Beyond the Bong

Cannabis Merger and Acquisition Deals Crumble

One of the major drags on U.S. pot stocks has been the lack of merger and acquisition (M&A) approvals.

This weighed on shares in 2019.

Over the past couple of years, cannabis companies raced to corner the market and secure growth at all costs.

We cheered as deal after deal after deal was announced. The money seemed to flow like water as record price tags were paid.

But the party came to a glass-shattering stop. And the proposed deals got sucked into the black hole of the Hart-Scott-Rodino (HSR) Antitrust Improvements Act.

As the HSR delays dragged out, pot stocks tanked and M&A deals started to be either renegotiated or abandoned.

I stated that anywhere between half to three-quarters of all proposed marijuana M&A deals would likely be scrapped or taken back to the drawing board.

I expect that trend to continue in 2020, as we saw last week.

More M&A Up in Smoke

Harvest Health & Recreation (OTC: HRVSF) was one of the latest to take such action. The multistate operator (MSO) filed suit against Falcon International to terminate its merger agreement.

Almost exactly a year ago, Harvest sought to gobble up Falcon in order to stake a claim in the California market. Falcon owns 16 licenses in the state and its distribution platform serves 80% of California dispensaries.

But now the deal has gone belly-up. Harvest Health wants the money it gave Falcon back.

The MSO alleges that Falcon failed to meet its obligations, including providing auditable financial records.

Harvest Health isn’t the only MSO walking back on its deal. With the extremely difficult market conditions of 2019, we’ve seen other once-friendly companies turn sour on one another, like Emerald Health Therapeutics (OTC: EMHTF) and Village Farms International (Nasdaq: VFF).

But there may be a light at the end of the tunnel…

High Hopes for Growth

Cresco Labs (OTC: CRLBF) finally closed its acquisition of Origin House!

This was another deal we covered that was restructured in November.

And now, instead of just being the largest MSO in Illinois, Cresco instantly becomes one of the largest distributors in California as well.

Through Origin House, Cresco is now selling products to 575 dispensaries in California, representing approximately 65% of total storefronts in the state.

The High Five

Below are our High Five, where – each Monday – I cover the five pot stocks I believe will make major moves – up or down – in the week ahead.

1) Aphria (NYSE: APHA) will announce second quarter results tomorrow. Analysts are looking for CA$130.32 million in revenue with a loss of $0.01 per share. When first quarter results were released, shares of Aphria surged 24.5%. But they’re now trading more than 10.5% below that level.

2) OrganiGram Holdings (Nasdaq: OGI) is also scheduled to report first quarter results after the bell tomorrow. Expectations are for a 19.8% increase in revenue to CA$15.73 million with a loss of $0.02 per share. When last year’s first quarter report was released, shares jumped 19.16%. But they then fell on two of the next three releases.

3) CannTrust Holdings (NYSE: CTST) was the epitome of cannabis’ fall from grace in 2019. The company is providing biweekly default status updates following the wreckage of its unlicensed grow operations.

And it’s received warnings from the New York Stock Exchange about its shares being delisted. The exchange requires companies to have an average closing price of $1 for 30 consecutive days. CannTrust shares moved above $1 on January 3, the first time they’ve done so since November.

4) Neptune Wellness Solutions (Nasdaq: NEPT) will be at the Annual ICR Conference in Orlando this week. The company recently announced several initiatives to accelerate growth, including the launch of its hemp-derived wellness brand, Forest Remedies, in February.

5) Scotts Miracle-Gro (NYSE: SMG) shares had a strong run in 2019. The gardening supply company that’s tied to the cannabis space wasn’t bothered by the weakness in the sector’s shares. It’ll report first quarter earnings on January 29. Shares have fallen on the release date in three of the past three years.

OrganiGram is the only member of this week’s High Five that hasn’t outperformed our benchmark, the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF), over the past month.

Chart - The High Five

CannTrust is really soaring. But that’s coming off of desperate, near-apocalyptic lows.

Meanwhile, the cannabis ETF itself continues to hover right around its 52-week low of $6.10.

Iconic film critic, Roger Ebert, once said, “No good movie is too long, and no bad movie is short enough.” And the bear market in cannabis is like a horrible flick that can’t seem to end.

We’re approaching our 10th month of declines. But with shares at multiyear lows, there doesn’t appear to be much further they can fall.

This week’s earnings will let us truly know if the selling pressure has exhausted itself.

If you have a pot stock in mind that you’d like me to discuss here, leave a comment below.

Here’s to high returns,

Matthew