Dont Panic! Read this, digest it and breathe easy:The Cannabis industry is currently between a rock and a hard place. Only producers that have the guts to swallow short-term pain for long-term gain will survive (e.g. scaling back unnecessary facility building, reducing production cost, opening new distribution channels and addressable market even if it means dilution, raising capital even if it means dilution). It is what it is. Now READ: The Acquisition creates a unique, high-margin sales channel for WeedMD’s low-cost, high-quality production, creating a vertically-integrated company that can execute across the entire value chain. Starseed has launched an industry-first partnership with Canada’s largest construction union, the Laborers’ International Union of North America (“LiUNA”), to provide medical cannabis as a fully-covered drug benefit for its more than 100,000 members and retirees in addition to their respective dependents.
"We believe that there are three pillars to long-term success in the cannabis space: quality production, unique distribution, and a strong balance sheet,” said Keith Merker, CEO of WeedMD. “This acquisition allows WeedMD to increase its distribution capabilities, maximize margins and access growth capital through a strategic investor.”
Angelo Tsebelis, President of Starseed, commented, "At Starseed, we have focused on building a unique sales platform that largely mirrors the pharmacy distribution model. Simply put, by making cannabis a paid benefit we have removed many of the barriers to mass market uptake of medical cannabis. Coupled with WeedMD’s high-quality cultivation assets and processing capabilities, we are well-positioned for accelerated future growth.”
LPF’s Strategic Investment bolsters the combined company’s financial position, bringing WeedMD’s pro forma cash balance to approximately $56 million (as at September 30, 2019 and including the $25 million Strategic Investment). Upon completion of the Transaction, existing WeedMD shareholders will own 55% of the newly-formed company while Starseed shareholders, including LPF, will own 45% (see Transaction Summary below for details).
Benefits to WeedMD Shareholders:
- Combining Complementary Operations Across the Value Chain: WeedMD is matching its low-cost production platform with Starseed’s high-margin sales channels to generate substantive margins. WeedMD’s production capacity creates ample supply for Starseed’s rapidly-growing patient base, currently at approximately 6,500 patients. Starseed is currently operating at a medical revenue run rate of approximately $10 million per year. WeedMD’s cultivation platform will also enable Starseed to scale the distribution of products in the adult-use market under its Saturday brand.
- Enhanced Processing and Distribution Capabilities: Wholly-owned by WeedMD, CX Industries is expected to reach a processing and extraction capacity of 200,000 kgs by year-end 2020, providing Canada and international markets with new and innovative consumption methods. By leveraging Starseed’s packaging and distribution capabilities at its fully-licensed Bowmanville facility, the Company has the necessary infrastructure to meet emerging industry demand, including expected growth in the retail environment in 2020.
- Significant and Immediate Cost and Revenue Synergies: Starseed’s cost of goods sold is expected to decrease significantly by transitioning from wholesale-purchased product to internally-produced WeedMD supply, creating an immediate production cost synergy. Furthermore, the Company has targeted SG&A savings of up to $10 million per year by end of 2020. On the revenue side, WeedMD expects to benefit from Starseed’s industry-leading average annual patient spend, which is approximately three times WeedMD’s predominantly business-to-business wholesale unit pricing, which creates a material, recurring, low-turnover revenue opportunity.
- Cornerstone Investor Fortifies Balance Sheet for Long-Term: Through its $25 million Strategic Investment into WeedMD, LPF is a supportive strategic investor. Upon completion of the Transaction, LPF will own approximately 29% of the pro forma company on a fully-diluted, in-the-money basis. LPF is one of the fastest growing pension funds in Canada.
- Broadens An Already Strong Management Team: Starseed’s management team brings extensive retail, medical, marketing, and financial expertise and experience, as well as strong industry and client relationships. These strengths are complementary to WeedMD’s cultivation and product-focused skillsets.