Sometimes the allure of a new industry is too strong to resist. The legalization of medical and recreational cannabis has attracted entrepreneurs from across the spectrum to try their luck in the nascent pot industry. Without a doubt there will be some spectacular successes in this new and budding sector, but the fact remains that the vast majority of startup firms will fail.
This is true and has been true for all of economic history. On average, 90% of all startups fail. For the cannabis industry specifically, because so many actors are entering the market all at once, it is estimated that 97% of all pot startups will end in bankruptcy. While the market potential is there for anyone who wants to try to take it, like everything, it’s easier said than done.
The big question is, as an investor, how can you pick one of the 3% of cannabis firms that will survive and thrive? There are two common answers to this question.
- You can stick to the big names like Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC) or Aphria (NYSE:APHA).
- You can do your due diligence and speculate in a handful of risky startups, hoping that at least one of them succeeds in the end and you see spectacular returns.
As for the first option, there is logic to sticking to safe picks in a volatile industry in its infancy. Holding a percentage of any pot stock portfolio in these relatively safe companies is prudent and wise. However, it’s probably not going to get you anything close to the spectacular gains that are possible if you are able to pick the right startups.
The second option is always a possibility, but it is admittedly a dangerous one. No matter how talented of a researcher you may be and no matter how well you can intuit markets, read financial statements and divine the direction of a newborn sector, publicly available information can only get you so far as an outside investor. Again, the vast majority of cannabis startups are going to fail. If you’re not an industry insider with intimate knowledge of how exactly it is structured, the pitfalls involved, who the important people are and what pressure points and bottlenecks and regulatory traps are out there, the chances of you hitting the jackpot here are vanishingly small.
In fact, they may be even smaller now, because 70% of startup failures happen between years 2 and 5 after inception. The pot stock space really got going in 2016, so we are right in the thick of the cull.
But there is good news. There is a third option in the cannabis space for outsiders like us. One that really is the best of both worlds. It is an option that combines the safety of the big names with the enormous return potential of the riskier startups. This third option can help you avoid the inevitable die-off of the vast majority of cannabis startups and stick to the winners. What is that option?
Simply this: When it comes to cannabis startups, just let proven industry leaders – insiders with major past successes – do the picking for you. How exactly?
If you’ve been paying attention to the cannabis space over the last two years, you may remember a company called MPX Bioceutical Corporation. This company was one of the largest in the cannabis space. It was acquired by iAnthus Capital Holdings (OTCMKTS:ITHUF) in a massive deal valued at $1.6 billion, a 30% premium over the closing price of MPX on the day the deal was signed late in 2018.
The people involved in that deal, one of the largest the cannabis space has ever seen, didn’t just drift off into that good night, retire to the Caribbean sipping cannabis-infused piña colada out of coconuts. They’re still very much involved in the cannabis space, and like all entrepreneurs who know their industries inside and out, they’re looking for more.
In fact, two of the founding partners of MPX recently decided to break off and form their own company. It’s called Nabis Holdings (CSE: NAB) (OTC: NABIF) and if history rhymes as it often does, it could end up being the next big deal in the cannabis space – this time even bigger than the MPX deal.
The most important resource for any company is its people, and Nabis is the brainchild of the very best in the entire industry. The company’s President and Chairman, Mark Krytiuk, was himself a founding partner of MPX before it was acquired for $1.6 billion, and served as Vice President of Grow Operations there for five years. He oversaw the production of medical and pharma-grade marijuana products across North America during his tenure.
Nabis’s CEO, Shay Shnet, was also a founding partner at MPX, in charge of building its portfolio of international cannabis assets. Together, these two helped build MPX into the powerhouse it became, which was instrumental in securing a business combination with iAnthus valued in the billions. Now they’re back to what they do best, indeed exactly what they did at MPX – building a company by handpicking a carefully selected portfolio of cannabis assets. This time, they’re focusing on three global cannabis hubs – the United States, Israel, and Canada.
The name of the company itself, Nabis, points to the ultimate goals of its leaders. “Na bis” means “repeat performance” or “encore”. And that is exactly what the company’s leaders are bent on accomplishing – an encore of the MPX valuation.
So how exactly are these industry leaders positioning Nabis to be the next big cannabis deal? Simple actually, but in order to understand it, let’s begin with an analogy particularly apt for the cannabis space. Let’s talk about planting a garden from seed.
In the cannabis industry you have an enormous amount of startups, all of whom know that if they stick it out long enough, there is an enormous market opportunity ahead. The problem is, because the industry was legalized all at once – on the state level in the US and on the federal level in Canada – everyone chases the market all at once, and so everyone tries to germinate their seeds and get them all growing simlutaneously.
Of course, some of the seeds will germinate, and others will not. Of the ones that germinate, some will take root, and others will not. Of the ones that take root, some will die, and others will not. Of the ones that survive, some will thrive, and others will be weak, eventually dying off to competition. And so on and so forth until you are left with a few strong plants or trees that bear fruit. It is the Darwinian principle of survival of the fittest, and it applies across the entire natural world, including the market economy itself.
In a brand new garden or industry that comes into existence all at once, there comes a point in the growth stage where it is evident that a plant has a decent chance of becoming a powerful plant or tree. You see a few green leaves that look healthy, and you may decide to put more effort into that particular plant. Train it, prune it, add better fertilizer, etc.
