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Stem Holdings Is A U.S. Multi-State Operator Flying Under The Radar

Apr 16, 2019 • 10:57 AM GMT+0000
6 MIN READ  •  By Anthony Varrell
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During the last year, the cannabis industry recorded incredible growth, and this is a trend that is expected to continue for years to come. We believe that the cannabis industry represents a once-in-a-lifetime opportunity for investors, and this is a market that we have been closely following since early 2014.

The recent advancements in the cannabis industry have been significant and we believe that the industry is reaching an inflection point. From North America to Europe, new cannabis markets are opening, and this is creating new opportunities for companies.

We have been focused on discovering companies that are focused on increasing market share in strategic cannabis markets and want to highlight an opportunity that we find to be exciting. The company, Stem Holdings, Inc. (STEM: CSE) (STMH: OTC) has been advancing its fundamental story through acquisitions and has been executing flawlessly on a major expansion.

Announces Significant Acquisition in California

Last week, Stem Holdings reported a significant development and executed a definitive agreement to acquire Western Coast Ventures, Inc. (WCV), which has been focused on the California cannabis market. This acquisition is significant as it represents the fourth state market that the company is levered to.

One of the reasons why we are favorable on the acquisition of WCV is due to the joint venture that it has with ILCA Holdings. ILCA has been issued a limited Conditional Use Permit for a Marijuana Production Facility (MPF) in San Diego, California. This is a significant market to be levered to since the city will only be granting a total of 40 MPFs. Another reason why we are favorable on this acquisition is due to WCV owning 51% of the joint venture with ILCA and it is having a working capital surplus of approx. $2 million.

We are favorable on the growth prospects associated with this opportunity. The facility is 10,700 sq. ft. and will feature state-of-the-art technology for the cultivation, production, and distribution of cannabis. A complex, sophisticated, portable racking system will create a 10,000 sq. ft. canopy that has the potential to produce over 6,000 pounds of premium cannabis per year. This is a significant amount of capacity and we are favorable on the amount of revenue that can be generated through the sale of it.

Once a final MPF permit has been granted and once construction is completed, the joint venture will operate an advanced cannabis facility to grow and cultivate cannabis, manufacture cannabis-derived products, and distribute cannabis and cannabis-derived products state-wide throughout California. Stem expects production from the MPF to begin during the fourth quarter of 2019 and we will monitor how the team executes on this.

California is the world’s largest cannabis market and we are favorable on this development. The leverage to this market is significant and we expect this acquisition to prove to be accretive in early 2020. Once this facility is operational, it should be generating significant cash flow, and this is an opportunity we will be monitoring.

Acquires a Leading South African Cannabis Firm

Earlier this month, Stem Holdings completed the acquisition of South African Ventures, Inc. (SAV) and this represents an attractive long-term growth opportunity. One of the reasons why we are favorable on this acquisition is due to the joint venture that SAV has with Profile Solutions, Inc. (PSIQ).

The joint venture has received preliminary approval to become the only licensed growing farm and processing plant for medical cannabis and industrial hemp in The Kingdom of eSwatini for a minimum of 10 years.  Another reason why we are favorable on this acquisition is due to SAV having a working capital surplus of approx. $11 million.

Upon issuance of related permits and the completion of construction, the joint venture will operate an advanced hemp and medical cannabis manufacturing facility to grow and cultivate cannabis in accordance with strict Good Manufacturing Practices (GMP) global health standards. The joint venture will also distribute hemp and medical cannabis within eSwatini, be the exclusive exporter within eSwatini for hemp and medical cannabis worldwide, operate a medical cannabis research and development lab, and build a training facility to create jobs for locals.

The eSwatini Facility will be located on 2,500 acres at The Science Park Matsapha for cannabis and industrial hemp cultivation and will adhere to strict GMP processing. The facility will include a state-of-the-art research and development lab that is focused on genetic propagation and we find this to be significant. The facility will be able to produce more than 12,000 kilograms of premium cannabis on annual basis and the company expects to start producing in the fourth quarter of 2019.

Unlike many other cannabis businesses and opportunities in this emerging market, the joint venture has already secured access to water rights, electricity, and banking for this project. This is probably the most significant part of the story and we are monitoring how the team is able to execute on this opportunity.

Advancing its Story Through All-Stock Acquisitions

2019 has already proved to be a banner year for Stem Holdings and the second quarter is just getting started. So far, the year has been highlighted by two significant acquisitions and we are favorable on this focus.

The terms of the WCV acquisition are favorable for Stem Holdings, which is expected to issue 2 million common shares to WCV’s shareholders. We are also favorable on the terms associated with the agreement to acquire SAV. The company has benefited from being able to use its stock as a currency to make acquisitions and we are favorable on the recent transactions.

When companies are able to use their stock as a currency to effect acquisitions, it provides them with a significant advantage. This allows the company to hold onto its cash and use the capital to support the growth prospects of the combined company. With Stem Holdings, the company has done an excellent job at using its stock as a currency and we expect its acquisitions to prove to be accretive.

An Under-appreciated Opportunity

Although Stem Holdings has significantly advanced its fundamental story and has attractive leverage to cannabis market such as California and Nevada, the shares have been under pressure and have been trending lower.

We believe that the market does not appreciate this opportunity or understand its growth prospects. The valuation is very attractive, especially when compared to its peers and this is an opportunity to be watching. Stem Holdings is in the early innings of a major expansion and the team has done a fantastic job at execution.

Stem Holdings is led by a management team that is focused on creating value for shareholders and this is an important part of the story. We believe that the recent decline is overdone as momentum is approaching oversold levels and this is an opportunity to be watching.

 

 

 

Pursuant to an agreement between StoneBridge Partners LLC and Stem Holdings (STEM) we have been hired for a period of 180 days beginning February 1, 2019 and ending August 1, 2019 to publicly disseminate information about (STEM) including on the Website and other media including Facebook and Twitter. We are being paid $7,500 per month (STEM) for or were paid “ZERO” shares of unrestricted or restricted common shares. We own zero shares of (STEM), which we purchased in the open market. We plan to sell the “ZERO” shares of (STEM) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (STEM) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.

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Authored By

Anthony Varrell

Anthony Varrell is Managing Director of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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