Cannabis 3.0: Investing in Profitability
February 23rd, 2021
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If you’ve been following the public cannabis markets for the past decade, you’ve seen a myriad of changes that can be bundled into a few major categories: The Canadian build up, the rise of the US MSO and the race to get profitable.
During the Canadian build up, call it Cannabis 1.0, it was all about size matters. After Canada legalized adult-use cannabis, investors poured capital into massive Canadian LP’s that in turn poured most of that money into building massive state-of-the-art greenhouse cultivation projects. All hoping they would become leading global suppliers and boasting future production numbers in the hundreds of thousands of kilos.
However, it didn’t take a Nobel prize-winning economist to see that global demand was a drop in the bucket relative to the supply being developed. So what did that mean for these massive LP’s and their respective massive output? They were going to be forced to look inward, and battle it out for whatever domestic market could be cobbled together in order to survive.
Unfortunately, the shift in focus to the domestic market only functioned to reveal the major blindspot of all the Canadina LP’s: there was no domestic market. At this point the Canadian regulators and operators began to understand how catastrophically underdeveloped their retail market was, and that it would take years to reach a level sufficient to support even a small portion of the existing production. In other words, the domestic demand that analysts had hoped would arise overnight was nowhere in sight.
The second major shift for the cannabis industry, Cannabis 2.0, came south of the Canadian border when the U.S. multi-state operators (MSOs) began to expand. After several east coast states legalized cannabis, creating limited license opportunities in the US market, companies began raising money on the premise that they could become leading brands across the United States—a much larger market than Canada to the north.
Companies like Acreage, Cresco Labs, Jushi Holdings and Green Thumb Industries began raising tremendous amounts of capital and winning licenses in markets like Illinois, Pennsylvania, Virginia, Florida and New York. Like Cannabis 1.0, this new movement failed to materialize as quickly as anticipated because states struggled to efficiently rollout regulations and open new markets. And as Canadian LP’s had just learned, the legal retail market can’t be created overnight and early regulatory mistakes can take years to overcome.
As such, large markets like New York have remained on the sidelines due to regulatory issues and markets like Virginia remain atrophied, unable or not ready to make the transition from medical to recreational. So a handful of companies have been successful in expanding across multiple states, but they failed to meet the ambitious expectations that many analysts had set for states opening up new markets.
A New Focus on Profitability
All of this brings us to today and Cannabis 3.0: the search for profitability. In spite of all the aforementioned growing pains, the cannabis industry continues to experience strong growth as the strong players emerge and the weak ones go by the wayside. The quality Canadian LP’s have begun to right their respective ships, the quality MSO are inching ever closer to positive EBITDA and a few quality public companies have achieved consistent profitability and are looking to expand.
For these reasons the next crop of investors is seeking maturity and stability. In particular, they are looking for Cannabis 3.0 companies that have achieved profitability and are no longer reliant on raising capital to stay in business. They want steady growth and cash flow that will ultimately generate long-term shareholder value.
For example, Next Green Wave Holdings Inc. (CSE: NGW) (OTCQX: NXGWF) recently reported revenue of $3,582,416 and net income of $402,007 during the third quarter of 2020. Management indicated that fourth quarter adjusted EBITDA hit $2,305,651 on revenue of $4,632,890, which represents a nearly 30% quarter over quarter revenue growth rate.
“We transitioned from a startup into a fully-fledged cannabis CPG company that has consistent revenue growth quarter over quarter, is cash flow positive month after month and has achieved true profitability for the last three quarters,” said CEO Michael Jennings. “Moving into 2021, we want to build on that momentum through expansion.”
Strong Growth Rates Continue
The cannabis industry continues to experience strong growth despite the COVID-19 pandemic weighing on other parts of the economy. While the grow-at-all-costs mantra of Cannabis 1.0 and 2.0 has faded, investors are keen on companies that are invested in measured growth that can help generate long-term shareholder value.
For example, Next Green Wave is building an additional 50,000 sq. ft. indoor cultivation facility at its Coalinga campus that’s scheduled to come online in late 2021, as well as actively pursuing opportunities to expand and diversify its cultivation operations. With existing distribution channels, these expansion efforts stand on solid footing.
The company also continues to build its award-winning line-up of over 120 cannabis strains and hybrids through its pheno hunting program. Through grower-to-grower relationships, the company carefully selects rare genetics from some of the most sought after breeders, building test gardens and bringing the best varieties into production.
Finally, the company is bringing these products to market through high-profile relationships, such as its two-year supply and production agreement with COOKIES. COOKIES is one of the most well-respected, top-selling and premier cannabis brands in California and around the world with 26 retail stores in California and around the world.
The cannabis industry has evolved from rapid expansion to prudent growth over the past decade. As retail investors give way to institutions, investment goals have evolved from rapid top-line growth rates to bottom-line profitability and measured growth.
Next Green Wave Holdings Inc. (CSE: NGW) (OTCQX: NXGWF) is a prime example of a company that has navigated the transition and is poised for success. With a track record of profitable growth, the company is a great addition to cannabis portfolios and recently earned a place in the OTCQX’s list of the top 50 performing companies on the exchange.
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