WeedMD Investors Have High Expectations for Q2

WeedMD Inc. (TSXV:WMD) will be reporting Q2/19 financial results on Thursday, August 29, 2019, before markets open

SmallCapPower | August 9, 2019: WeedMD Inc. (TSXV:WMD) (OTCQX:WDDMF) is a Canadian federally-licensed cultivator and distributor of cannabis and cannabis extracts for medical and recreational markets. The Company currently owns and operates two licensed facilities: 1) in Aylmer, Ontario, a 26,000 sq. ft. facility and; 2) a 158-acre property located in Strathroy, Ontario, which also includes a 616,000 sq. ft. greenhouse facility. In total, WeedMD has 136,000 sq. ft. of licensed production space with 150,000 kg of fully-funded capacity. The Company is expecting to expand its footprint to more than 550,000 sq. ft. of indoor and greenhouse production space by the end of 2019. The Company also received approval on May 31, 2019, for 27 acres (1.1M sq. ft) of outdoor cultivation space.

Recent Updates

On August 7, 2019, WeedMD reported preliminary unaudited revenues of $8M for the three months ending June 30, 2019, an increase of more than 140% compared to the previous quarter. These results would put WeedMD in the Top 12 for revenues for Canadian licensed cultivators. The Company will host a conference call with management on August 29, 2019, at 10 am to discuss its Q2/19 financial results.

On July 24, 2019, the Company announced an exclusive licensing agreement between Ignite Brands Ltd. (CSE:BILZ) and CX Industries, for an initial two-year term with an option for a third year. Under the terms of the agreement, WeedMD has an exclusive agreement to sell Ignite branded CBD products in Canada. This follows an announcement from July 23, 2019, when WeedMD announced the launch of its extraction subsidiary, CX Industries. CX Industries is expected to have 200,000 kg of biomass processing capabilities and will offer tolling and white-label services.

Company Highlights

On June 17, WeedMD completed planting of more than 20,000 fully-rooted cannabis plants at its 27-acre outdoor cultivation space in Strathroy. The Company is expecting to complete the harvest by Fall 2019. This will provide WeedMD with sufficient access to one of the least expensive methods of cultivating cannabis (International Cannabis Corp., 2018).

Figure 1: Strathroy’s Outdoor Grow Operation

Source: WeedMD

WeedMD has converted its 26,000 sq. ft. Aylmer facility into a large-scale cannabis extraction and processing operation that is expected to process over 200,000 kg of biomass annually. This should help to streamline the Company’s operations and increase its ability to put forward market-ready products. WeedMD’s experience and expanded extraction facility will help aid the Company in processing product for the growing demands expected to occur in Canada with the legalization of edibles in October 2019. The Company already has experience in oil extraction, as it has been doing in-house extraction since 2017.

Figure 2: Strathroy Indoor Facility

Source: WeedMD

Valuation

Figure 3: WeedMD Comps Table

Source: Capital IQ, Ubika Research

Trades at a discount compared with its peers. WeedMD trades at a 1.5x 2020E EV/Revenue and 4.3x 2020E, EV/EBITDA multiples, compared with Canadian large-cap LPs, which trade at a consensus average of 7.9x and 25.1x multiples, respectively. Additionally, WeedMD has one of the lowest EV/fully-funded production capacities at 1.3x, compared with 13.7x the average of its peer group. We believe that this valuation gap should close once the Company successfully finishes its outdoor grow, brings its extraction facility on-line, and ramps up production going into 2020.

Figure 4: Overview of WeedMD’s Operations

Source: Company Reports

Figure 5: Indoor Facility Layout at Strathroy

Source: Company Reports

Distribution Channels

WeedMD utilizes a multi-channeled distribution strategy that involves medical, recreational and international initiatives. Within Canada, WeedMD has supply agreements with six provinces that include: 1) British Columbia; 2) Alberta; 3) Saskatchewan; 4) Manitoba; 5) Ontario; and 6) Nova Scotia. Below is a brief summary of each of the Companies distribution methods:

Medical

WeedMD supplies directly to medical patients and utilizes its agreement with Shoppers Drug Mart, one of Canada’s largest retail pharmacy chains, to reach its customers. With this agreement, customers will be able to purchase WeedMD’s cannabis products from Shoppers’ online store. Currently, WeedMD is the only licensed cultivator to establish multiple preferred supplier agreements with long-term care providers. The Company currently represents more than 3,500 patients in a market that is made up of more than 400,000 patients.

Recreational

WeedMD has agreements with six different provincial distribution agencies in Nova Scotia, Ontario, Manitoba, Saskatchewan, Alberta and British Columbia.

International

The Company announced in September 2018, that it had completed an export of cannabis genetics to Australia’s Medifarm, which is a private licensed producer based in Queensland. Additionally, the Company announced its expansion into Israel with its partnership with Technion-Israel Institute of Technology in February 2018. Lastly, WeedMD delivered its second international shipment to PharmoCann, a private pharma-agricultural medical cannabis producer that is under the control of Israel’s Ministry of Health, following the quarter end of September 30, 2018.

Product Development

Below is a snapshot of WeedMD’s current product pipelines:

Vapes and Other Concentrates

Currently in development with a planned release in Q4/19. Revive Therapeutics and WeedMD signed a medical cannabis and R&D supply and collaboration agreement on June 13, 2018. One of its objectives is to develop an alternative delivery system to smoking or vaporization.

Beverages

On March 8, 2018, WeedMD and Phivida Holdings Inc. entered a Joint Venture (JV) for cannabis-infused beverages. The JV will focus on manufacturing, marketing and distribution of cannabinoid-infused beverages under the brand name CanBev.

Edibles

Currently developing partnerships for 2020 product expansion.

Topicals

  • Currently in the process of development for release in Q4/19.
  • Gel Capsules and other Medical Products
  • Gel Capsules, along with other products, are in the pipeline to be released in Q2/19.
  • Current medical products include dried cannabis and cannabis oil.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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