The shares have been on a tear recently, nearly reaching an all-time high. But is any company with no revenues, massive losses, and limited capital worth $83 million? For the answer, let’s take a look.
Raising capital for startup companies is the most impossible task on the face of the planet. Unless, of course, you are in the business of cannabis. So much money is chasing a growing number of names. It is an investment banker’s real-life fantasy.
Take the case of Speakeasy Cannabis Club Ltd. (SPBBF). To say that the Rock Creek BC Canada-based company is benefitting from the rush to invest in the future of pot in all of its forms would be an understatement. The company is currently valued at $83 million-plus. That is a fair distance from the $20 billion Canopy Growth Company. Still, $80 million is not exactly chump change.
The thing is, Speakeasy is not even a cannabis company—at least not yet. So what are they? Here is how they present themselves. “Speakeasy is a late-stage applicant under the Access to Cannabis for Medical Purposes Regulations (the "ACMPR") that is seeking to leverage three generations of farming experience in B.C. to produce high quality, small batch cannabis products once it obtains a license to do so.”
In the past, this description contained the words “when, as, and if,” but on January 30th the company announced that it had completed the review by the Health Canada, which is a prelude to being granted a license to cultivate.
Exactly when any sort of license might be granted is unknown, but let’s assume it will take place sometime soon. On that day, a company owned 28,000 square foot indoor facility will be ready to ramp up.
Another 100,000 square foot expansion facility was promised for the recently completed first quarter of 2019. A press release dated Jan. 16, 2019, discussed plans to expand the facility from 80,000 to 100,000, but revealed no date as to when this goal is to be achieved.
C&P is key
Cultivation and production appear to be key variables in the Speakeasy story. In spite of its memorable name, the company has no retail stores or any products bearing the Speakeasy name. A small section of the new facilities is being devoted to research.
Instead, Speakeasy is more of a collective of cannabis growers taking the strains of a very limited number of featured growers (5) to produce small batch, premium quality cannabis in the wilds of British Columbia where there are probably as many cannabis growers as there are bongs. So EASY should have lots from which to choose.
Financials: Who needs revenues?
EASY has no revenue, but they do have some C$27 million in operating losses. Management has been generously doling out stock left and right to board members and others.
Neither of these two issues seems to restrain investor enthusiasm. Back in January, Speakeasy raised C$5.5 million in a private placement of equity. Then just last month, C$8.25 million was closed on another private placement. Between the two offerings, existing shareholders saw a 35 percent dilution.
In the real world, when substantial amounts such as 35 percent dilute shareholders, sellers show up, and prices tumble. However, this is not the norm in the surreal world of cannabis. Over the past three months, the shares of EASY have doubled.
The private placements haven’t been the only thing going on. A new CFO, David Cross, was appointed to clear up a few regulatory and public reporting problems Speakeasy had on its plate.
Speakeasy is no Canopy
The benefits of an inflated stock price have permitted EASY to finance its existence to this point. The very same can be said for most every cannabis company. So what is the appeal of a company like Speakeasy? Let’s face it, based on its own strategy; the company is searching for a limited, but profitable, niche in the future of medical and adult cannabis.
The key assets are centered on cultivation and production. It is reasonably safe to assume that permits from Health Canada will be received, turning idle space into revenue generators. Okay, so that helps explain the recent superior price performance, but what about the future?
After a news-driven doubling in the share price, and no imminent likelihood of revenues, there is a decent chance the stock could run out of gas, and correct, perhaps even significantly.
The attraction of Speakeasy rests more on the probability that the current cannabis industry consolidation will put the company in the crosshairs of acquisition oriented companies such as Aurora (ACB) or others seeking to expand their production quickly.
Of course, however, this argument can be applied to just about every cannabis stock.