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Who's Going Public? Cannabis IPOs in 2019 Part 2

Written by Jason Williams
Posted January 3, 2019 at 7:00PM

Last week, I started my multi-part cannabis IPO series with a look at Magical Butter, a Florida-based company specializing in cannabis cookware.

This week, we’re going to learn about another American company with plans to go public this year.

I know I promised to step up my coverage to a couple companies a week. But this one has so many parts that it really needs all the space I’ve got this week.

So let’s get into part two of my 2019 cannabis IPO series with Chicago-based Verano Holdings...

Starting Small and Growing Fast

Verano is a holding company made up of multiple smaller operations that were recently consolidated under central ownership. It’s now one of the biggest U.S. cannabis companies. But it hasn’t always been such a major operation.

The companies that make up Verano got their start just a few years back. In 2014, one applied for its very first cultivation application in Illinois. That company was called Ataraxia. And it was a tiny company. But it marked the start of something truly massive.

The next year, Ataraxia became one of just 18 companies to get a license to grow cannabis in Illinois. And a few months after that, the company began sales and became the first to market medical cannabis in the state.

The first sales also marked the introduction of the Goldleaf brand — a brand that has become one of the best known in the industry.

After those first two years, growth started to really ramp up for what would become Verano.

In 2016, Freestate Wellness got one of the first 15 licenses to cultivate cannabis in the state of Maryland. It also acquired a Las Vegas cannabis company called Lone Mountain Partners. And the combined companies became the first iteration of Verano.

Late that year, the company acquired another Nevada-based company in Naturex, LLC. The name was changed to Zen Leaf. And another one of the country’s most popular cannabis brands was born.

Verano went on to get three dispensary licenses in Maryland in 2016 as well.

The next year was more about optimizing the many purchases from 2016. But in 2018, management came out swinging again and started adding more valuable brands and operations to the portfolio.

Verano signed licensing agreements with two dispensary companies in Illinois and expanded the Zen Leaf brand. It also introduced more products into the Nevada market and created two more sought-after brands: Encore Edibles and Sweet Sins.

The Zen Leaf brand was expanded into Maryland with the opening of several new dispensaries early in the year. And now we’re going to see expansion of the company’s brands into Puerto Rico as well. In June 2018, Verano acquired two dispensary licenses on the island.

And finally, that takes us to the Verano Holdings I’m talking about today. In July 2018, the cofounders secured $120 million in funding to consolidate all the brands under one roof.

The newly formed corporation has more than 45 facilities and licenses in six states plus Puerto Rico. And it’s the proud owner of some of the best brands in the U.S. cannabis market.

And the funding round was led by cannabis investing experts who should help propel Verano to the next level.

Big-Time Backing

Most of the funding for the consolidation into Verano Holdings came from a Canadian company that’s long focused on U.S. cannabis.

Scythian Biosciences put up $88 million to get a piece of Verano. Plus, it sold one of its other investments, 3 Boys Farm, to the newly formed company for an additional $100 million worth of class B shares.

That may seem like a lot of ownership going to one investor. But Scythian is the kind of company you want on your team when you’re trying to take over the cannabis market.

Scythian, or SOL Global Investments (SOL), is already an international cannabis company. And its focus has always been the United States market.

SOL is based in Canada. But it knows, like I do, that the real money will come from the market to the south.

It’s already got other investments in the U.S. market in the form of medical cannabis facilities and a media platform exclusive to the global cannabis industry. And a partnership with the University of Miami neuroscientific research department is helping advance cannabis research for the U.S. and abroad.

Plus, the directors at SOL also sit on or have helped found many successful cannabis companies in Canada already. So having them backing Verano is definitely a bonus for the company.

Caveat Emptor — Let the Buyer Beware

While I see a lot of great potential for Verano when it lists on the Canadian exchanges, investors need to temper hopes with concerns.

And Scythian’s involvement does bring up one potential concern in my mind.

You see, Scythian was recently involved in a controversial report from a short-selling hedge fund called Quintessential Capital Management.

The report was about Canadian cannabis company Aphria (TSX: APHA). And it suggested that the directors and insiders at Aphria used company money to make themselves and their friends rich.

I read the report and looked through the images and information. And I’m not convinced anything illegal went down. Shady, perhaps. But not illegal.

The short of it is that this private investor who’s worked with Scythian, Aphria, and many other cannabis companies in the past bought some property in Colombia and Jamaica. Then he sold it to Scythian at a big markup. Scythian then sold the property along with some other assets to Aphria — again, at a major markup.

When you see how much the insiders at Scythian made — and how much the private investor made — for such a short investment, you start to get suspicious that something illegal went on.

But like it or not, that’s how private equity works. That’s why we all dream of becoming the folks on Shark Tank. They make the gut-busting profits. They’re the ones who really come out on top.

And a lot of the investments they make come to them by recommendation.

So it’s not odd that a private cannabis investor who’s been involved with the industry for decades found a deal on a lucrative opportunity before someone else did.

And it’s not strange that an investment company would pay him a massive premium for the assets.

And it’s completely normal for that company to then sell the assets to another.

The connections between the companies and investors make it shady. But none of that is illegal. It’s how venture capital and private equity work.

But Verano will definitely be under scrutiny from the short sellers. And anything that seems amiss could send shockwaves through Verano’s shares.

But if the company goes wild after its IPO, early investors could take some negative press and still have a profit.

I was an early investor in Aphria. My profits aren’t as high as they were before the questionable coverage by Quintessential Capital. But they’re still looking nice.

Just keep in mind this is a new industry. And there are some snakes out there. Sometimes they’re hiding in the boardrooms. But sometimes they’re masquerading as defenders of shareholders just to make a buck on a short position.

Either way, they lead to elevated risk. And they need to be on your radar at all times.

Coming Next Week

That’s all I’ve got for you on Verano. It looks like it could be an incredible opportunity. But it’ll be closely watched for any management missteps.

I’ll be back next week with more coverage on cannabis IPOs to watch for in 2019. I’ve got a producer, a processer, and a seller lined up for you.

And later this month, I’ll be doing some boots-on-the-ground research as I head off to South America to check out another cannabis company prepping to go public.

Make sure you keep an eye out for my emails. Hopefully you’ll appreciate the information.

If nothing else, they’ll have some pretty pictures for you to look at.

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Jason Williams

follow basic@TheReal_JayDubs

After graduating Cum Laude in finance and economics, Jason analyzed complex projects and budgets for the U.S. Army. Then, at Morgan Stanley, he led the assistants' team for the North American repo sales desk, responsible for hundreds of multibillion-dollar trades every day. Jason is the assistant editor for The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.

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