Cannabis Investment Club

[JohnCM]

5 U.S. Cannabis Opportunities Leveraging The Power Of Brands

May 16, 2019

BY ANTHONY VARRELL

After Select, a leading cannabis concentrate company, was acquired for almost $1 billion, many investors have become highly focused on the cannabis brand opportunity and this is an area that we have been focused on.

One of the most interesting aspects of the cannabis industry is the emergence of specific trends and the amount of value that can be created by being levered to these trends. First, it was the Canadian Licensed Producer (LPs). Next, it was the United States multi-state-operator (MSO). Now, it is time for the cannabis brand.

If you are trying to determine the outcome of the Canadian LP and the United States MSO trend, you only need to look at the valuations of the top three players; all of which have multi-billion-dollar valuations. The cannabis industry is in the early innings of a multi-decade growth cycle and this is an area that investors should be monitoring.

When it comes to the cannabis brand opportunity, this market is just getting started and has significant upside potential. Today, we have highlighted 5 cannabis brand companies that we have been following and are worth taking a look at.

Ionic Brands is an Emerging Cannabis Brand Company

Ionic Brands (IONC: CNX) (ZRRRF: OTC) is a company that has been able to penetrate some of the most competitive cannabis markets by accumulating a portfolio of leading cannabis brands and has been highly focused on the cannabis concentrate opportunity. The company has been consolidating leading cannabis brands and acquiring businesses that are generating significant cash flow and we are favorable on this approach. We have taken a deep dive into the assets that are owned (or will be owned) by Ionic Brands and believe that they represent attractive and scalable opportunities.

Over the next year, we expect the trend toward cannabis concentrates to become even more significant and believe that cannabis infused products or edibles will be the primary driver of this. By 2022, the cannabis concentrate market is expected to be generating approx. $8 billion in retail sales and this represents a massive opportunity. Cannabis concentrates are the primary input product for cannabis infused product companies as well as vaporizer companies and in 2017, vaporizers accounted for more than half of the total cannabis concentrates sales in the United States.

Through WW Agriculture (WWAG) and Zoots, Ionic Brands is highly levered to the Washington state market. The company owns Vuber, a vaporizer hardware company that expects to generate $8 million in revenue and $720,000 in EBITDA in 2019. Vegas Valley Growers (VVG) is an exciting aspect of the story and is a vertically integrated cannabis concentrate operation in Las Vegas that has been generating revenue from their popular retail brands Vegas M Stick and Reno M Stick.

One of the reasons we are excited about Ionic Brands is due to the potential growth associated with its current expansion. In 2019, the company has expanded into California and Oregon, which represent massive cannabis markets and we are favorable on the growth prospects associated with these markets.

Last month, Ionic Brands expanded on its position in California and signed a letter of intent to acquire licensed cannabis volatile extraction and manufacturing assets from Kavry Management LLC. When it comes to California, we are very excited about the distribution agreement that it recently signed with Origin House (OH.CN) to enter 500 retail stores. In California, vaporizers dominated the cannabis concentrate market and represents 14% of the entire cannabis market. We believe that this relationship will prove to be a major value driver for Ionic Brands and will monitor this opportunity.

Currently, consumers can find Ionic Brands’ products in three states (California, Oregon, and Washington State) and the company plans to enter the Nevada market in the near future. The company represents a differentiated opportunity that is focused on one of the most attractive verticals of the cannabis industry and we will monitor how the team executes from here.

When compared to its peers, Ionic Brands has an attractive valuation and we believe that the opportunity has been flying under the radar. If we were to compare Ionic Brands to another publicly traded cannabis company, SLANG WorldWide (SLNG: CSX) would be the best comparable. SLANG was an early mover when it comes to acquiring cannabis concentrate brands and has a market capitalization that is greater than $500 million (CAD). This valuation bodes well for Ionic Brands which has a market capitalization of $75 million (CAD), and we are of the opinion that this opportunity has been flying under the radar.

Plus Products Continues to be a California Leader

According to BDS Analytics and Headset, two leading cannabis market research firms, Plus Products Inc. (PLUS.CN) (PLPRF) has been dominating the California cannabis infused product market and has been taking market share at rapid rates. The California edibles company has been in the middle of a major expansion and has been recording increasing demand for its product line.

