Due to cannabis being illegal at the federal level in the US, many investment firms cannot invest in companies that touch the plant. This is a trend that will continue while cannabis is illegal at the federal level and we have been highly focused on the ancillary side of the business.
Ancillary cannabis companies are those that do not touch the plant and is a wide-ranging vertical. From point-of-sale to agricultural technology, a number of businesses can fall under the ancillary category and this is a trend that our readers need to be aware of. When it comes to the ancillary cannabis opportunity, selectivity is key and there are a number of factors that we analyze at the company level.
During the last year, we have seen an increase in the number of publicly traded ancillary cannabis companies. While we are favorable on the increase, many of the new listings do not meet the criteria that we have found to be worth featuring. Today, we have highlighted 5 ancillary companies that are positioned to record strong growth in 2020 and beyond.
ManifestSeven: The Next Big Cannabis IPO
In the near future, ManifestSeven (M7) will complete a go-public transaction and is an opportunity that we are excited about. The ancillary cannabis company is California’s first omnichannel model for legal cannabis, servicing both business-to- business (B2B) and business-to-consumer (B2C). We are favorable on the structure of the business as well as the management team that is behind the company.
We believe that M7 meets our criteria for an ancillary cannabis company to be watching. The management team is focused on bringing the business down a path to profitability. In 2019, M7 recorded strong top and bottom-line growth and this is a trend that is expected to become more significant in 2020.
During the last year, M7 completed the acquisition of three strategic assets and we are favorable on the growth profile associated with these assets. Going forward, we expect the management team to find significant synergies between the businesses and are bullish on the long-term opportunity. From a fundamentals standpoint, M7 represents an exciting opportunity and the current revenue run rate is approaching $60 million per year.
A $60 million run rate provides M7 with a great starting point, especially for a public company, and we are going to be monitoring how the story continues to advance. California is the world’s largest cannabis market and is an opportunity that we are excited about. We believe that M7 represents a differentiated opportunity and find this to be of significance in a market that seems to be fatigued. Going forward, we are bullish on M7 and will keep the opportunity on our radar.
Surna: An Underappreciated Cannabis Ancillary Opportunity
Earlier this month, we highlighted Surna Inc. (SRNA) after having met with the management team at MJ Biz in Las Vegas and at its facility in Boulder, Colorado. We believe that Surna represents an attractive ancillary cannabis opportunity that is in the early innings of a major growth cycle and we are favorable on how CEO Tony McDonald has been able to advance the operation.
In late 2019, Surna reported third quarter financial results that showed substantial growth on several key levels (revenue, EBITDA, net income, and cash on hand) and the market responded favorably to these numbers. Following the blow-out earnings report, the shares have come off its highs and this is a trend that caught our attention. We believe that Surna has substantial growth prospects and find the risk-reward profile to be compelling. When analyzing Surna, there are a number of factors that stand out with the business and we are bullish on the company for the following reasons:
- At current levels, the company is trading at 1x revenue and is at a discount when compared to its peers
- During the last year, Surna began to sell its proprietary products to leading operators with grow facilities around the country. This is a trend that is expected to become more significant this year and this should benefit the business
- Surna is positioned to benefit from the opening of new markets and this is a trend that is expected to continue on a going forward basis
In 2020, we expect to see Surna record substantial growth and are impressed by the amount of work that is backlogged. There is significant demand for the proprietary products that are created by Surna and we expect to see a substantial increase in activity on a going forward basis. Over the next year, we expect to see the company secure relationships with large multi-state operators in the US and licensed producers in Canada.
During the last year, Surna has been quietly executing on a multi-faceted growth strategy and is an opportunity that is starting to gain traction. The company has an attractive risk-reward profile and has a number of avenues for growth. We believe that the market has unnecessarily discounted the growth prospects associated with Surna and believe that it is one of the most underappreciated ancillary cannabis opportunities.
GrowGeneration: A Nasdaq Listing to be Watching
In late 2019, GrowGeneration (GRWG) was approved to commence trading on the Nasdaq and we have been closely following the ancillary cannabis company. GrowGeneration owns more than 20 retail hydroponic/gardening stores. During the last few years, the company has been highly focused on opening additional locations and we have been monitoring this aspect of the story. The company is also highly focused on the rollout of its new ERP platform, adding its stores in California, Michigan, Maine, Oklahoma, Nevada and Rhode Island to the system so far this year.
