The Cannabis Market -- Where Only the Strong Will Survive

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Dec 07, 2021, 08:30 ET

NEW YORK, Dec. 7, 2021 /PRNewswire/ -- Even as the cannabis market continues expanding, pricing for wholesale cannabis has been under protracted pressure from oversupply and price cuts. Make no mistake — the cannabis market is still robust with large upside, and survivors of this supply side shake-out should secure ever-greater market share. The pressures may be most prevalent in California, the world's biggest cannabis market, as light-deprivation crops reach market in 2021 and the potential for Type 5 cultivation licenses allowing for massive outdoor-growing facilities could be issued in California by 2023. To survive and thrive, companies will need to be nimble, diversify assets across the value chain and generate revenues from multiple venues. That's preaching to the choir for Los-Angeles-based Cannabis Strategic Ventures Inc. (OTCPK: NUGS) (Profile) One of California's publicly traded cannabis cultivators, NUGS has been actively diversifying into integrated operations complete with high-profile retail locations and new indoor grow facilities. NUGS views the shake-out as opportunity and fully expects to capture increased market share as the company continues to diversify. Throughout the last decade, as the "green rush" has swept across the globe, the wheat has been separated from the chaff, leaving strong companies — such as Canopy Growth (NASDAQ: CGC), Curaleaf Holdings (OTCQX: CURLF), Green Thumb Industries (OTCQX: GTBIF) and Trulieve Cannabis (OTCQX: TCNNF) — still standing as they take necessary steps to secure market share going forward.

Diversifying from its highly regarded outdoor grow facility, NUGS is adding high-margin indoor cultivation and high-profile retail stores.
NUGS earlier acquired four comprehensive cannabis licenses in Los Angeles.
The company intends to develop and acquire indoor grow facilities capable of producing 22,000 pounds of premium, exotic cannabis flowers per annum.

Click here to view the custom infographic of the Cannabis Strategic Ventures Inc. editorial.

Cannabis Price Pressures

According to Cannabis Benchmark(R)'s U.S. Cannabis Spot Index, the average price of a pound of cannabis declined around 17% over the last year. Nowhere has that been more noticeable than in California. It's difficult to exactly discern just how big the California market is, but published information shows 2021 tracking for more than $5 billion in taxable sales for the state.

In truth, however, the question is not about market size as much as it is about survivability for small companies, which could be heading for stiff competition come Jan. 1, 2023. In 2016, the state's proposition 64 eliminated cannabis prohibition, with an acreage cap in effect until 2018. Eliminating the cap allowed stacked licensing and bigger farms, and the fear is that type 5 licenses becoming effective at the start of 2023 could lead to unlimited cultivation that will be a death knell for small growers.

From its headquarters in Los Angeles, Cannabis Strategic Ventures (OTC: NUGS) is starting to leverage deals forged pre-COVID-19 pandemic to position for pressures on wholesale cannabis prices. Management is leveraging its collective experience in operational and financial strategic partnerships to ensure that NUGS both survives and thrives during this supply-side disruption.

More precisely, Cannabis Strategic Ventures has expanded opportunities in what many see as a downturn by opening dispensaries and shifting focus on higher-margin indoor cultivation that commands higher prices. As NUGS continues a high-margin growth strategy, the company expects to simultaneously increase brand recognition and market share.

The New Retail Footprint

In 2019, Cannabis Strategic Ventures entered into an agreement where the company gave up limited equity stake in exchange for up to $8 million in financing and the transfer of four cannabis licenses. The licenses were issued by the city of Los Angeles and the state of California for the retail sale, cultivation, distribution and manufacturing of cannabis products.

Then the COVID-19 pandemic hit, which delayed the approval of the transfer of the licenses by the city and state until Aug. 9, 2021. With licenses now in hand, Cannabis Strategic Ventures is moving with purpose to execute a farm-to-sale model. This strategy means eliminating middlemen that gobble up margin, passing savings on to consumers and adding to corporate coffers.

First up for NUGS is the grand opening of its flagship retail cannabis dispensary under the MDRN (Modern) Tree brand. The store will showcase cannabis flower produced at the company's NUGS Farm North cultivation site.

Expanding Indoor Cultivation

The L.A. licenses represent multiple vertical opportunities for NUGS, inclusive of substantial expansion of indoor grow operations to complement its NUGS Farm North property. The plan is to establish new indoor cultivation facilities in Los Angeles and Sacramento to grow premium exotic cannabis flower, thus distancing NUGS from basic competition that has flooded the markets.

