Canada became the first developed nation to legalize use of recreational marijuana in October 2018. It has since also passed a law allowing citizens with a criminal record for marijuana possession to be pardoned quickly and without cost.

Canada’s health minister was required to conduct a review of the legislation, its administration, and operation three years after coming into force, so the review is coming a year later than had been planned.

Health Minister Jean-Yves Duclos said it took longer than expected to begin the review because the government wanted to “make sure things were done right” and plan a review broader than what is mandated by law.

While a study of the law’s safety was a priority, Duclos said the review also would look at Canadian cannabis industry complaints about high taxes, sale limitations and advertising restrictions.

The Canadian Chamber of Commerce welcomed the review, saying its broad scope would help facilitate growth of the legal cannabis sector.

“However, to effectively displace the illicit market and protect the public health and safety of all Canadians, law enforcement, businesses, industry and all levels of government will need to continue to work together,” the chamber’s National Cannabis Working Group said in a statement.

The review will evaluate the law’s impact on young Canadians and progress toward the legislation’s aim of providing adults with access to regulated, lower-risk and legal cannabis products, according to a statement from the government.

It will also analyze what progress has been made in deterring criminal activity and displacing the illicit cannabis market.

Through this review, “we will strengthen the (Cannabis) Act so that it meets the needs of all Canadians while continuing to displace the illicit market,” Duclos said in a statement.

— Reporting for Reuters by Ismail Shakil in Ottawa.

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Demand for pot edibles such as gummies has risen during the pandemic, as people stuck at home turn to cannabis-related products for relaxation and entertainment.

“The categories that resonate the most with consumers, particularly in THC space are gummies and beverages, we continue to look at other ways of consumption but these two seem to be the ones that are taking off,” Canopy CEO David Klein told Reuters.

Tetrahydrocannabinol or THC is the ingredient in marijuana that gets users ‘high.’

Wana sells gummies in the U.S. state of Colorado and licenses its intellectual property to partners who manufacture, distribute and sell Wana-branded gummies in states including California, Arizona, Illinois, Michigan and Florida.

Canadian pot producers are looking at cross-border expansion, as the industry has garnered investor interest with some U.S. states legalizing pot and on increased expectations for federal marijuana reform.

“We remain more bullish than others in the regulatory front and feel that our ecosystem in the U.S. is strong enough to grow even without federal permissibility happening in the short term,” Klein added.

U.S.-listed shares of Smiths Falls, Ont.-based Canopy, down 46 per cent so far this year, rose nearly two per cent to US$13.55 in premarket trade.

The acquisition will provide Canopy access to Wana’s vertically integrated facility in Colorado and its licensing division, the company said, adding that it would continue operating independently in the state until the deal closes.

The transaction is structured as three separate option agreements allowing Canopy Growth a call option to acquire 100 per cent of the membership interests in each Wana entity, the company said in its statement.

— Reporting for Reuters by Rithika Krishna in Bangalore.

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The decline in valuations over the last few months has been largely due to a lack of progress on anticipated federal marijuana reforms in the United States.

Jushi said Monday its revised offer of $91 million upfront, down from $100 million agreed upon in April, comprised $40 million in cash, about $34.7 million in stock, a $11.5 million unsecured three-year note and a $5 million unsecured five-year note (all figures US$).

With this latest acquisition, Jushi enters one of the largest U.S. weed markets. The Florida-based, Vancouver-registered company, which went public in Canada through a reverse takeover in 2019, has operations in seven states and a retail footprint of 24 dispensaries.

— Reporting for Reuters by Sahil Shaw in Bangalore.

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Dealmaking in the U.S. cannabis industry has heated up this year as companies bank on Democrats’ promises to reform marijuana laws and potentially legalize the plant at the federal level.

However, little progress has been made so far and weed stocks have fallen off a cliff in recent months. Gage Growth shares have plunged about 22 per cent up to its last close, since its direct Canadian listing in April.

Gage Growth, which closed its first day of trading at C$2.89 on April 6, will receive an implied consideration of C$2.66 per share in the merger.