In March, Plus Products released unaudited revenue numbers for the fiscal period that ended on December 31, 2018. During this period, the company generated $8.4 million of unaudited revenue and this represent more than 680% growth when compared to the same period last year. During the fourth quarter, the company generated $3.4 million in revenue, which represents approximately 32% anticipated increase above the third quarter of 2018 and 776% above the fourth quarter of 2017.

These results show impressive growth and the revenue growth was driven by sales of Plus Products’ concentrated brand portfolio. Plus Products has significant growth prospects and plans to increase the number of products that are being offered after its acquisition of GOOD CO-OP in late 2018. This was a significant acquisition as it will increase production capacity and the number of products offered to consumers. We believe that the market does not properly value the growth prospects associated with this asset and expect it to prove to be accretive in the back half of 2019.

Plus Products is in the middle of a major expansion (fully funded) and is constructing the largest dedicated cannabis food manufacturing facility in the US. The facility will be able to generate $150 million worth of products per year, with the potential to expand to $450 million and we are bullish on this opportunity. Plus Products holds the eighth temporary manufacturing license granted in California and was one of the first to introduce fully compliant products to the state.

The California cannabis market is the world’s largest cannabis market, and this makes it a very competitive market. Despite the increased competition, Plus Products continues to take market share and we are favorable on this. According to Headset, the company’s Uplift Sour Watermelon gummy was the top selling branded product across all cannabis categories in California in 2018. This is a significant accomplishment and is a testament to the quality of its product. According to BDS Analytics, the company’s Uplift and Restore products remained the #1 and #2 best-selling edible products in California, respectively.

The reason why we find these statistics to be significant is due to the opportunity that Plus Products has when it expands into new markets. The company has already proven to be a leading cannabis brand in what is probably the most competitive cannabis market and we expect to see the management team replicate its success in burgeoning cannabis markets across the United States. Plus Products is a cannabis brand to be watching and we are excited about this burgeoning opportunity.

Wildflower Brands is an Under-appreciated Opportunity

Earlier this month, we highlighted Wildflower Brands (SUN.CN) (WLDFF) as an opportunity that has been flying under the radar and has a portfolio of cannabis brands. Wildflower Brands was one of the first cannabis companies to go public and the shares started trading on the Canadian Stock Exchange in June 2014.

2018 was a banner for Wildflower Brands and we expect 2019 to be even more significant. So far this year, the company has been off to a hot start and has been able to further advance its story. Over the next year, we expect to see Wildflower continue to build on its success and expect to see the company fundamentals significantly improve.

During the last year, Wildflower Brands has been nothing short of an execution story and has expanded into several new markets in the United States, while creating a significant footprint to capitalize on the Canadian cannabis retail opportunity. The North American cannabis company has massive potential catalysts for growth, and we will monitor how the team is able to execute from here.

Wildflower Brands has an attractive operating structure and is comprised of three divisions that are focused on distribution in California through King Extracts, the global CBD market through Wildflower, and the cannabis product and accessory market in Los Angeles through Exclusive.

Currently, more than 300 stores in the United States carry Wildflower-branded cannabis products. More than 200 of the stores are located in Washington State and the company also has a significant presence in California and New York. When it comes to being focused on attractive cannabis markets, Wildflower Brands has had its finger on the pulse of the market and we are bullish on the markets that it is levered to.

Going forward, we expect to see Wildflower Brands continue to penetrate the United States cannabis market while it also expands its reach in Canada. The company recently announced a major acquisition of a cannabis retail operation in Vancouver and we find this to be significant. This is one of the most attractive Canadian cannabis markets and we expect this focus to be a major growth driver in the near future.

Another attractive aspect of the story pertains to its focus on the cannabis delivery opportunity in California as well as its relationship with Eaze. In late 2018, Wildflower launched its delivery service in Los Angeles and is licensing technology from Eaze to help route deliveries efficiently, manage inventory and comply with state law. The cannabis delivery market represents a massive market that is not too saturated and Wildflower could not have selected a better strategic partner. Eaze has been able to dominate the California market and we believe that much of its success is related to its technology and its ability to comply with regulations.