Cannabis Strategic Ventures has also inked a Memorandum of Understanding (MOU) with Devine Solutions Inc., a California corporation, relating to the proposed acquisition by NUGS of an indoor cannabis cultivation facility in Sacramento, California. According to the terms of the MOU, NUGS intends to initially purchase 10% of the facility for $1.5 million, with an option to purchase an additional 41% of the facility for a controlling stake at the same $15 million valuation.

Capacity and Profitability

NUGS becomes a vertically integrated cannabis company with the downtown L.A. licenses, new indoor grow facilities in Los Angeles, a retail brand, Sacramento assets and existing NUGS outdoor greenhouse. The company is effectively covering all the bases of mass markets and premium artisanal consumers, adding a new demographic to its revenue stream.

NUGS isn't planning to add just a little bit of capacity; the facilities represent a major expansion. For the L.A. facility, management foresees up to 1,200 grow lights, projected to produce two to three pounds of premium exotic cannabis flower per light per harvest across an estimated 5.75 harvests per year, suggesting an upside potential for total production capacity of more than 15,000 pounds of premium exotic cannabis flower per year.

With the addition of approximately 15,000 square feet and an estimated 500 grow lights, the Sacramento facility will have capacity for 7,000 pounds of premium cannabis flower annually; 22,000 pounds even at a further price depreciation to $1,500 for indoor flow equates to $33 million.

NUGS CEO Simon Yu succinctly summarized the recent developments in saying, "We have already amassed years of experience refining our cultivation methods and strains in an outdoor framework with our NUGS Farm North site. Adding a top-tier indoor cultivation operation stands to help us further build upon that success and drive more volume in the premium flower market, which has powerful implications given our recent expansion into the dispensary marketplace with our MDRN Tree downtown L.A. dispensary location."

Success Favors the Strong and Vertically Integrated

Pricing pressures aren't unique to California. As other markets develop and become saturated, the pattern is almost certainly to repeat, which will play into the hands of strong cultivators and those with efficient, integrated models.

Canopy Growth (NASDAQ: CGC) is a world-leading diversified cannabis and cannabinoid-based consumer product company. The company has also entered into the health and wellness consumer space in key markets including Canada, the United States and Europe through BioSteel sports nutrition and This Works skin and sleep solutions. Canopy Growth has also introduced additional federally permissible CBD products to the U.S. through its First & Free and Martha Stewart CBD brands. In addition, the company has an established partnership with Fortune 500 alcohol leader Constellation Brands.

Curaleaf Holdings (OTCQX: CURLF) is an international provider of consumer CBD and hemp products headquartered in Wakefield, Massachusetts. The company has a presence in 23 states, and owns and operates 112 dispensaries, 25 cultivation sites, and 30 processing sites with a focus on highly populated, limited license states. Curaleaf also has a footing in the beverage space, recently signing an important distribution agreement with Southern Glazer's Wine & Spirits, the world's largest distributor of beverage alcohol, that will bring Curaleaf's lineup of products from its eponymous Hemp and Select CBD product lines into Southern Glazer's distribution network.

Green Thumb Industries (OTCQX: GTBIF) is a national cannabis consumer packaged goods company and retailer that manufactures and distributes a portfolio of branded cannabis products including Beboe, Dogwalkers, Dr. Solomon's, Good Green, incredibles and Rythm. The company also owns and operates rapidly growing national retail cannabis stores called Rise. Green Thumb has 16 manufacturing facilities, 66 open retail locations and operations across 14 U.S. markets. Earlier this month, Green Thumb announced financial results from Q3, showing that revenue increased 5.3% sequentially and 48.7% year-over-year to $233.7 million.

Trulieve Cannabis (OTCQX: TCNNF) is an industry-leading, vertically integrated cannabis company and multistate operator in the United States, operating in 11 states, with leading market positions in Arizona, Florida and Pennsylvania. Trulieve is poised for accelerated growth and expansion, building scale in retail and distribution in new and existing markets through its hub strategy. The company recently announced the launch of TruTonic, a brand-new drink powder that is the first of its kind in Florida.

Diversification is mandatory to keep up with the constantly shifting and evolving cannabis markets that are still only in their nascency. Supply surpluses and shortages are bound to occur as the cannabis markets find their footing and competition intensifies. In all probability, cannabis company survivors and thrivers will be diversified and vertically integrated to capture share and carve a path to ever greater profitability.

For more information about Cannabis Strategic Ventures Inc. (OTC: NUGS), please visit Cannabis Strategic Ventures Inc.

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