In 2019, one of the most significant themes in the cannabis industry was the vaping health crisis that has put tremendous pressure on the entire sector. The main question that we have when it comes to the vaping opportunity is related to the sourcing of the necessary input product that has been tested by a third-party laboratory and the companies that are capitalizing on this.
The vaping health crisis impacted the entire cannabis sector and leading operators were reporting decreasing sales from this vertical. Once more information came to light on the cause of the crisis, companies started to report much stronger sales growth, and this is a trend that we have been closely following.
Although the vaping health crisis had a negative impact on the entire cannabis industry and caused unnecessary illnesses and deaths, it showed the importance of buying products from legal outlets. Over the next year, we expect to see changes at the consumer level when it comes to the vape market and expect to see a much larger emphasis put on brands.
During the last few years, we have been closely following the vape market and have been identifying leaders in the high-growth vertical. During this time, we have seen public companies come in and consolidate the vape market and have been favorable on this trend. Although we have been favorable on these acquisitions, the companies that focused on the vape opportunity were especially impacted by the vaping health crisis. We believe that the recent weakness is overdone and believe that these companies are well positioned to record strong growth in 2020 and beyond.
1933 Industries: An Under-appreciated Opportunity
1933 Industries (TGIF.CN) (TGIFF) is one of the companies that was impacted by the vaping crisis and this is an opportunity that we are bullish on. 1933 Industries owns a portfolio of leading cannabis brands (CBD and THC) and is levered to some of the most attractive cannabis markets in the US (California, Colorado, and Nevada).
During the last quarter, the US cannabis company was under considerable pressure and traded lower with the market. We believe that the recent weakness is overdone and find the risk-reward profile to be attractive at current levels. 1933 Industries recently launched Blonde, a leading cannabis concentrate brand in Nevada, and we are impressed with the way the product has been gaining traction.
Earlier this year, 1933 Industries announced the execution of a licensing agreement for the launch of Blonde™, a high-end California brand making its debut in Nevada. Last month, we were in Las Vegas for the MJ Biz conference and visited several dispensaries in the area. While visiting the store fronts, we heard positive commentary from budtenders in regard to Blonde and we found this to be significant. We believe that the market does not fully appreciate the growth prospects associated with the brands that fall under the 1933 Industries umbrella and find this to be significant.
In 2020, we expect to see 1933 Industries report stronger revenues and expect numbers to incrementally improve in the back half of the year. The company has been transitioning into a facility in Las Vegas that is 10x larger than the initial facility and we expect production capacity to increase throughout the year. We are bullish on the amount of revenue that can be generated from the new facility and believe that the market does not fully appreciate the growth prospects associated with it.
At current levels, the company has a market cap of approx. $65 million (CAD) level, and we believe that the operation is trading at a substantial discount to its peers. As of September 30th, 1933 Industries reported to have almost $18 million of cash on hand and $22.5 million of working capital. When compared to the same period last year, the company has been able to significantly improve the strength of its balance sheet and we find this to be significant.
Aurora Cannabis: A Global Growth Story
In late 2019, the types of cannabis products that can be sold to recreational consumers in Canada changed in a big way. Now, consumers can purchase cannabis derivative products (i.e. vape pens, cannabis infused products, cannabis concentrates, and more) from retail outlets across the country and we are favorable the growth prospects associated with this vertical.
Although we are bullish on the cannabis derivative product market, we expect to see a slow rollout in Canada and this is a trend that we are following. Aurora Cannabis (ACB.TO) (ACB) is another company that has been impacted by the vaping crisis and is highly levered to the Canadian cannabis market.
From cannabis retail stores to vape pens, Aurora Cannabis has been focused on some of the most exciting verticals of the cannabis industry. Last year, the company formed a strategic relationship with Binske, a leading US cannabis brand, to sell cannabis infused gummies in Canada and we are favorable on this relationship for Aurora.
Binske offers a wide variety of cannabis derivative products in California, Colorado, and Nevada. In 2020, we expect to see the agreement with Aurora Cannabis expand to include additional Binske products. In the US, Binske’s vape pen has gained substantial traction and the product is tested by third-party laboratories before being sold to consumers. Through Binske, Aurora Cannabis is well positioned to capitalize on cannabis 2.0 in Canada and we will monitor how the relationship evolves from here.
Aurora Cannabis has recently come under pressure and a few important executives have left the company during this time. The company’s balance sheet has become a major pain point for the business and we believe that the team needs to find ways to innovate in order to be successful. By forming relationships with brands like Binkse, the company is better positioned for growth and we will continue to monitor Aurora.
VEXT Sciences: A US Cannabis Brand that Continues to Execute
In 2020, Vext Science, Inc. (VEXT.CN) (VEXTF) is well positioned to further capitalize on the US cannabis concentrate opportunity and is a company that we are excited about. Although Vext has been able to gain significant market share in Arizona’s medical cannabis market, the brand has been impacted by the vaping health crisis and is an opportunity that we continue to monitor.
From Oklahoma to Nevada, Vext has been focused on expanding its reach and entering new markets. In 2020, the company is positioned to record strong growth and we are bullish on the growth prospects associated with the markets the company is levered to. Last year, Vext became highly focused on the CBD opportunity and has been able to expand into strategic U.S. markets through joint venture partnerships that are focused on this aspect of the industry.
This year, we expect Vext to report incremental revenue growth and we are favorable on the assets and the relationships that are in place. During the first half of last year, the company generated more than $13 million of revenue in Arizona. These are strong revenues for one market and we expect the business to benefit from the current expansion.
In 2019, VEXT announced several important advancements on both the CBD and the THC sides of the business. WE believe that the market underappreciates the growth prospects associated with the operation and highlighted some of the most important developments that were reported last year:
- Enters the Las Vegas THC market: Vext announced the entry into the Nevada THC market through a letter of intent with Pegasus.
- Expands into Kentucky: In June, Vext entered the Kentucky hemp-CBD market through a partnership agreement with Emerald Pointe Hemp.
- Enters the Hawaii Hemp Market: In August, Vext announced a new equity partnership with Archipelago Ventures, a strategic joint venture with Legacy Ventures and Arcadia Biosciences (RKDA) that is focused on the Hawaiian hemp market.
- Expands its reach in Arizona: In August, Vext CBD executed a strategic partnership with CBD Emporium which has nine retail stores in Arizona
- Enters the Oklahoma THC market: In September, Vext announced a cannabis THC production and extraction partnership with Texoma Herb Company in Oklahoma.
Vext was impacted by the vaping health crisis and is an opportunity that we continue to monitor. Although the business was under pressure in 2019, we believe that it is well positioned to capitalize on a major growth vertical in 2020 and this is an opportunity to have on your radar.
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