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The cannabis industry continues to be the hottest sector to invest in as Wall Street has become more favorable on investment opportunities within it.
One of the hottest areas in the cannabis industry has been the Canadian licensed medical cannabis producers which continues to see impressive growth as the number of registered patients has increased at double digit percentages on a month-over-month basis.
Canada Continues to Lead
We are favorable on the Canadian cannabis industry for many reasons but one of the main factors is that medical cannabis is legal at the Federal level. Unlike what we have in the United States, Canadian cannabis companies can use banks and access basic business services for companies to operate more efficiently and effectively.
Earlier this month, we highlighted Emblem Corp as one of the next big investment opportunities as the company gears up for its initial public offering on the TSX venture exchange.
Investment Thesis
Emblem is a licensed medical cannabis producer in Canada uniquely positioned within the rapidly growing medical and recreational cannabis industry. We are favorable on Emblem for the following reasons: 1) Operates three distinct divisions which can create value for each other, 2) It recently completed a capital raise that was oversubscribed and the company has seen remarkably high interest from the marketplace, 3) The company started selling medical cannabis in August and we expect to see significant growth on a month-over-month basis, 4) It is led by a management team that has a proven track record of building successful multi-billion dollar companies, and 5) Its current valuation is attractive as we expect to see incremental growth on a year-over-year basis.
Attractive Operating Structure
Emblem is comprised of three distinct divisions which can create value for each other as well as improve the value proposition of the entire company.
Its three divisions are focused on cannabis production through Emblem Cannabis, patient education through GrowWise Health, and pharmaceutical production through Emblem Pharmaceuticals.
Emblem Cannabis is focused on producing a high-quality, higher-margin product and is working to create the ideal balance of quality and quantity. Its state-of-the-art facility is comprised of three buildings on a 4.1-acre property in Paris, Ontario and the buildings take up less than 20% of the acreage. After phase 2 is complete and online in February, the facility will be able to generate over $17 million a year. Emblem has a planned expansion for its 3rd phase of development as well, which has the potential to take Emblem to almost 12,000KG per year, and even that only takes up 50% of their property.
Emblem received its sales license in August, and has been actively selling its high quality strains into the wholesale market, while finalizing their patient launch, expected in mid-November. Emblem can store over 600Kg of cannabis, which is right below its 700Kg operating capacity. Since inception, Emblem has invested over $11 million into its facility, land and infrastructure.
The company estimates an average sale price of $8.50 per gram when it starts delivery of the product to patients and its all-in costs, at full phase 2 production are $2.08. Emblem feels it can reduce this even further, with economies of scale once phase 3 goes online. Emblem will continue selling its flower at wholesale prices to other licensed producers while beefing up their patient count, for between $3.50-$5 per gram.
GrowWise Health serves as the company’s education vertical. The problem in Canada, is patients still have a hard time accessing medical cannabis, and only 2% of doctors are currently prescribing. GrowWise solves this by providing easier access for patients, and saving doctors a significant amount of time. GrowWise is operated as a joint venture between Emblem and White Cedar Pharmacy and is now seeing over 200 patients per month.
GrowWise currently operates within seven medical clinics and one stand-alone medical cannabis clinic. The stand-alone medical cannabis clinic opened in November 2015 and since then it has received referrals from more than 100 doctors. GrowWise is expanding its service in both platforms this year. The company has plans to open an additional 22 clinics, providing access to thousands and thousands of patients.
Emblem Pharmaceuticals is a very attractive aspect of the business as it offers investors leverage to not only the legal cannabis market but also the cannabis pharmaceutical market. In the second quarter of 2017, Emblem Pharmaceutical President John Stewart will lead the launch of cannabinoid-based medications in customary pharmaceutical dosage forms such as liquids, gel caps, oral sprays, and inhalers.
Stewart has over 30 years experience developing and commercializing pharmaceutical products. He has launched 11 new products, including OxyContin, and was the worldwide President and CEO of Purdue Pharma, the largest privately held pharmaceutical company in the world. We recently interviewed Stewart and you can listen to this interview by clicking here.
