When Tweed Marijuana Inc. – long since renamed Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) – was granted a Health Canada license giving to operate, little did investors realize that it would become such a dominant industry force. Not just in Canada mind you, but with brands and name recognition the world over.
With the company celebrating five years on the public markets tomorrow, we salute “King Canopy” with this special feature.
In response to several key changes to the Marijuana for Medical Purposes Regulations (MMPR)—particularly the phasing-out of home cultivation and easier access through medical prescriptions—one company, in particular, saw cannabis’ burgeoning potential before anyone else. The founders of Tweed recognized the opportunity to become a substantial licensed commercial operator in the Canadian marketplace, and became among Canada’s earliest cannabis entrants.
[stock_chart symbol=”WEED:TSX” width=”60%”]
On November 18, 2013 that goal became a reality when Health Canada granted Tweed a license giving it the right to acquire, produce and destroy cannabis. The license was later amended two months later, giving Tweed expanded status as a commercial supplier of medical marijuana under the MMPR. The company could execute now engage in core business strategies.
For the very first time, explosive patient enrollment rates in combination with favorable regulatory circumstances fostered business conditions necessary for private cannabis companies to go public. But to buildout and retrofit these massive greenhouses to supply the market wasn’t cheap; a tremendous amount of capital would be needed.
At the time, banks were not issuing loans against collateral, as the industry was simply too speculative and immature. Without any revenues or significant asset base to draw from, viable credit facilities were unavailable from the nation’s banking system. The necessity to tap the public markets for capital would be key to scale out Canada’s growing medical—and eventually, recreational—demands.
A Cannabis Star Is Born
Reacting swiftly to favorable investor sentiment and full ‘Licensed Producer’ status under the MMPR granted in November 2013, Tweed made its move to go public. It did so by acquiring a shell company and enacting what is known as a Reverse Takeover (RTO) transaction.
On January 2, 2014, a small Capital Pool devoid of commercial operations named LW Capital Pool Inc. (LWCP) entered into a non-binding letter of intent (LOI) with Tweed to acquire all of its issued and outstanding securities in exchange for securities of LWCP.
The proposed transaction saw the existing LWCP 7.26 million common share structure balloon to approximately 5-times that level, once the 1:5 share consolidation took place. The transaction left LWCP common shareholders with about 4.34% of the outstanding common shares of the combined entity, with optionality for greater ownership if newly-issued warrants were exercised.
On March 26, 2014, LW Capital Pool officially announced its Qualifying Transaction pursuant to an agreement between it and Tweed. Trading in the new corporate entity—long since halted on the exchange—resumed on Friday April 4, 2014 under the symbol “TWD”. This transpired exactly five years from tomorrow.
In just over four months after Tweed Marijuana obtained their first cultivation license, they went public, thus becoming the first Canadian licensed producer to list on the Toronto Venture Exchange.
This would set the stage for a myriad of competitors to follow suit.
No Shortage Of Investor Enthusiasm
On paper, Tweed certainly looked like the ultimate speculative play. Since its corporate inception back in 2010, revenues were scant and business plans mostly conceptual. According to its first consolidated financial statement, Tweed’s inaugural quarterly earnings only produced C$188,236 worth of revenue, against operating losses 6-times that amount. Its balance sheet was light in tangible assets, consisting of little more than $12.25 million in cash & cash equivalents, and similar value of property, plants and equipment. It was a long path to fiscal respectability in those early years.
(Source: Tweed Marijuana Inc. Interim Consolidated Financial Statements for the Three Months Ended June 30, 2014)
Despite the daunting odds leading into its public listing, Tweed believed in its business plan. But there were inherent risks. The company knew medical cannabis patient enrollment was growing rapidly—and sought to capitalize on that fact—but stringent regulations made the profitability picture uncertain. Aspirations of a recreational marketplace was only a pipe dream with the incumbent Conservative Party in power. The long term bet was that cannabis’ therapeutic and recreational use cases would multiply over time—both here and abroad. Did that bet ever pay off handsomely.
Judging by the enthusiasm generating on opening day, the investment community believed in Tweed’s dream also. Thousands of investors frantically bid up the stock, sending TWD soaring as demand far outstripped supply.
On Friday, April 4, 2014, TWD traded as high as $4.75/share—or 533.70% above its implied LW CPI transaction price of $0.89—on a trough-to-peak basis. Volume was impressive, chiming-in at 9.9 million shares, and finishing on the TSX’s Top 5 most actively traded list. Although gains were pared as the session progressed, TWD still finished at $2.59/share—up 291.01% from its implied private placement price. Clearly, the market was engaged and ready to deploy significant investment capital immediately.
Showing that its opening session was no fluke, TWD followed up its impressive debut with a strong encore showing the following week (April 7-11, 2014). Prices consolidated into what is known as an inside bar (weekly highs and lows were inside April 4th price band), and volume totaled just under 20 million shares—or about a 4 million shares per day on average.
For the week, Tweed gained an additional 30.12%, making it clear that revenues or no revenues; proven operating model or not, throngs of investors were clamoring for a piece of North America’s first publicly-listed cannabis company.
Fast Forward to Today
While a full account of Canopy Growth’s operational timeline is beyond the purview of this article, we feel it’s important to recap the company’s early years. After all, contributions made by Canopy Growth then helped pave the way for what the industry is today: a world leading, vibrant, and thriving marketplace. Canopy Growth literally set the standards that so many LPs in the marketplace—both public and private—strive to emulate.
Canopy Growth’s first big breakout occurs in the 1st week of August, 2016. After spending a couple months within a tight consolidation range (orange), WEED soared to new heights.
Perhaps the most amazing part of Canopy Growth’s story is its position as sector trail blazer. Their biography reads as a who’s-who of industry firsts: They were the first to cannabis company to list and obtain a $1 billion valuation; the 1st to procure a major direct-equity investment from a multi-national conglomerate; the 1st to up-list to the New York Stock Exchange; the 1st to sell a legal gram of cannabis in Canada post-legalization. They remain the only cannabis company to be a member of a major global stock market index, joining the the S&P/TSX Composite index last year.
All along the industry’s evolutionary curve, Canopy Growth has been at the forefront of progress. We’re all familiar with the public announcement that helped WEED become the sector’s market cap leader. But there’s plenty of less heralded events that make the company great. Whether that involves helping to shape government policy, or aiding emerging juniors gain visibility through its CraftGrow platform, Canopy Growth has impacted the sector in ways not readily apparent to the average investor.
Forward-thinking has always been an integral part of the company’s ethos under the stewardship of Founder, Chairman and Chief Executive Officer Bruce Linton. For example, he was among the first executives to publicly talk about cannabis as an ingredient, and introduced cannabev into the industry lexicon. Innovating is simply what WEED does, and why it will continue being a sector powerhouse going forward.
Thus, we can’t wait to see what the next 5 years will bring. Midas Letter would like to extend our deepest gratitude to Canopy Growth for leading Canadian and World cannabis to ever-newer pinnacles. Neither the sector, nor Midas Letter and affiliated outlets, would be where we are today without your exquisite leadership.
And the greatest part of this journey—the best is yet to come.
April 3 will mark the 5th Anniversary of @CanopyGrowth being public. In 5 short years @BruceLintonCGC et al have taken the company from a market cap of $30m to ~$20 billion. One of the greatest accomplishments ever in Canadian capital markets.
“High Five” to Canopy Growth. pic.twitter.com/dt46MEcWG1
— James West's Midas Letter (@MidasLetter) March 31, 2019
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