Of Mice and Men and Cannabis Companies
Cannabis supply troubles continue in Canada due to a variety of factors. In the spring of 2019 and into summer, companies face a reckoning as to who can hang in and supply a hungry market in a stable, cost-effective way. The variety of operational and expansion models being used are showing their strong and weak points and company managers are seeing the strategic paths they have pursued exposed as either successes or as doomed endeavors.
It’s a logical step to add spending money to boost production capacity capital spending in order to grow. Capital expansion is an uncertain path, but with good site selection, strong planning of the grow facility and solid return on investment based on expected new demand a company can meet after bringing the new building online and enter the product mix. The plan doesn’t always turn out, however.
VIVO Cannabis Inc. (TSXV: VIVO) (OTCQX: VVCIF) showed us last year that the air giveth and the air taketh away–its first-in-Canada Airhouse facility at Napanee, Ontario–where internal pressure keeps the building up–deflated along with investor hopes for a speedy start to production at that site.
Dial M for Merger
Teaming up with or gobbling up a competitor is a reasonable choice for companies and leaders who determine that the merged entity would be worth more than the sum of its parts. Sometimes those mergers never get off the ground, or they go haywire after approval–personalities, processes, and plans can turn out to be anti-synergistic, leaving everyone holding a bag worth less than when they started.
Auxly Cannabis Group (TSXV: XLY) (OTCQX: CBWTF) (FRA: 3KF) had announced and been very excited about a strategic investment in FSD Pharma Inc. (CSE: HUGE) (OTCQB: FSDDF) (FRA: OK9) to build a grow facility, but the initially sweet-smelling partnership went sour within a few short months. The companies released competing versions of events through press statements, without actually saying it was concerned about certain aspects of the building infrastructure, and FSD countering that it had met its obligations in preparation for a Health Canada inspection. This volley of competing perspectives led to overall confusion and likely detracting from the value of each individual by demonstrating poor initiative and decision making on either side of the aborted deal. Blame flew in both directions, but the end result is the same no matter who bears more of it: investors lose confidence, the market loses certainty, and each side lost energy and time.
As an example of a new tie-up going smoothly, we have Aleafia Health Inc. (TSX: ALEF) (OTCQX: ALEAF) (FRA: ARAH) and Emblem Corp. (TSXV: EMC) (OTCQX: EMMBF), with Emblem shareholders voting overwhelmingly to approve the acquisition by Aleafia Health. Management on both sides has continued to hit milestones in the consummation of the partnership. At the end of the day, Emblem will be the latest but not the last company that has been successfully integrated into the Aleafia Health’s array of services and products, following Aleafia’s previous successful absorption of Canabo Medical Clinics.
Crop and Facility Failures Lead to Faltering Confidence
In late 2018, rumors flew around the Internet saying and showing that esteemed licensed producer Canopy Growth Corp. (TSX: WEED) (NYSE: CGC) had lost some 15 tons of product at its Tweed facility in British Columbia. Canopy countered that it was planned destruction due to regulatory delays, which did not soothe investors as the story now sounded like mismanaged regulatory risk rather than a straight-up horticultural mess.
Overall, executives are telling and selling their stories to each other and to the broader investor audience. The crowd will only react favorably if the product is delivered and sold for profit, quickly. Look for growth strategies that focus on consistent, compliant crops and an efficient path to market.
Best of luck to you all and happy trading!
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