In this edition of "Rising High," The Fly conducted an exclusive interview with Keith Merker, chief executive officer of WeedMD (WDDMF), a Health Canada-licensed producer and distributor of medical-grade cannabis. Here are some of the highlights:
STARSEED ACQUISITION: On November 29, WeedMD announced it entered into an agreement to acquire Starseed Holdings, a medically-focused, federally-licensed cannabis company offering products to insured patients with coverage under their benefit plans. The arms-length all-share acquisition is valued at approximately $78M, and Starseed’s strategic investor, the Labourers’ Pension Fund of Central and Eastern Canada made a concurrent $25M equity investment directly into WeedMD. “This transaction was the natural progression of a long-standing relationship between WeedMD and Starseed,” Merker said. “We’ve previously been a supplier to Starseed as they do not cultivate. We'd been talking about pursuing a more permanent partnership for some time now... It's truly a complementary deal.” According to the company, the deal will combine complementary operations across the value chain, enhance WeedMD’s processing and distribution capabilities and allow it to realize significant cost and revenue synergies. “The benefit of this acquisition is that once complete, we’ll be starting 2020 on a fully-funded, financially stable footing,” Merker said. “We see the LPF investment providing WeedMD with a strong financial partner in the event WeedMD chooses to be more opportunistic.”
COMPETITIVE EDGE: When asked about the company’s key differentiators, the CEO said the company’s consistent supply of quality cannabis sets it apart from competitors. “The problem with the production in this space is that there is an undersupply of quality cannabis,” he said. “That is the key differentiator that WeedMD brings – we are widely recognized as a reliable source of quality-produced, medical-grade cannabis. Our products – sold in the adult-use market under the Color Cannabis brand - generally sell out as soon as they hit the shelves and we consistently get positive reviews from both our medical and adult-use clients.” The Color Cannabis line includes a variety of strains in multiple formats and aims to reflect the range in tastes and preferences of cannabis consumers.
EXPANSION: Merker said the company does foresee eventually making a move to expand internationally as more regions and countries mull the legalization of cannabis use. “Up to now, we’ve been focused on scaling our quality production platform,” he said. “While we’ve already started exporting genetics to Australia and Israel, we are a very pragmatic company and we prefer to perfect our local channels before we expand too quickly. I’m generally satisfied that we’re now at that point and we’re looking at the potential opportunity for international growth.”
CHALLENGES: When asked about the challenges facing the company, the CEO said the biggest hurdle has been the need to shift amid industry changes. “Our biggest company challenge to date has been the need to pivot at a moment’s notice as the industry matures and aligns to meet new regulations and changes,” Merker said. “While all very necessary, it’s been a challenge nonetheless and has had a domino effect on production and processing timing.” However, the CEO noted that WeedMD’s team is “very astute” and has been prepared to meet the challenge. “For example, ensuring we had a licensed space to dry and process our outdoor harvest as the crops came down this year,” he said. “I believe we were the only licensed producer that received approval for a designated outdoor grow processing facility adjacent to the field.”
OPPORTUNITIES: As the cannabis space develops, Merker said the company has been forming selective and strategic partnerships and is excited to launch new products in Canada. “With the acquisition of Starseed, we’ve chosen a partner that has a distinct medical distribution platform and access to a captive patient base,” he said. “Additionally, with the onset of Cannabis 2.0 products and our extraction facility known as CX Industries coming fully online in 2020, we expect to introduce new high-margin cannabis products in Canada.”
FLOWER VS. DERIVATIVES: When asked about how he expects cannabis use to shift over time, the CEO said the company has been monitoring how market has rolled out in places like California and Colorado as they have similar size markets to Canada’s industry. “What is consistent is that dried flower still outpaces the sale of derivatives and we don’t see that changing here in Canada,” he said. “We do however expect that the regulated vape market will be in demand.”
INVESTOR INTEREST: As investor interest in the space rises, Merker said all investors need to conduct their own due diligence. “Pay attention to balance sheets: cash flow, revenue, gross margins as well as stability of distribution channels,” he said. “Also, pay attention to companies that try to tackle too much, too quickly – they will lose focus. WeedMD took the time to perfect its cultivation and production platforms and we’re now widely recognized for maintaining that focus in all that we do.” The CEO added that the company is seeing that the cannabis industry has reached an inflection point. “Consolidations will happen more frequently but success will come to those with strong balance sheets, fiscal discipline and a focused approach,” he said.
OTHER CANNABIS STOCKS: Other publicly-traded companies in the space include Aleafia Health (ALEAF), Aphria (APHA), Aurora Cannabis (ACB), Biome Grow (BIOIF), CannTrust (CTST), Canopy Rivers (CNPOF), Cronos Group (CRON), Cresco Labs (CRLBF), CV Sciences (CVSI), Delta 9 (VRNDF), DionyMed Brands (DYMEF), Elixinol Global (ELLXF), Greenlane (GNLN), General Cannabis (CANN), GrowGeneration (GRWG), Harborside (HSDEF), Harvest Health & Recreation (HRVSF), Hemp Inc. (HEMP), HEXO (HEXO), ICC International Cannabis (KNHBF), India Globalization Capital (IGC), Indiva (NDVAF), Innovative Industrial Properties (IIPR), Khiron Life Sciences (KHRNF), Liberty Health Sciences (LHSIF), MediPharm Labs (MEDIF), MedMen Enterprises (MMNFF), Origin House (ORHOF), Organigram (OGI), Planet 13 Holdings (PLNHF), Real Brands (RLBD), Sproutly (SRUTF), Sunniva (SNNVF), Tilray (TLRY),Tetra Bio Pharma (TBPMF), Trulieve Cannabis (TCNNF), Vireo Health (VREOF), Wayland Group (MRRCF), Westleaf (WSLFF) and Zynerba (ZYNE).
Keywords: cannabis, weed, stocks, marijuana, cultivation, legalization, CBD, THC, hemp