The combined company will have operations in five U.S. states and Canada, including seven cultivation and processing facilities and 23 operating dispensaries in the two countries, according to TerrAscend, which has a major cultivation and processing plant at Mississauga, Ont.

— Reporting for Reuters by Shariq Khan.

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The Cannabis Administration and Opportunity Act floated by Senate majority leader Chuck Schumer, finance chairman Ron Wyden and New Jersey Senator Cory Booker, would expunge federal non-violent marijuana crimes, further medical research and allow cannabis companies access to essential financial services.

While adult use of cannabis is legal in 18 states, and allowed medically in 37 states, it remains illegal under U.S. federal law, deterring banks and others from dealing with companies that sell marijuana or related products.

The draft set the minimum age required to buy cannabis at 21 and limited retail sales transactions at the state level to 10 ounces of cannabis at a time or the equivalent amount of any cannabis derivative.

The draft also states that a new definition of cannabis would be established and proposes moving cannabis oversight to the Food and Drug Administration and regulators that overlook alcohol and tobacco, away from the Drug Enforcement Administration.

States will control the possession, production, or distribution of cannabis, the draft says, while shipping marijuana into states that have not legalized it will be prohibited. However, such states can not stop shipments going to other legalized regions through their borders.

Senator Chuck Grassley, the top Republican on the Judiciary Committee, said “This new bill puts the cart before the horse.” He added that marijuana use needs more research.

A final legislative draft will be introduced later and feedback on the discussion draft can be provided until Sept. 1.

To become a law, the measure will have to pass both the Democratic-controlled Senate and House of Representatives and be signed by President Joe Biden.

“It is hard to see how this can pass, but nonetheless it is positive to see progress and momentum,” said Greg Heyman, founder of cannabis investment firm Beehouse Partners.

A major cannabis banking reform bill that was approved by the U.S. House of Representatives in April has failed to make any progress in the Senate.

“Our main concern over this current legislation (Cannabis Administration and Opportunity Act) is around the ability to get it passed in the Senate,” private equity firm Poseidon managing director Michael Boniello said, adding it may hinder other federal cannabis reforms, including the banking act, from being passed in 2021.

— Reporting for Reuters by Arathy S Nair in Bangalore.

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Calgary retailer High Tide Inc., which operates the Canna Cabana chain of stores in three provinces, announced a merger deal Friday to take up Toronto-based Meta Growth Corp., which runs the Meta Cannabis and NewLeaf Cannabis chains.

Once combined, the proposed new entity expects to have 63 stores in Alberta, Saskatchewan, Manitoba and Ontario and about $133 million in annualized revenue, the two companies said.

It would also be the top cannabis retailer in Ontario by corporate-owned store count — and will have “high-graded its Alberta portfolio to hit the maximum stores allowed” in that province, they said.

The deal announced Friday would see High Tide acquire all TSX Venture Exchange-traded shares of Meta, for 0.824 High Tide shares per Meta share. Once the deal closes, Meta’s shareholders would have a total stake of about 45.625 per cent in the combined company.

High Tide and Meta said they plan on “nearly doubling” their current combined footprint to about 115 locations by the end of next year, “with a focus on Ontario, Canada’s largest cannabis market” — and to show “cost and operational synergies” of about $8 million to $9 million a year within 12 months of closing their deal.

Their immediate post-merger count of 63 stores accounts for “optimizations (and) closures” as well as “transactions that have yet to close.” Those include Meta’s purchase of locations in Kitchener and Waterloo, and High Tide’s planned $12 million selloff of its KushBar retail stores to U.S.-based Halo Labs.

“Both companies have complementary retail footprints and similar proven operational efficiency models,” Meta CEO Mark Goliger said Friday in a release. “We can immediately leverage synergies, increase margins and have double the scale for the combined company’s owned IP and private label initiatives.”

High Tide, as “the first publicly-traded Canadian cannabis retailer in our peer group to generate positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), we are excited to demonstrate the tremendous strength of this combined entity,” CEO Raj Grover — who would lead the combined company — said in the same release.

Industry observers have been expecting a surge in mergers and acquisitions in the cannabis sector, as profitable companies seek to expand, betting on more widespread legalization in the U.S. market after November’s presidential election.

