There was a time – quite coincidental with the Coronavirus lockdown – when cannabis stocks were all-the-rage. The ‘green rush’ as it was termed saw an explosion of cannabis-related companies across North America, so much so that a North American Cannabis Index emerged, that tracked the performance of the plethora of cannabis stocks.
However, as the industry became more regulated, a lot of that promise disappeared into smoke. That said, with Maryland and Missouri recently legalising the use of recreational cannabis, twenty-one states in the US approve the use of cannabis as a pastime or hobby, and 37 states now have legislation that allows for the use of cannabis-cultures for medicinal or therapeutic use.
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Although many companies have vanished into a haze, the projected sales of legal recreational and medicinal cannabis products is expected to hit almost USD150bn by 2031 (according to market research analyst, Allied Market Research), quite an uptick from the USD13.4bn market three years ago.
Seed Innovations provides access to finance
One of the main issues that the cannabis industry has had to face has been access to banking, and it has been (because of the legally-questionable nature of the industry, where in one part of the world you can buy cannabis in a retail outlet, and in another part of the world you are risking a trip to the gallows, or a long time in jail, as WNBA player Brittney Griner found out in Russia) locked out of the traditional financial sector.
This is where AIM-listed incubator fund, Seed Innovations LON:SEED (and others) have stepped in to provide a financial lifeline to nascent cannabis businesses. Formerly known as FastForward Innovations, the fund makes investments in: “fast growing and industry leading businesses with a focus on investing within the medical cannabis, health and wellness space”.
Seed operates at the early-stage end of the sector, “[identifying opportunities] that have an upcoming investment catalyst and [can] grow its portfolio in terms of value whilst limiting the number of investee companies to a level where relevant time can be devoted to each.”
The company released its final results to the end of March today (27th June), making a loss for the year of GBP4.4m, marginally down on the GBP4.5m loss it reported for 2022. The company did not pay any dividends, due to: “challenging […] macro-economic and political factors affecting stock market stability,” said non-executive chairman, Ian Burns.
Bit of a downer
The company was on something of a downer, with Burns saying: “There is no denying that early-stage investing continues to be challenging. However, we are confident that the current negative period, like previous ones, will create opportunities for Seed and produce a cohort of companies that, in the long term, will create value for our shareholders.”
The fund claimed that a number of its portfolio companies were on the cusp of “liquidity events” and it hoped that the opportunity to dispose of some of its portfolio companies through IPO or trade sale this year was viable, after applying the brakes to any disposals last year due to the instability of the markets.
The firm claimed to be in a strong position with regards to new opportunities, with GBP2.5m cash on hand, but: “we share our investors’ frustrations in what is perceived sometimes as a lack of deal flow from the company…” said Burns, adding: “…it is worth saying that whilst we evaluate numerous opportunities throughout the year we believe it is vital to look for quality over quantity and we are not alone in striving for the higher quality deals.”
The fund did make some progress in the year, most notably the sale of Leap Gaming, a virtual-sports, slots, and casino applications to IMG Arena US, for EUR14m which it announced in December – IMG had already acquired a stake in Leap, and the sale would see USD5.8m coming into Seed Innovations over the next two years – a sum it earmarked for future investment.
Sou’wester
The fund followed this up with the disposal of South West Brands to OTO International for GBP6.2m – a wellness brand that used plant ingredients and cannabis extracts in it treatments. The South West Brands sale was paid for in shares in OTO up to 1.4% of the company.
Seed received GBP423,000 in OTO ordinary shares after the fund converted shares it held in South West Brands and had GBP167,000 repaid, originating from a GBP150,000 loan. In total Seed made GBP90,000, or 1.18x profit from the investment.
Little Green Pharma [ASX:LGP] an Australian medical cannabis pharmaceutical, part of Seed’s portfolio, had a good year, doubling revenue to AUD20m and halving losses to AUD9.2m. Portage Biotech NASDAQ:PRTG also had a encouraging year, according to Seed, however the American biotech’s shares have been drifting around the USD3 level, well-below analyst consensus of USD10 a share and “a significant discount to cost” said Burns.
The fund continues to live in hope. It is hoping its GBP960,000 investment into Jersey-based horticultural company, Northern Leaf will blossom as Seed said the company is aiming to IPO this year. Seed also hopes, Isle of Man-based pharma, Juvenescence, which hopes to prolong human life and combat the effects of aging, will see a price uptick if it heads into Series C funding.It is a hard industry to call. Undoubtedly, the cannabis sector will grow over the next decade, as more nations legalise marijuana for recreational purposes and the biotech sector has some wins. But since 2019, there has been a lot of froth generated in the sector.
Seed Innovations opened trading today at 1.95p, and had dropped to 1.86p by lunchtime. The investment company has offered a -27.4% year-to-date return, with a -62.8% one-year return with shares ranging from 1.6p to 5p over a 52-week period.
Seed Innovations has a market cap of GBP4.2m.
