Cannex Capital Holdings (CNSX:CNNX) Seeks to Extend Washington Cannabis Dominance to California

Benjamin A. Smith
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Cannex Capital Holdings Corp (CNSX:CNNX) (OTCMKTS:ARRXF) is making headway in the West Coast American cannabis market. The company is the full-spectrum (cultivation, extraction, manufacturing, and more) leader in Washington State and has its sights set on the fragmented California market. It recently made a strategic acquisition of Jetty Extracts based in Oakland. The company says it plans to project Cannex’s dominant Washington State business model onto the entire West Coast, and then beyond as a national multistate player.

In a relatively short timeframe, the company formerly known as Arco Resources Corp has not only transformed itself completely, but become a force to be reckoned with. This isn’t fluff talk or hyperbole—real operating numbers bare this reality out.

Cannex Capital CEO Anthony Dutton outlines the company’s plans in regard to transplanting their leadership position in Washington State onto California.

For example, through its subsidiary holdings in Washington State, Cannex controls the top two flowering brands, and seven of the top ten edible brands regionally. Everything from confectionery, concentrates and vape cartridges are included in this ensemble. With the explosive growth in the edible market, that’s a great place to be.

In the last year, sales of edibles in Washington increased by 121 per cent, with unit sales of over 2.6 million, up 28 per cent from the previous year.

Cannex’s pole-position lead in Washington State was cemented last year, when the company purchased 100% of BrightLeaf Development LLC. The company has real estate holdings, property leases, brands and intellectual property, and material supply agreements with Northwest Cannabis Solutions LLC (the biggest producer/processor in the State), and 7Point Holdings LLC. According to the Washington State tracking site 502data (www.502data.com), NCS is the number one operator in the Washington, with revenues US$4,605,773 in the first two months of 2018 alone—and they are profitable.

Perhaps the most notable detail of Cannex’s BrightLeaf entity is the flexibility within its supply chain operations. While it is a licensed producer (LP), those operations aren’t the core focus. For Cannex Capital Holdings, is all about brands and the flexibility to ramp up production on a dime where consumers demand presents itself. BrightLeaf’s Tumwater facility currently maintains 40,000 ft2 of processing space and the blessing of Washington Department of Agriculture approved kitchens. There’s significant expansion space on site, as needed.

With Phase I expansion plans going as well as expected, Cannex is branching out. Not content with owning the Washington State sales channel, the company is setting its sights higher. 

California Roll-out Gets Underway

For regular readers of the Midas Letter, this narrative comes as no surprise. Unlike Canada—which has a couple dominant players at the top and a treasure trove of well-run regional stalwarts—California has neither. Despite being the world’s fifth largest economy, California’s cannabis market is fragmented and in many ways disheveled; it’s a hodge-podge of mainly local players with little coordinated top-down structure. Essentially, it’s a market just begging for someone to take the ball and run with it.

Enter Cannex Capital Holdings.

Realizing that California is one of the largest untapped markets in the world, they’ve initiated Phase II of their strategy to capitalize in this vacuum. While Phase II is every bit as much about international expansion as it is regional, California provides the most logical segue as Cannex looks to expand its imprint along the U.S. West Coast. Opportunities in the international sphere tend to materialize once regional mastery has taken place.

Less than a month ago, Cannex announced it had signed a binding letter agreement to acquire 100% of Oakland, California-based Ametrine Wellness Inc. (doing business as Jetty Extracts). While the transaction went below the radar, perhaps it shouldn’t have. Jetty has a presence in 600 California dispensaries in 2017, complete with its own cannabis distribution license and  50% ownership in award winning MindTrick edible brand. Jetty Extracts currently enjoys a 4.4 out of 5-star rating on its Weedmaps review site.

The relatively modest sum paid to acquire Jetty was, we suspect, just the opening salvo. In my view, the acquisition was notable insofar that it seemed to fit into Cannex’s overarching strategy of winning out in the edible brand market. That focus perhaps sets Cannex apart from most of the other LPs out there, who tend to dabble in multiple cannabis sub-sectors. Generally, edibles is not considered the core focus among Canadian cannabis companies, despite $180 million being spent in cannabis edibles in 2016 in California, according to financial data company Arcview.

Bottom Line

With president Donald Trump giving tacit support to the U.S. marijuana industry at-large, a new California gold rush has officially commenced. Many Canadian operators (mainly smaller) are entering the fray, in quest of staking their claim to the market. In that respect, Cannex Capital Holdings is not much different from the rest.

But ask yourself this question: would you feel more comfortable investing your hard-earned investment dollars in an operator with proven brands and leadership pedigree, as seen two states to the north? In a sea of pretenders with fluff press releases and shiny stories, Cannex has actually yielded encouraging results. Though early, it’s operation, supply chain and distribution success in the fast-growing edibles market might make sense for investors seeking a win in the emerging California market.

Because whoever wins in California, should win the preponderance of cannabis investment capital flooding into the state.

 

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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bsmith@midasletter.com |

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