Within Canada, where recreational cannabis has been legal since October 2018, the onset of the COVID-19 pandemic and related lockdowns are also believed to have spurred more consumer demand for such products.

Retail data published Friday by Statistics Canada showed domestic cannabis stores having booked $201 million in sales in June 2020 alone, up 7.9 per cent from May 2020 and up 119.3 per cent from June 2019.

Major Canadian cannabis production companies such as Aphria — already an investor in High Tide — and Canopy Growth are reported to be interested in acquisitions. — Glacier FarmMedia Network

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Shares of Tilray Inc. and Canopy Growth Corp. have climbed more than 20 per cent since the start of the year, while Cronos Group and Aphria Inc. are up more than 10 per cent. The ETFMG Alternative Harvest exchange-traded fund, which targets the global cannabis industry, is up 5.8 per cent in that period.

A speculative “green rush” fueled by the legalization of cannabis in Canada and some U.S. states faltered last year, as investors grew worried about oversupply and whether companies could bring enough customers out of the black market. Uncertainties over U.S. regulations and revenue shortfalls further weighed on the sector.

Investors are now betting that some of these companies have become undervalued. Canopy, for instance, trades 10 per cent below the average target price among the 22 analysts that cover it, according to Refinitiv data. Its forward price-to-sales ratio, meanwhile, is at 16.4, well below its peak of 32.1 it hit in January 2019 and more than double its low from November.

“We went through the golden age and then we fell into the dark ages where valuations were assuming that these companies were just dead,” said Michael Underhill, chief investment officer at Capital Innovations.

Underhill’s fund owns shares of Canopy and is increasing its stake in companies such as CBD beverage maker Alkaline Water Company, cannabis financing company Ianthus Capital Holdings, and multi-state cannabis operator Harvest Health and Recreation Inc.

Others are focusing on companies that are not pure plays on cannabis, which they expect to better weather a tough regulatory environment in the U.S.

Illinois this year became the 11th U.S. state, along with the District of Columbia, to allow the recreational sale of cannabis. Yet a ballot measure to legalize recreational use in Florida, the nation’s third most-populous state, will likely not appear until at least 2022, according to a note from research firm Jefferies.

“Investors have realized that the rollout from a regulatory perspective isn’t as efficient as it should be,” said Jason Wilson, who focuses on cannabis research and banking at ETF Managers Group, which manages the US$810 million ETFMG Alternative Harvest ETF.

He is recommending shares of e-cigarette maker Turning Point Brands Inc.

Dan Ahrens, portfolio manager of the US$49 million actively-managed AdvisorShares Pure Cannabis ETF, believes the sell-off in cannabis shares was exacerbated by aggressive short-selling, or investors betting against the prices of cannabis stocks.

He is focusing on smaller companies such as Innovative Industrial Properties Inc., a real estate investment trust that leases greenhouses to grow medical-use cannabis, and cultivators such as Village Farms International and OrganiGram Holdings . Short interest in both stocks has fallen by half over the last six months.

At the same time, he is underweight large Canadian companies such as Tilray in favour of companies that will focus more directly on the U.S. market.

There are “still too many companies in the space,” he said. “Some will make it and some won’t.”

–Reporting for Reuters by David Randall.

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Klein was appointed Canopy chairman in October after Constellation booked a $430 million net loss related to the company (all figures US$). He replaces company co-CEO Mark Zekulin who took over the top job from founder Bruce Linton in July.

Linton had said that he was fired from the top job, days after Constellation expressed its disappointment over Canopy’s 2018 results.

Canopy’s U.S.-listed shares were up 3.3 per cent at $19.36 premarket, while Constellation shares were broadly unchanged.

Canada’s new brand of pot producers have all struggled to deliver in the first year of the legalization and shares in most have sunk since March. An ETF tracking Cannabis stocks has lost more than half its value since then.

Constellation Brands bought into Canopy’s shares and warrants in 2017, betting on the proposed legalization of recreational weed in several countries.

Canopy’s finance chief, Mike Lee, was previously senior vice-president and chief financial officer for Constellation’s wine and spirits unit.

