Surprisingly, few analysists have done deep dives into one of the largest cannabis marketplaces in the world, California. Reasons for the lack of investment advice may include the uncertainty regarding the multitude of rules, regulations and laws at all levels of government; from municipalities, to counties, to the State level.
However, the investor that comprehends the approach of, “this too shall pass” to to their investing could be well prepared for the cannabis industry. The reason is that over time a coherent state-run system will be created that will unify the various regulations and bring certainty to the marketplace. The cannabis companies that withstand the test of time negotiating the barrage of challenges will be rewarded.
Fundamentals: Candidly speaking, it’s far too early to be concerned with fundamentals. Companies that have the potential to reach the billion-dollar valuation mark are probably going to have to postpone profit for growth in the next few years. The reason is simple: the industry is in its infancy. Organizations should be concentrating on gaining a larger footprint than delivering a bottom line. However, if on the rare occasion a California PubCo at this early stage demonstrates strong fundamentals, then you should seriously consider it as an option for your portfolio.
Management: Last month another California publicly traded company in the cannabis sector basically imploded due to poor management. We’re seeing this happen regularly. The idea of this particular company was valid, but the execution was not, in our opinion.
One of the key requirements in the public cannabis space is having significant management experience. This includes experience in the cannabis sector, knowing how to get your product to market, and identifying and rewarding loyalty within your team.
Easy to say but very difficult to execute. There are few management teams with “years of experience in the cannabis marketplace,” let alone, the California cannabis market. If you find a company that does, it would be prudent to take a closer look.
Business plan: The business plan is obviously crucial. Rolling out another gummy bear edible from a home kitchen to compete with the other 10 gummy bears in the market won’t work. The key is introducing a unique, discreet, medicinally beneficial product that uses organic grade bio mass and is relatively inexpensive that can reach the masses.
And the masses include 39 million residents and over 251 million visitors per year. The other requirement is that the company has the capability to scale, and scale fast if need be. To at least a 1 million units per month.
Capital Requirements: Contrary to public belief, it’s extremely difficult to be successful in the cannabis sector without being well funded. Capital in the cannabis industry, like in any other industry, is not a luxury, it’s a necessity. And as mentioned above, lots of capital in the hands of unexperienced management is the perfect storm for a bad situation.
Capex includes, but isn’t limited to licensing fees, land costs, building acquisition costs or retrofitting expenses, equipment purchases, staffing, or raw material acquisition. Time value of capital also is a critical element since there can be a long wait to get various licenses, permits and/or certificates of occupancy approved by the municipality, county and/or State. The saying that it takes twice as long and costs twice as much is a hopeful dream. It’s a much different scenario in the cannabis industry.
Weathering the Storm: It’s difficult to determine which California cannabis companies will withstand the various “storms” that will continue to rain down. The storms can be defined as the continuation of the federal prohibition, state regulation, taxation, and an array of conflicting laws almost everywhere you look. The storm also includes the commencement of Adult-Use cannabis in California starting January 1st, 2018.
However, to determine California’s outcome, one might look north to Canada. Our neighbors to the north have weathered a fair share of stormy regulatory weather, and though the country has still not implemented a long over-due cannabis framework, they have issued approximately 80 licenses to various producers. Some of the producers are publicly traded with valuations that exceed a billion dollars, with a few hitting two billion in valuation. This bodes well for California for a variety of reasons.
First, California is in the process of implementing its cannabis framework. Second, California has a larger population than Canada, 39 million as compared to 37 million. And third, the multi-billion dollar valuation companies in Canada are specifically concentrating on nursery and cultivation. In California there exists more revenue options, which include sales from nursery, cultivation, extraction, manufacturing and distribution, to name a few. Reasoning dictates that within the next 12-24 months California could be able to produce a few public cannabis companies with valuations in the multi-billions.
Guts: The fact that the federal government may intercede at any time, combined with limited banking access, tremendous capital costs, a void of senior level executive talent, with conflicting local, county state laws means that anyone that gets into the cannabis industry in California requires an appetite for risk; arguably more than in any other industry in the world.
The counter to that is the upside. The industry has tremendous upside. Billions of dollars could literally be up for grabs for the companies that check all of the boxes above.One Company that Could Meet The Requirements: Lifestyle Delivery Systems Inc. (CSE: LDS, OTCQB: LDSYF). It’s a company that we’ve reported on numerous times in the past and could already be meeting many if not all of the variables above.
Management. Combined 30 years of senior management in the cannabis industry; 20 of which are in California. In 2010 the current LDS management team took a cannabis company public. Within twenty-four months it was generating more than $16 million in revenue, with 30% pre-tax net profit, and valuation that exceeded $500 million..
Capital Requirement. LDS has raised over CA$15m of which mostly came from the private placement overseen by Canaccord Genuity. Many US readers are unaware, but Canaccord is one of the more successful cannabis investment firms in Canada. After meeting the CEO of LDS, Brad Eckenweiler, Canaccord agreed to, predicated on due diligence, fund LDS. Subsequently, Canaccord legal needed to fully grasp the federal, state, county and municipal laws before approving the LDS funding. After 105 days of due diligence, legal signed off and LDS was funded this past summer.
Business plan. LDS flagship product is CannaStrips™, a sublingual oral strip similar to a breath strip. It is not only a safer, healthier option to smoking, but it is also a new way to accurately meter the dosage and assure the purity of the product. Unlike edibles which have significant dosage and consistency deficiencies, Lifestyle Delivery Systems has a unique method for delivering nano-encapsulated biological molecules of therapeutic value systemically – directly across mucous membranes – in order to achieve ease of administration, compliance, dose repeatability and improved bioavailability. Simply put, there’s nothing like it in this sector or in the cannabis universe.
However, management recognized the need for organic grade biomass, which is difficult to come by before the California fires, and is virtually impossible to source after the fires. Consequently, LDS transformed an empty warehouse into a vertically-integrated state-of-the-art, automated facility with eight isogenic seed rooms, agricultural nursery, cultivation division, cutting-edge laboratory and three explosion proof extraction and distillation rooms. And of course, the company’s CannaStrips™ division.
Guts. CEO Brad Eckenweiler took an idea, and transformed it into a closed loop eco-system that has the ability to generate high-quality cannabis oils to drive strong revenue for the company. For many of these reasons, we’re keeping a close eye on LDS.
MARIJUANASTOCKS.com is owned by MAPH ENTERPRISES LLC., a Florida Corporation that has been compensated $50,000.00 by Lifestyle Delivery Systems Inc. for a period beginning December 8, 2017 and ending Feb. 15, 2018 to publicly disseminate information about (LDSYF). We own zero shares. Full Disclaimer