From the industry perspective, let’s say it’s at the point where a company first becomes cash flow positive. Now, that could be a sign of success, or it might not mean anything at all. It could be a fluke, some kink in the market that really has nothing to do with long term prospects. The thing is, you can’t just look at it and make a snap judgment from what you see on the surface. To really figure it out, it takes an experienced gardener with the right tools, the right chemistry set to discern whether the seedling really has a good shot at making it big or not, whether it is worth it to continue investing resources into it, to add more nutrients and care and time at the expense of other opportunities, or to look for another candidate.
This is exactly where a keen eye for the industry becomes absolutely crucial, and where personal expertise in the nuances of the space from every angle simply cannot be replaced strictly by dry financial data that is publicly available. The data of course is crucial and absolutely necessary as well, but it is not enough to be able to pick the true successes.
The long term Nabis business strategy is to identify the cannabis startups with the best chances of long term success, and give them the support they need to become powerhouses of the cannabis industry.
Nabis has three rigorous requirements before it even considers adding a cannabis firm to its holdings. First, the company must be EBITDA positive. That basically means earnings before interest on debt and taxes. Second, it must be vertically integrated in a state with limited licenses. This helps ensure that the company has tight control over its product and is locked in to its jurisdiction. Third, it must be on track to add to EBITDA within 12 months. This third requirement is of course a judgment call that involves considerable understanding of the market and regulatory layout. Fourth, any firm potentially acquired by Nabis must be a multi-state operator (MSO) with strong brand traction. Finally, it must have pharma-grade cultivation, extraction, and dispensaries.
At this point you may ask the following legitimate question: Why would these companies choose to become part of Nabis as opposed to any other holding company looking to execute some profitable roll-up? A key point to keep in mind here is that the MPX-iAnthus merger was an all-stock deal. That means, as opposed to an outright cash transaction, the original owners of MPX maintain their ownership, only within a larger capital structure.
Understanding the advantages of these types of deals for both sides is key. From the perspective of Nabis, all-stock deals allow management to keep a large cash pile in reserve. In fact, Nabis’s cash hoard is enormous relative to the size of the company. Cash, short term investments and net receivables on its balance sheet total over CAD$31 million right now, about twice the size of its market cap. To say Nabis is undervalued right now is an understatement.
What are the advantages from the perspective of the firms Nabis acquires? Namely that they continue their ownership of the companies they founded, maintain their influence over operations, and benefit from an influx of capital to continue and expand the businesses they poured their hearts into. Plus, these owners know and understand the history behind Nabis’s management team. Outside investors are not the only ones who want to see the tantalizing possibility of a billion dollar deal like the one pulled off last year by these same people. Would you rather cash out for chump change, or hitch a ride with industry mavens who know how to employ your capital in the best way and also have a $1.6 billion deal under their belts?
Using this approach and leveraging personal relationships, Nabis has already expanded into the key states of Michigan, Washington, Arizona, and California. Not only that, but with the specific acquisitions already made, the company has been able to rack up more licenses than even some competitors many times its size. For example, in Michigan it enjoys 10 cultivation licenses, compared to one competitor about 40x its size that only has 2.
The regulatory implications of this could be enormous as the state tightens its grip over the industry as it grows. As veterans of the cannabis space with intimate knowledge of how the industry works and its interrelationship with the regulatory environment, the leaders of Nabis are setting up for the long term. By keeping it all under one umbrella, Nabis is positioning itself in tune with the regulatory environment in order to minimize that burden on its future business.
In the words of Nabis’s Chairman and President:
“The existing regulations are complex, requiring businesses to follow detailed rules that govern every area of the industry from growing to packaging and selling to consumers. Even the smallest error can cost a cannabis business thousands, and incur harsh punishments such as losing their cannabis license.”
Nabis has a solution for this problem. In Krytiuk’s words:
“Artificial intelligence is one key technological advancement that could make a significant impact. By implementing this technology, cannabis retailers would be able to more easily track state-by-state regulations, and the constant changes that are being made. With this information, they would be able to properly package, ship, and sell products in a more compliant way that is less likely to be intercepted by government regulations.”
Beyond Michigan, in Arizona, Nabis has already entered into a definitive agreement to acquire 100% ownership of an asset serving 132,000 patients in the Phoenix area. The acquisition meets all of Nabis’s requirements with audited 2018 financials of $8.7 million in revenue, gross margins over 50%, and estimated $9.0 million in revenue for 2019.
The SodaStream of the Cannabis Industry
Perhaps one of the most exciting of prospects in the Nabis acquisition spree comes from Israel, a critical cannabis export hub, where Nabis has acquired a 49% interest in Cannova Medical with an option to acquire the rest upon certain sales milestones. Cannova is unique among cannabis firms. It has developed a sublingual strip that delivers cannabinoids directly into the bloodstream without passing through the digestive system. That itself is not what makes it stand out though. Cannova is also developing the NovaJet Pro, a counter-top machine that enables clients to create customized film strips at home, in real time while combining various cannabinoids of their choice in accordance with their personal needs. Think of it as the Soda Stream of the cannabis industry, where customers can, well, customize their dosing to exact paramaters among various different cannabinoid compounds.
Incidentally, SodaStream, also an Israeli company, was acquired by PepsiCo (NYSE:PEP) last year for $3.2 billion, at around the same time that iAnthus acquired MPX from Nabis’s current leaders.
Starting to see a pattern here?
So do the firms already acquired by Nabis who have joined under its umbrella. If you see it, too, you simply cannot afford to miss out on Nabis Holdings.
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