The Cannabis Bubble and the skyrocketing stock price of Elixinol

  • Feb 04, 2020 AEDT
  • Team Kalkine
The Cannabis Bubble and the skyrocketing stock price of Elixinol

Cannabis industry belongs to a sector that has seen traction and speculation at the same time. Once, a topic of taboo, cannabis has become one of the most debated topics globally at present. The industry has seen massive hype after cannabis was legalized for recreational purposes. In Canada, cannabis stocks earned immense attention following its legalization in October 2018. Meanwhile, in Australia, cannabis has become a vigorous and fast-growing sector with strong growth prospects following its legalization in February 2016 and ever since, Australia’s medicinal cannabis industry flourished at a rapid pace.

However, the year 2019 has been a roller coaster ride for the medicinal cannabis sector. The biggest cannabis market in the world, North American market, witnessed a substantial deterioration in 2019 when the largest cannabis company in terms of market value globally, Canopy Growth revealed that its cannabis oil products were reverted following the rejection from retailers and thus, resulted in a loss of USD 20.3 million, in turn, losing share price by as much as 32.8% last year.

The industry was thought to be the game-changer at first, but so far, the bubble seems to have burst. Analysts have correlated the overall condition to the dot-com bubble that was seen in the early 2000s. With the industry increasingly looking unattractive to investors, the market experts are of the belief that the bullish view cannabis sector has been witnessing over the past few years is going to be a thing of the past.

Lets now discuss about the soaring share prices of ASX-listed cannabis stock, Elixinol Global Limited (ASX: EXL). However, before digging in deep let us first take a look at the benchmark S&P ASX 200 performance.

The Australian share market plunged 94 points on Monday, 03 February 2020, to close at 6923.3 points, as oil prices falls, and Chinese stocks witnessed 9% decline on re-opening under the shadow of the coronavirus outbreak after being closed for more than 7 days. However, Tuesday 04 February 2020, as the global markets rebounded, S&P/ASX 200 also edged up 24.2 points or 0.35% to 6947.5. The impact of the deadly virus epidemic was also visible on the health care sector of Australia, represented as S&P/ASX 200 Health Care index that surrendered at 45324.1 with an dip of 203.8 points or 0.45% from the previous close on Monday, but this sector also bounced back on Tuesday with 442.5 points or 0.97% to trade at 45,766.6 (mid-day).

The share prices of a cannabis stock, Elixinol Global Limited (ASX: EXL), a global leader in the hemp derived CBD business involved in innovating, manufacturing and selling hemp derived CBD products skyrocketed by 20.635% at the time of writing on Tuesday, 04 February (03:40 PM AEDT) and trading at $0.760. The market capitalization of the company stood at 86.97 million with 137.89 million outstanding shares.

Elixinol Sold its Business Assets

In a recent announcement dated 03 February 2020, Elixinol unveiled that it has agreed to sell its subsidiary Hemp Foods Australia Private Limited (HFA) to a subsidiary of Shanghai Shunho New Materials Technology Co., Limited (Shunho), Yunnan Lvxin Biological Pharmaceutical Co., Ltd., pursuant to a share purchase agreement.

Elixinol informed that the sale of HFA is in accordance with its refined strategy to focus on the hemp derived CBD market.

Hemp Foods Sales in Australia

As per the announcement, Shanghai Shunho New Materials will acquire the entire business (100%) of HFA, including all the assets & liabilities, for cash consideration of $500k.

Completion in this share purchase agreement is provisional on, among other standard conditions, gaining 3rd party consents & entry into a licence agreement between Elixinol and Shunho wherein the later will be appointed as the exclusive licensee for manufacturing & distributing hemp derived CBD products in regions including China, Hong Kong, Taiwan and Macau under the Elixinol brand. Completion of the transaction is expected to take place in Q1 2020.

Furthermore, a non-cash impairment charge of approximately $12.5 million is expected from the sale of HFA which is to be included in the 2019 full year financial results. Nevertheless, this transaction will enhance the future operating cashflow of the group allowing Elixinol to focus its wealth and resources exclusively on its business of CBD products derived from hemp.

The licence will begin on the date of completion within the terms of the SPA. The agreement will continue for 3 years as per the terms from the 1st date when Shunho begins invoicing its 1st customer for any Elixinol product in China, Macau, Taiwan, & Hong Kong.

Audit and inspection of the manufacturing units & facilities, marketing supplies & products produced by Shunho within the terms and conditions of the licence agreement will be conducted by Elixinol. This is to ensure that they comply with Elixinol’s product standards.

It is anticipated by Elixinol that Hemp Foods Australia business sale will generate nearly $12.5 million non-cash impairment charge which is to be included in the full year financial results of FY2019.

Elixinol’s management also deems this sale will boost its future operating cashflow & will allow to direct its wealth as well as resources exclusively on its hemp derived CBD products business.

Sale of Nunyara land

  • Elixinol also informed that it has taken a decision to not pursuing its application for a medical cannabis cultivation licence in Australia, after reviewing numerous options for the Nunyara business.
  • Furthermore, it was updated that the Elixinol would initiate the process of selling the assets owned by Nunyara including the land and redistribute the cash earnings to support its Elixinol CBD operations.
  • This decision gives rise to an additional non-cash impairment charge amounting to $4.8 million which will form a part of FY 2019 financial results.

In a nutshell, despite the general market impulsiveness, strong competition and economic pressures, globally, the companies have been investing in this sector with an aim to deliver finest, proven and trusted products for both the consumer and medical markets, conducting research and development via collaborations on clinical trial programs to prove the benefits of cannabis in a range of indication- this all indicates that the cannabis sector may have seen a decline, but it is not yet out of the league. The bubble might have burst but the pie-in-the-sky growth estimates for the cannabis industry on a long-term basis are still very much in the picture.


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