In March 2014 Lexaria Corp (LXRP) announced [1] its intent to enter the medical marijuana industry after eight years of being in the oil & gas business. Nine months later on December 1, Lexaria announced [1] they are in the process of closing a transaction to sell all of their Belmont Lake oil assets.
Lexaria is using the proceeds from the sale to retire all corporate debt, and to further its business pursuits in the medical marijuana market in Canada and the Cannabidiol (CBD) infused products market in the USA.
After the completion of the recent acquisition of PoViva Tea, the sale of oil & gas assets, and the reitring of all corporate debt; Lexaria expects to have a remaining cash balance of around $1 million US.
The Fundamentals
Lexaria has some attractive features that many penny stocks do not. Besides being debt free and having cash on hand the company is an SEC filer [2] , has insider buying, a reasonable outstanding share count, and a diversified business strategy in two emerging growth markets.
As of September 11, 2014 there are 34,249,690 shares outstanding. At a PPS of $0.10 this gives the company a market cap of around $3.5 million. From November 13 to November 21 CEO Chris Bunka purchased [3] 470,405 shares on the public market bringing his total ownership to around 5.2 million shares. The float is 22,400,000 shares.
Most importantly to me as an investor management has delivered more than empty words since their announcement to enter the medical marijuana sector. Click here to see an interview [4] with the CEO, unfortunately it was done before the announcement of the PoViva acquisition.
ABOUT POVIVA TEA
Lexaria recently announced [5] an acquisition of 51% of PoViva Tea. PoViva Tea is a company in its infancy that specializes in delivering CBD infused products. PoViva owns two patents pending that govern the process used to infuse CBD into food products.
Initially the company will sell PoViva teas. Lexaria is also investigating several popular food and drink sectors where their patent pending cannabidiol delivery may prove extremely popular. The company hopes to start rolling out a CBD infused product line in early 2015 and will announce further developments as their product mix becomes finalized.
“Most CBD’s taste awful,” stated Lexaria CEO Chris Bunka in an interview with Financial Press. “Marian Washington and Michelle Reillo, the two principals at PoViva, have developed patent-pending technology to bind CBD to a lipid. As well as enabling the body to process the CBDs more efficiently, this technology makes it taste much better.”
Here is some background info on the two principals of PoViva taken from an 8-k filed by Lexaria [6] .
“Founder of PoViva, Ms. Marian Washington lends her extensive leadership and knowledge of athletic physiology to the company. Marion has a Master’s Degree in Biodynamics and Administration and was awarded an honorary doctorate from West Chester State College. For thirty years, Marian served as head women’s basketball coach of a prominent division one university. Ms. Washington has been received into multiple Halls of Fame, received prominent athletic leadership awards, and coached national and international teams, including coaching the 1996 Olympic Women's Basketball Team to a gold medal.
Michelle Reillo, PhD, the co-founder of PoViva, will drive production and new products within PoViva as the Product and Research Manager. Michelle has a BSc in Nursing; a MS in Gerontology; and a PhD in Education. She has extensive experience with both Federal and private proposal development and submission and research projects, including CDC, NIH, NCI, NIDA, and AmFar. She is a former Clinical Director of Hyperbaric Medical Clinic. Michelle is the author of AIDS Under Pressure and pioneered retroviral research in hyperbaric medicine and HIV/AIDS. She is the author of many highly regarded research papers in the medical community.”
PoViva Tea Business Plan
The following is an excerpt from PoViva’s business plan, the whole thing can be found in the same 8-k linked above.
Vision Statement
Poppy’s Teas, LLC envisions providing an array of Legal CBD teas enriched with CBD and/or THC for easy, flavorful, and healthy delivery via loose or tea bag form (patent is pending). An alternative to inhaled Legal CBD, Poppy’s Teas LLC provides Legal CBD teas which combine the antioxidant qualities of various teas with the benefits of CBD and/or THC, ready for convenient preparation by the patient as a hot or cold beverage.
Mission Statement
Poppy’s Teas, LLC intends to introduce into the Legal CBD marketplace a line of Legal CBD teas which provide the benefits of various teas, such as, but not limited to, green, black, and white, in combination with the benefits of CBD and/or THC in convenient, easy-to-prepare tea bags or as loose teas for use with tea balls or brewing systems.