Over the next year, we will monitor how Wildflower Brands is able to expand its business and capitalize on these opportunities. The company is focused on some of the most significant markets and is led by a management team with a proven track record of success. During a time where more than 20 public cannabis companies are valued are more than $1 billion, Wildflower Brands has a market cap of approx. $100 million. This is a company with a significant growth prospects and is one to be watching.

1933 Industries is a US Brand Story to be Watching

During the last year, we have becoming increasingly excited about 1933 Industries Inc. (TGIF.CN) (TGIFF) and have been monitoring its expansion. The company has an attractive operating structure and its three subsidiaries are focused on the production of cannabis through Alternative Medicine Association (AMA), the production and sale of industrial hemp-based and CBD infused products through Infused MFG., and security and intelligence through Spire Global Strategy.

When it comes to the cannabis brand opportunity, Infused is the best positioned subsidiary and we are favorable on the growth prospects associated with this brand. Last month, 1933 Industries reported to have acquired the remaining ownership interests of Infused MFG. and we believe that this was a strategic decision.

When looking at the overall business, we are very excited about Infused and believe that it has significant growth prospects. During the second quarter, Infused generated approx. $2.4 million in revenue and has significant growth prospects. Infused is highly levered to the burgeoning CBD opportunity and has been executing on this.

One of the reasons why we are favorable on the CBD opportunity is due to the passing of the 2018 Farm Bill in late December. The legislation effectively removes CBD derived from hemp from the DEA’s list of controlled substances and was a massive development for companies like Infused. Demand for CBD products has been steadily increasing and this is one of the most exciting opportunities in the cannabis sector.

Infused has been a beneficiary of the increasing demand for CBD products and we expect to see it penetrate new markets in 2019. Earlier this year, 1933 Industries reported that Infused had attained product distribution into 46 states and had established its own distribution to over 600 stores. Infused’s recognized brands are available in over 250 retail stores in California, Nevada, Arizona, and Colorado, with the remainder distributed across the United States.

When you are looking at a publicly traded cannabis company, one of the most important parts of the business to analyze is the management team. We have been focused on identifying cannabis brands that are led by a management team that is able to scale the business and believe that 1933 Industries meets our criteria. The company is led by a management team that is focused on creating value for shareholders and we find this to be significant.

We were impressed with the quarterly financial results reported earlier this month and are favorable on the growth prospects going forward. When looking at the revenue numbers and the balance sheet, you can see that the company has an attractive valuation when compared to its peers and is trading at a massive discount to its peers.

During the last year, 1933 Industries has reported strong growth and is benefiting from its position in the CBD market and its levered to some of the most significant cannabis markets in the United States. We believe that the company is one of the most underappreciated opportunities and we will monitor how the team continues to execute.

Dixie Brands: Where Does it go From Here

In late 2018, Dixie Brands Inc. (DIXI-U.CN) (DXBRF) completed a go-public transaction and commenced trading on the Canadian Stock Exchange. This company has been around for several years and is one of the best-known brands of cannabis-infused products. Dixie Brands started with a single product and is now one of the industry’s most recognized consumer brands with more than 100 products across more than 15 different product categories.

Dixie Brands has been formulating award-winning THC (tetrahydrocannabinol) and CBD infused products since 2009 and is in the middle of a major expansion in the United States and abroad. In 2019, the cannabis-infused product company expects to double its manufacturing and distribution capabilities in the United States as well as expand internationally, including Canada and Latin America.

When it comes to strategic partnerships, Dixie Brands has been someone to watch as it has secured strategic relationships with leading cannabis brands. One of the reasons we are following Dixie Brands is due to the markets that it is levered to. During the last year, the cannabis infused product company has expanded its reach and entered new markets. The company’s products have been gaining considerable traction in the markets that it is levered to and this is a trend that we have been watching.

Although Dixie Brands is one of the best-known cannabis brands, we are not that impressed with the product quality. We believe that the company is focused on a very competitive market and believe that quality and consistency are keys for success. As the cannabis industry continues to become more competitive, companies like Dixie will need to adopt to remain successful and this is a company to be following.