In late 2019, GrowGeneration released third quarter financial results and recorded more than $1 million of net income on $21.8 million of revenue. When compared to the same period last year, revenue increased by more than 150% and this is a trend that we are bullish on. Going forward, GrowGeneration has substantial catalysts for growth and we will monitor how the story advances in 2020.
The company is utilizing a growth strategy focused on both organic and inorganic initiatives. We are favorable on this strategy and the recent execution and will monitor how these initiatives benefited the top- and bottom-line. The newly acquired stores and new store openings are all performing better than expected and have been successfully integrated into the operations of the overall company. GrowGeneration has approx. $16 million of cash, which will allow it to complete the acquisition of additional stores that are expected to close in the near future.
During the last year, the company has outperformed the vast majority of the cannabis sector and we will monitor how the Nasdaq responds to the new listing. We believe that GrowGeneration is an ancillary cannabis company that is worth watching and will be keeping an eye on the opportunity.
Innovative Industrial Properties: The World’s Largest Cannabis REIT
Innovative Industrial Properties, Inc. (IIPR) is the largest cannabis focused real estate investment trust (REIT) in the world and is one of the best-known ancillary cannabis companies. One of the reasons why the cannabis REIT has been able to stand out is due to the dividend that is issued on a quarterly basis. This puts the company in a league of its own and makes it one of the only cannabis companies that provides an income stream.
One of the reasons why we closely follow Innovative Industrial Properties is due to the number of assets that it owns and the markets that it is levered to. As of December 23, 2019, the company owned 46 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New York, North Dakota, Ohio and Pennsylvania, totaling approximately 3.1 million rentable square feet. This makes the company one of the largest cannabis operators in the world and is an opportunity that we continue to follow.
During the last year, Innovative Industrial Properties recorded mixed movements and has come well off its highs. After a significant rally, momentum has been trending to the downside and this is something that we are watching. Although the recent trend has been mixed and to the downside, we believe that Innovative Industrial Properties is an ancillary cannabis company to be watching.
Akerna: An Ancillary Company to Watch Post-Ample Organics Acquisition
In late 2019, Akerna Corp. (KERN) caught our attention after announcing the acquisition of Ample Organics. This was a transformational acquisition for Akerna and we are bullish on the amount of value that can be generated through the deal. During the last quarter, the trend has been to the downside and Akerna is a company that is worth watching.
Akerna’s service offerings include MJ Platform, Leaf Data Systems, and solo sciences tech platform. As part of its business strategy, the company plans to expand its reach through a series of organic and inorganic growth initiatives. From an acquisition standpoint, the business intends to grow through targeted strategic acquisitions that are complementary to its existing platform and organically by accelerating its product development efforts.
In December, Akerna reported plans to acquire Ample Organics in a cash and stock transaction (valued at up to $45 million). Ample Organics serves over 70% of the Canadian market with its industry-leading seed-to-sale platform. In late 2019, the company was selected to deliver the world’s first national cannabis tracking platform in St. Vincent and The Grenadines in 2020 and this represented a major milestone for the business.
Projected calendar-year 2020 revenue for Ample Organics is $8.7 million and the business is projected to be cash-flow positive in the second quarter. The deal is expected to close by the end of the first quarter and we are favorable on the impact that the transaction will have on the existing Akerna business. With the acquisition, Akerna is further executing on its business strategy of complementing strong organic growth with select acquisitions of highly targeted and synergistic technology companies. We are bullish on the long-term value that can be created through this acquisition and believe that the opportunity is flying under the radar.
Pursuant to an agreement between StoneBridge Partners LLC and Surna Inc. (SRNA) we have been hired for a period of 90 days beginning January 1, 2020 and ending April 1, 2020 to publicly disseminate information about (SRNA) including on the Website and other media including Facebook and Twitter. We are being paid $7,500 per month (SRNA) for or were paid “0” shares of restricted common shares. We own zero shares of (SRNA), which we purchased in the open market. We plan to sell the “ZERO” shares of (SRNA) 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 (SRNA) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.
Pursuant to an agreement between StoneBridge Partners LLC and Manifest7. (MSVN) we have been hired for a period of 180 days beginning August 1, 2019 and ending February 1, 2020 to publicly disseminate information about (MSVN) including on the Website and other media including Facebook and Twitter. We are being paid $10,000 per month for or were paid “ZERO” shares of unrestricted or restricted common shares. We own zero shares of (MSVN), which we purchased in the open market. We may buy or sell additional shares of (MSVN) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.
Published at Tue, 21 Jan 2020 12:52:22 +0000