November 2018 - Volume 15 - Issue 5 | Wednesday November 21, 2018

Canadian Stock Exchange Will Not Ban U.S. Cannabis Investments

While Canada’s medical marijuana industry is leading the global movement, marijuana producers in the country have their sights set on the United States market.

Although the U.S. marijuana market is attractive, Canadian firms levered to this market came under pressure after the TMX Group said it may prevent companies from making investments in a country where cannabis is illegal at the federal level.
Now, these firms have reason to rejoice after the TMX Group reported that there would not be a ban on the clearing of securities of issuers with marijuana-related activities in the U.S.
Aphria: The Greatest Beneficiary of this News?
Canadian medical marijuana producer Aphria Inc. (APH.TO) (APHQF) is probably the best example of an international firm looking to take advantage of the booming cannabis market in the United States.
From Arizona to Colorado, from cultivation to technology, Aphria is levered to some of the most attractive cannabis markets in North America.
Aphria first invested in the United States through an intellectual property (IP) transfer agreement with Arizona-based Copperstate Farms, LLC. The company purchased a 40-acre greenhouse facility and is one of the largest medical cannabis facilities in Arizona.
Doubles Down on Its Arizona Investment
Earlier this year, Aphria’s subsidiary invested an additional $3 million that will help advance its capital expenditure program related to extractions, lighting and power generation. In return, Aphria's ownership increased to 18.5% from 10%.
Copperstate owns approx. 1.7 million square feet of greenhouses on its 40-acre property in Snowflake, Arizona. The company plans to start producing medical cannabis on approx. 348,000 square feet in the fall. Copperstate estimates that its expanded operations can produce approx. 18,000 kgs every year.
Copperstate has received a special use permit for cannabis production in its entire facility and the Arizona Department of Health Services previously approved Copperstate's initial operations located in 6,000 square feet. They will need to approve the expanded cultivation prior to operating the expanded facility.
Launches United States Expansion Strategy and Enters Florida
In April, Aphria announced the launch of its United States expansion strategy through a lead investment in Liberty Health Sciences which will operate under Aphria USA.
Under the agreement, Aphria will invest $25 million into DFMMJ Investment Ltd., a special purpose private company, to acquire the assets of Chestnut Hill Tree Farm. These assets will then be placed into a subsidiary of SecureCom Mobile Inc., (SCE.CN) (SCQBF) as part of a business combination.
The initial $25 million investment will acquire the assets of Chesnut Hill Tree Farm LLC, a licensed holder in Florida authorized to dispense low THC medical cannabis to patients. Once the transaction is complete, Aphria will own approximately 37.6% of the issued and outstanding common shares of Liberty.
As part of the transaction and upon completion of the business combination, Aphria has agreed to license its brand to Liberty for a perpetual 3% royalty on all cannabis and related product sales. In addition, Aphria is also licensing its intellectual property of its greenhouse growing capabilities.
While Aphria’s initial investment relates to Florida, the goal of the expansion strategy is to target states that have approved medical cannabis and entities that meet specific investment criteria.
Outlook is Bright
Although Aphria has been under considerable pressure, it is not unique to the company and its peers have been facing a very similar situation. We are favorable on the opportunity Aphria has to capitalize on the North American cannabis industry and believe this is a stock that needs to be watched.
While we have concerns regarding Aphria’s greenhouse production method, the Sun Belt tends to be much warmer and have much more sun than the rest of Canada. Going forward, we would like to see the company expand its presence and not be levered to one production facility.
That being said, we believe the valuation is attractive after the recent decline and continue to see upside to current levels. Aphria is led by a management team that continues to execute and we will keep an eye on how this continues going forward.
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