WeedMD goes public with a new take on the Canadian cannabis sector

WeedMD (CVE:WMD) got off to a good start on the TSX Venture Exchange today, volume reaching 2.7 million shares during morning trade at prices from $0.83 to $1.29. That range gives the company a market capitalization north of $50 million.

It’s a strong debut that has been some years in the making.  Private capital has backed the company to this stage in its young life, enabling it to obtain approval from Health Canada in April 2016 for the start of cultivation at its 26,000 square feet of growing space in Aylmer, Ontario.

The next major milestone should be receipt of a license to sell dried cannabis, expected this spring or early summer.  With some 300 kg of product in the vault awaiting the green light for shipping, and existing capacity to produce over 1,300 kg per annum, the company stands to see revenue build up quickly as full commercialization gets underway.

WeedMD Chief Financial Officer Keith Merker foresees expansion at Aylmer before long, with 120,000 square feet being the number management has in mind for this second-phase build-out.  The space would house a full seed-to-sale cycle, accommodating as many as 45,000 plants once fully operational.

“We have the application process going with respect to increasing capacity and once we receive our sales license we’ll start on phase 2.  We will build out our lab as well as a further mothering room and nursery that would augment overall production by up to 40%,” says Merker.

The 6,000 plants under cultivation right now had to weather multiple rounds of Health Canada testing.  Policies and procedures, plus analysis of products to measure for pesticides, heavy metals and “other nasties” as Merker refers to them, were just some of the screens.

During that time, the WeedMD team conducted phenotyping to make sure it was cultivating only the best of the breeds it chose to grow based on an extensive genetics library.  The team is confident it will be selling a product second to none into the market soon.

Initially, sales will be primarily to established dispensaries serving the medical-use market.  Longer term, however, WeedMD has a complementary strategy reflecting the medical leanings of its corporate name.

“Our strategy for differentiation is founded on the relationships our CEO has in the retirement home and long-term care communities,” Merker explains.

Bruce Scully, WeedMD co-founder and Chief Executive Officer, is the third generation of his family to operate long-term residences for seniors.  It is an industry that has more parallels with the young medical cannabis market than you might think, given the similar levels of regulation and frequent inspections.

It is also a sector where people deal with health issues on a daily basis that cannabis has the potential to help alleviate.  These conditions include chronic pain and trouble sleeping, among many others.

“With a lot of these situations we will be looking to provide high CBD (cannabidiol) products as opposed to high THC products,” Merker points out.  “We are not looking to expose seniors necessarily to the psychoactive effects known to go along with THC.  We are hoping to alleviate some of the issues with the non-psychoactive compounds in cannabis that have significant medicinal benefits.”

The strategy on this side of the business is a gradual build designed to develop deep relationships that ensure two primary things: reliable revenue sources for WeedMD and a dependable source of high-quality products for care homes.

“We are developing a comprehensive program that will acknowledge KPIs (key performance indicators) that speak to what the homes are about and provide them real-time data to monitor what is happening with each resident,” explains Merker.  “It is much more than providing a product – it is providing a service.”

With Canada’s Liberal Government having recently introduced early legislation to bring about the legalization of recreational use cannabis, however, WeedMD is also preparing to take full advantage of what is sure to be a large increase in demand for product through new legal channels.

“With legalized recreational use just around the corner, the supply opportunity is immense and we have a long-term plan in place to be one of the top-tier players,” Merker says, referring again to expansion at Aylmer, and the possibility to add facilities at other sites, as required.

WeedMD begins public life with just over 60.5 million shares outstanding, about 20% of that owned by management and insiders.  The company raised $7.6 million in November via convertible debentures that automatically became shares through the public listing process.  Merker says “the bulk” of that raise remains in the treasury, ready to use for operations and initial expansion work.

Importantly, there are some 18.8 million shares worth of warrants and options also on the books, which at today’s debut share values are all in the money.  If converted in their entirety, proceeds would total over $14 million.

In explaining the decision to go public Merker, says the team is looking forward to working with “the tremendous arbitrage between the private and public markets with respect accessing capital.”  While there was an early urge to put the company on the market, the seasoned team, which includes highly respected public company executive Michael Kraft as co-founder and chairman of the board, decided to wait until production was underway and commercial sales were within reach.

Dr. Luc Duchesne, Chief Scientific Officer and the man in charge of quality control, is another strong hand.  And Merker is exceedingly pleased with the quality of other team members as well, perhaps coining a new term when he speaks of enjoying “second-mover advantage” in the sector.

“We have been able to bring on some great employees who had experience growing for other licensed producers.  They saw the mistakes and went through the growing pains of the industry in 2014 and 2015 when a lot of operations had trouble ramping up.  We have been able to roll out our cultivation program without too many hiccups.  Second-mover advantage has served us well.”

Story by ProactiveInvestors