Recent Offering Generates Massive Interest
Since its inception, Emblem has been executing on its initiatives and this has put the company in the position it is in today. In the summer of 2014, the company’s founders invested in the initial seed round and since then, things have progressed significantly.
Earlier this month Emblem opened up a $23 million dollar raise and within days the offering was oversubscribed. Interest in Emblem is huge and we expect to see the company have a successful IPO when the shares start trading on the TSX-V, in the second half of November, under the symbol EMC.
Cannabis Oils Will be a Growing Revenue Stream
The Canadian medical marijuana market is saturated with mid-grade products and Licensed Producers are usually sold out of top quality flower.
One of the best solutions for Licensed Producers when they have too much product is to turn it into cannabis oil. This higher cost product increases the shelf life of medical cannabis and is attractive to consumers.
Emblem purchased oil extraction equipment in July and since its inception has invested $1 million into this division. Demand for cannabis oils, especially high CBD oil, continues to increase and this is a trend we expect to continue as researchers learn more about the therapeutic value cannabinoids provide.
Led by an Elite Management Team and has an Attractive Valuation
Emblem is led by its founders and a management team with a proven track record of success. Since inception, management has invested over $6 million of their own dollars, and executed flawlessly on the business plan to create world class facility, with world class products. Because of this, combined with an excellent capital structure including over 1,000 shareholders, Emblem is incredibly attractive to the capital markets.
We expect to see Emblem show consistent growth and improving fundamentals on a year-over-year basis for many years to come as it just recently received its sales license from Health Canada.
Its pre-IPO valuation is $63 million, or $90 million fully diluted including all warrants and options, and this is very attractive as it is significantly lower than other licensed medical cannabis producers in Canada, with many now trading over $500 million. We expect to Emblem see rapid growth on account of its unique three-pronged approach, dedicated to the production of premium quality cannabis, patient and physician education creating easy access, and a pharmaceutical approach that is second to none.
By early 2017, we expect to see the market catch on with Emblem’s potential and this has created an attractive investment opportunity for investors looking for a stock that has growth potential and can survive a recession.
Danny Brody, Director of Investor Relations at Emblem Corp, will be attending the Marijuana Business Daily Conference in Las Vegas on November 16-18, 2016. If you would like to schedule a meeting with Mr. Brody, he can be reached at dannybrody@emblemcorp.com
Important Investor Disclosures
Disclosure. Compensated Affiliate. This report was authored by and is property of StoneBridge Partners LLC. All information and data relied upon in drafting this report is publicly available. The author believes and considers its sources to be reliable, but does not guarantee the accuracy or completeness of any information contained in this report. Any and all information, data, analyses and opinions are provided for informational purposes only and is not intended, in any manner, as investment advice. Any projections or other information generated by StoneBridge Partners LLC regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. None of the material contained in this report is intended as a solution or offer to sell or purchase a specific stock or any other investment. This report is not directed to, or intended for distribution or use by, any person or entity that is a citizen, resident or located in any municipality, state, country or other jurisdiction where the distribution, publication, availability, or use of this report is contrary to any governing law or regulation. The securities discussed in this report may not be eligible for purchase and/or sale in certain jurisdictions or by particular individuals. It is important that you check any and all governing laws and/or regulations that may be applicable in your jurisdiction. Investing in securities of issuers organized outside of the United States, including ADRs, entail certain risks. The securities of non-United States issuers may not be registered with, nor be subject to the reporting requirements of the United States Securities and Exchange Commission. Please contact a Financial Advisor for professional advice regarding any and all securities investments. This report is intended for informational purposes only. StoneBridge Partners LLC’s officers, directors, employees, affiliates, or subsidiaries may have positions in securities covered by StoneBridge Partners LLC. StoneBridge Partners LLC receives compensation from the company and/or has a position in the securities mentioned in this report.
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