Constellation said in October that it was “pleased with the progress of the Canopy team and what they have done in the last few months.”

Earlier in the day, Cantor Fitzgerald analyst Pablo Zuanic said he was surprised that it has taken this long for Constellation Brands to appoint a new CEO at Canopy, adding that there was more than a two-thirds probability to Constellation putting in a bid for Canopy in the near term.

Separately, Constellation said on Monday senior vice-president Garth Hankinson will take over Klein’s role at the company.

— Reporting for Reuters by Shanti S Nair and Shariq Khan in Bangalore.

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The decision to hold expansion plans follows a wave of enthusiastic spending by marijuana companies to scale up production, expand in new markets and on research after Canada’s legalization of recreational weed last year.

However, demand has not kept up with expectations as the country struggles with a slow rollout of retail stores among other problems.

Canada’s recent legalization of derivative products, dubbed Cannabis 2.0, has also failed to generate much hype and estimates for growth have become more cautious.

“The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations, and Cannabis 2.0 products are yet to come to market,” CEO Mark Zekulin said.

Smiths Falls, Ont.-based Canopy also took a restructuring charge of $32.7 million in the second quarter to account for returns, return provisions and price cuts for its softgel and oil products.

Suppliers like Canopy enter agreements with retailers and depending on the terms of the contract, buyers can return the product if it does not meet the expected quality or pay less if potency is below agreed ranges.

Sundial Growers ran into problems earlier in August when tons of weed were returned by a buyer because of quality issues. In fact, Tilray CEO said on Tuesday the company regularly inspects crops before buying them.

Canopy also took a $15.9 million charge related to its inventory. It harvested 40,570 kg of weed in the quarter, but sold only 10,913 kg and kg-equivalents of cannabis products.

Adjusted core loss of $155.75 million was wider than analysts’ expectations of $92.9 million, as operating expenses surged 48.2 per cent.

On an adjusted basis, net loss was 96 cents per share, above analysts’ expectation of a loss of 40 cents, according to Refinitiv IBES data.

Net revenue rose more than threefold, to $76.6 million.

— Reporting for Reuters by Shanti S Nair in Bangalore.

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Shares of the Nanaimo, B.C.-based company fell eight per cent after hours.

Canada in October became the first G7 industrialized country to legalize recreational marijuana, but sales have been dampened by supply constraints and prices that are higher than those on the black market.

The company’s cost of sales, or the cost related to pot production and its supply, rose more than six-fold to $33.6 million in the second quarter from a year earlier while total kilogram equivalents of cannabis sold surged nearly 270 per cent to 5,588 kg.

Chief financial officer Mark Castaneda told analysts that revenue growth in the second half will slow.

“You won’t see the doubling of growth like we had this past quarter. You’ll see a much more muted growth into the channel for adult-use.”

Castaneda attributed the muted growth in part to Health Canada’s decision to bring products such as edibles, extracts and topicals to the market only in mid-December, later than many had expected.

Revenue in the quarter rose to $45.9 million from $9.7 million, beating the average analyst estimate of $41.1 million. The net loss widened to $35.1 million in the quarter ended June 30, from $12.8 million a year earlier, and the loss per share of 36 cents was deeper than the 25-cent loss expected on average by analysts, according to IBES data from Refinitiv.

The results came on the back of increasing demand in the Canadian cannabis sector, which has faced supply constraints.

Larger players such as Canopy Growth, Aurora Cannabis and Tilray have spent heavily to bridge the supply-demand gap, spooking investors waiting for a sign of profitability.

The Canadian market also is seen as a testing ground for companies hoping eventually to expand in the U.S., where some states have legalized cannabis despite a federal prohibition.

“We expect the United States and Europe will be two of the largest cannabis markets long term, which is why we continue to invest in our global operations, particularly in those markets,” CEO Brendan Kennedy said on a conference call.

Castaneda also said that Tilray could turn profitable by the end of the year if it was not for international expansion.

“If the world were to stop and…no new countries to invest in, we do believe that we’d be positive EBITDA by the end of next year.”

— Reporting for Reuters by Debroop Roy in Bangalore.

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