50,000 kilograms of dried hemp sitting in a warehouse in Saskatchewan. At current pricing, Mr. Sharples estimates there’s potential for $30-40 million in revenues, worth about $0.03 or $0.04/share in annualized EBITDA.

This latest news might be the apex of what has been an incredibly busy news cycle. The company has disseminated no less than eleven press releases since January 29th, with presumably a twelve arriving early Monday morning. In kind, CANN.C has been among the sector’s best junior performers, rising ↑123.25% since the news blitz began, and ↑190.90% year-to-date. Even with Canadian-listed cannabis extractors rising at a dizzying rate in 2019, Heritage Cannabis’ performance stands out.

While Monday’s trading session is shaping up to be a good one, expectations should be kept in-check. Heritage Cannabis does not yet produce cash flow from operations—much less booked revenue—although that’s poised to change quickly. It must rely on equity financing to fund operations, with was sitting at roughly $8 million in January. We also note that fully-diluted market capitalization now exceeds $200 million. At this level, Heritage Cannabis faces stiff competition for investing dollars from more mature and developing juniors.

Either way, Heritage Cannabis continues hitting its benchmarks and accomplish everything it said it would. As we’ve noted previously, there’s a tremendous opportunity for performing cannabis extractors to seize the vastly under-served Canadian cannabis oil marketplace. There’s nothing to dissuade us from believing that Heritage Cannabis can’t make the cut, given its credibility in meeting operational goals.

CV Sciences

The last time Midas Letter spoke of a “great formation” in technical terms, Canopy Growth broke out precipitously just a couple weeks later. While I don’t carry the same level of actionable confidence this time around, CV Sciences may be close to making a material move of its own.

As we can glean from the chart below, CVSI is forming a very clear ascending symmetrical triangle formation on the daily, with volume grinding to 11-month lows. With lower highs/higher lows wedging towards an inflection point, we think a defining move is close at-hand. This is especially true with the company’s Q4 and FY 2018 results scheduled next week (March 12th).

Unlike most sector operators, CV Sciences tends to move forcefully in the days following earnings releases. For example:

  • Following its Q1 2018 financial results on May 15, 2018, CVSI surged ↑33.17% after posting positive GAAP Net Income and increasing sales ↑114% YoY; three weeks later, the stock crested at a bull impulse high of $2.78/share—up ↑336.56%.
  • Following Q2 2018 financial results on August 1, 2018, CVSI proceeded to catapult ↑294.87% trough-to-peak over the next fourteen trading sessions. The slow start to the FOMO-type move was likely due to brief sell-the-news pressure, as CVSI pre-announced record Q2 2018 sales six days earlier.
  • And following Q3 2018 financial results on November 7, 2018, CVSI tanked ↓33.65% over six sessions, although extreme sector bear market conditions likely overpowered the overwhelmingly positive news.

What comes next is anybody’s guess. Usually, such perfectly manicured symmetrical triangles tend to break in the direction of the trend, which is up. With upcoming earning segueing perfectly into a tightening range running out of free space to operate, investors will find out soon which way the wind blows. In our opinion, the potential for an outsized move is high.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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