WeedMD Inc (CVE:WMD) (OTCMKTS:WDDMF) shares grew in Canada on Monday as the market reacted to its blockbuster acquisition of Starseed Holdings Inc.
CEO Keith Merker said that the deal “brings together two like-minded organizations that are both deeply committed to quality cannabis and to our respective medical roots”.
Shares closed up nearly 7% to C$0.99 in Toronto on the news.
READ: WeedMD inks blockbuster deal with Starseed Holdings to become major player in the medical cannabis sector
Starseed Holdings is a medically focused, federally licensed company that provides cannabis for insured patients through their benefit plans.
In addition to the acquisition, WeedMD is bringing on a key strategic investor in the Labourers’ Pension Fund of Central and Eastern Canada (LPF), which will inject C$25 million into the new medical cannabis company.
In a release Friday, WeedMD told shareholders that the acquisition bolsters the company’s leadership position in the medical cannabis market through Starseed’s exclusive distribution and patient channels, provides important growth capital, and fortifies the firm’s balance sheet.
The firm also hailed its first outdoor harvest season as a success after it cultivated 17,000 kilograms of dried flower.
WeedMD’s Merker told shareholders in a Monday letter that the transaction was spurred by headwinds in the cannabis sector, as capital becomes scarce and the adult-use market is slow to ramp up. With its traditional reliance on the B2B wholesale market as a source of revenue, the firm experienced lower margins.
The deal will help to increase margins through its built-in distribution channels, according to Merker. “Starseed’s captive and covered patient base offers something different, selling cannabis at over C$9 per gram and at usage rates twice the industry average,” Merker wrote. “This exclusive channel allows us to drawdown our quality inventory at materially higher margins.”
Starseed comes to the table with a built-in partnership with Canada’s largest construction union, the Laborers’ International Union of North America, 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.
LPF’s investment boosts the new company’s financial position, bringing WeedMD’s pro forma cash balance to approximately C$56 million. Through the combination of cash on Starseed’s balance sheet and the new investment from LPF, WeedMD has secured $42 million of fresh capital, the company said.
“Following our convertible debenture raise in September, WeedMD was fully-funded for its near-term plans, (but) with valuations under pressure and challenging business conditions, we wanted to ensure that we were fortified for the periods to come,” Merker wrote of the investment. “To achieve this, we wanted more than just capital, we wanted a long-term investor.”
For Starseed, the transaction means it is able to move off expensive and unreliable third-party supply and instead draw down on WeedMD’s reliable, low cost and quality product, the CEO wrote. Merker said the company anticipates savings of C$10 million per year by the end of 2020 without factoring in any improvement in gross margin.
“With a target of 20,000 patients by the end of 2020, spending on average approximately $1,500 per year, and now moving to targeted gross margin of 75%, we believe the Starseed channel has an incredibly exciting runway in the years to come,” Merker told shareholders.
“We are preparing to take WeedMD into the future with new products, new brands, sustainable and growing profitability, and a message that we’re here for the long run.”
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