The coronavirus has put considerable pressure on the global economy as countries across the world implement measures to try and slow the outbreak. The cannabis sector has not been immune to the pressure and the industry has been significantly impacted by the virus.
During the last month, we have taken a hard look at the cannabis sector to better understand the companies that will be able to survive in the current market. Following our analysis, we became increasingly excited about companies that are levered to burgeoning markets in the US and that have been executing on previously announced initiatives. From a balance sheet standpoint, we are looking for companies that can weather the storm and continue to drive the story forward
Chemesis International (CSI.CN) (CADMF) is a US operator that we are excited about due the markets that it is focused on, the growth profile of the business, the leverage to the hemp and CBD market, the focus on the international cannabis opportunity, and the management team. So far this year, Chemesis has been under significant pressure and this is a trend that caught our attention.
Through a series of investments and acquisitions, Chemesis has been able to further expand its position in the US and has been highly focused on the opportunity in California, Michigan, and Puerto Rico. During the last year, Chemesis has increased market share in strategic markets in the US and created a footprint for growth in the Colombian cannabis market. The company has reported strong growth during this time from a revenue standpoint and we believe that it has a favorable risk-reward profile.
An Emerging Growth Story to be Aware of
Last week, Chemesis reported an update as it relates to its Puerto Rico operations and the coronavirus. The company announced that it plans to remain operational during the COVID-19 pandemic and will adjust hours to accommodate its patients. This comes after the government of Puerto Rico passed an executive order that allows medical cannabis establishments to remain open. This was an important update and we believe that it answered some important questions as it relates to the business.
Earlier this month, Chemesis reported second quarter financial results and the market responded negatively to a decrease in revenue when compared to the same period last year. The decrease was directly related to the abeyance of licenses held by its subsidiaries, Natural Ventures and GSRX Industries. During the quarter, the company focused on reinstating its licenses, maintaining its cultivation inventories, and reducing its operational burn rates.
Although revenue decline on a year-over-year basis, Chemesis reported $1.3 million of gross profit for the quarter and this represents a considerable increase when compared to the same period last year. The increase was related to an increase in values that are related to cultivation inventory and higher-margin sales.
Following the end of the second quarter, Chemesis completed a $5 million private placement and significantly strengthened its balance sheet. We find the capital raise to be significant, especially due to the impact that the coronavirus has had on the market and believe that the business is well positioned to execute on previously announced initiatives.
A majority of the net loss that was reported in the second quarter was related to non-cash expenses and we find this to be worth noting. We believe that the market had an over-reaction to the quarterly results and are favorable on the growth prospects that are associated with the operation. At current levels, the company is trading at a considerable discount to similar businesses and find this to be significant.
Has an Attractive Risk-Reward Profile
Going forward, we believe that Chemesis is well positioned to increase market share in the states that it is focused on in the US and believe that the market does not assign much value to the Colombian operation. As the company continues to execute on these initiatives, we expect to see the market become more favorable on the business and believe that this is a company to be following.
Chemesis is a company that has substantial potential catalysts for growth and we believe that the market does not appreciate this aspect of the story. From Puerto Rico to California, the business is focused on increasing market share in burgeoning cannabis markets and we will monitor how the management team is able to execute on this.
Although the market has not responded favorably to the recent developments that were reported by Chemesis, 2020 has already proved to be a significant year for the business. We believe that Chemesis is in the early innings of a major growth cycle and this is an opportunity that we will continue to monitor.
If you are interested in learning more about Chemesis International, please email email@example.com to be added to our distribution list.
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