The Company
Poppy’s Teas, LLC is a Legal CBD tea company located in Florida which has developed a collection of Legal CBD teas (patent pending) for sale online or in stores and dispensaries (CBD/THC teas may be sold where law allows; CBD enriched teas may be sold nationally and internationally). Poppy’s Teas, LLC is licensed in Florida and is managed by two owners of the company.
The Product
Poppy’s Teas, LLC presents a collection of CBD and/or THC enriched Legal CBD teas for use as hot or cold beverages. Conveniently offered in ready-to-use tea bags or loose tea forms, Poppy’s Teas are original, Legal CBD teas which offer an alternative for patients who do not wish to inhale cannabis. Tea is the second most popular beverage in the world, following water, maximizing the appeal for Legal CBD teas for health and well-being through the combination of antioxidants which naturally occur in teas and the benefits of CBD and/or THC. Offered in boxes of twelve, twenty-four, or forty-eight tea bags or as one pound containers of loose tea, Poppy’s Teas are priced to remain competitive and profitable in the Legal CBD industry.
MMPR License Application & Odds of Approval
Lexaria submitted their first license application to grow and sell medical marijuana in Canada in July of 2014. The submission was done via a Joint Venture agreement with Enertopia (ENRT). Lexaria would own 49% rights to the grow operation.
The facility [7] they have submitted the application for is a 75,000 sq. ft. building in Burlington Ontario. Currently they are leasing 20,000 sq. ft. with a right of first refusal to lease the additional 50,000 sq. ft. Planned production areas have 22 foot ceilings which allow for further expansion through the possibility of a 2nd mezzanine level. The license application is for 10,000 kilograms per year (22,000 lbs).
As of early November there have been over 1,100 MMPR applications submitted [8] . About half of all applications submitted were returned as incomplete, around 250 were rejected and around 40 withdrawn.
22 licenses to produce have been granted and 291 applications are still in process. Health Canada has stated they will not cap the amount of licenses granted, instead letting the free market decide how many manufacturers there ultimately will be.
The application process has slowed considerably over the summer and fall. General thinking for the reasons behind this is the changing to more stringent requirements for licensed producers and the injunction filed allowing MMAR to continue. Click here for more info on MMAR vs MMPR. [9]
I believe Lexaria has better odds than most at receiving a license. The consultants the company hired to help with the MMPR application process had prior experience consulting for one of the companies that have been awarded a license. The facility in Ontario has municipal approval. Either Lexaria or Enertopia are in regular contact with Health Canada. This shows they are making their best effort to be compliant with the evolving Licensed Producer requirements.
The slow application process may also prove beneficial to Lexaria as they have enough cash to wait out the long license approval process. Many of the smaller applicants may not be able to hold out long enough to see a license awarded. Getting the paperwork together for a credible application is about a $50,000 investment. When you add the recurring costs of leasing a facility and payroll the application gets to be a hefty investment. [8]
The Chart
While the company has been getting their business plan from point A to point D the company’s price per share has been on a bad roller coaster ride. Here is my narration of the story behind the chart.
When the company initially announced their entrance into the medical marijuana industry in March the company’s share price shot from $0.04 to $0.80. The rapid increase was most likely caused by rampant investor enthusiasm in the sector at the time, the JV agreement with Enertopia giving exposure, and a relatively small public float.
The slow descent from $0.80 back down to $0.05 I think can be attributed largely to two factors. One, the pot stock bubble of early 2014 popped and share prices across the sector came tumbling down over the summer and fall. Two, investors lost faith in companies that had applied for MMPR Licenses as they learned the approval process would be lengthy and the number of applicants high.
After the PoViva acquisition announcement the price rebounded slightly to where it is now around $0.10.
Summary
Lexaria stands out amongst its peers in the medical marijuana sector. Management has provided investors with more than empty words since their announcement to enter the sector. The company has stayed busy and dedicated to their business transformation. After the sale of their oil & gas assets the company will be debt free with cash on hand and 100% focused on growth in two emerging industries, medical marijuana and CBD infused products.
Disclaimer: I am long LXRP
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