2020 is expected to be a period of substantial growth for the cannabis sector and this is an industry that we have been closely watching. When looking at the most significant potential growth drivers for the sector, we are the most bullish on the international side of the industry. Going forward, we also expect regulation reform to play a key role in growth and for markets such as North America to benefit from this.
When it comes to the North American cannabis market, we are excited about the regulation change in Canada that was implemented in late 2019. This change resulted in the legalization of the cannabis derivative products (i.e. vape pens, edibles, and cannabis concentrates) and this is an opportunity that we are excited about. Cannabis is illegal at the federal level in the US and this is a market that we have been highly favorable on. This year, we expect to see significant regulation reform in the US and for this to be a catalyst for the sector.
We believe that the cannabis sector is in the early innings of a major growth cycle and continue to work to identify companies that are positioned to be industry leaders. In 2019, the sector was under pressure and valuations are looking much more compelling at current levels. Going forward, we believe that selectivity will be more important than ever and want to highlight a company that has been flying under the radar.
An Under-appreciated Canadian Cannabis Growth Story
The company, Namaste Technologies (N.V) (NXTTF) is highly levered to the Canadian cannabis market and is positioned to capitalize on the changing landscape of the industry. The company represents a multi-faceted growth opportunity and we find the valuation to be compelling at current levels.
During the last year, Namaste reported several major milestones related to CannMart, a wholly owned subsidiary of the business. CannMart’s online store offers one of the largest selections of legal cannabis products from established cannabis producers in Canada and around the world. Through CannMart, the company has been able to form strategic partnerships with leading cannabis brands and we are bullish on the amount of traction these brands can generate in Canada.
CannMart represents an attractive aspect of the business and we are favorable on how the management team has been able to position the asset for growth. From a distribution standpoint, CannMart is well positioned to capitalize on the cannabis market in Canada and this will play an important role in the success of the brands that it has formed relationships with. We expect Namaste to be a major beneficiary of the cannabis 2.0 movement in Canada and believe that the market does not fully appreciate this aspect of the story.
Positioned to Capitalize on Canada’s Cannabis 2.0 Market
Last week, Namaste reported a major milestone related to one of its investments and we are bullish on how the fundamental story has advanced through strategic investments and accretive acquisitions. Last year, the company acquired a 49% ownership stake in Choklat, an Alberta-based craft chocolate manufacturer and chocolatier that is highly levered to the cannabis 2.0 movement in Canada. Namaste announced that Choklat was granted a processing license from Health Canada to produce a line of chocolate bars, drink mixes and infused sugar. The granting of the license represents a substantial development for the business, and we expect it to serve as a growth catalyst for Namaste.
Through CannMart, Namaste is well positioned to capitalize on the cannabis 2.0 opportunity, and we find this to be significant. The company expects to start selling several new cannabis derivative products in March and to submit up to 11 unique product SKUs to Health Canada for approval. The new product formats will be available on CannMart.com and offered through provincial cannabis stores in authorized markets. From a distribution standpoint, Choklat will benefit from the assets that are owned by Namaste and it will have attractive exposure to Canada’s recreational cannabis market.
One of the reasons we are excited about this asset is related to the existing demand for the product line. Choklat has been selling non-infused products through its e-commerce platform and through a network of distributors across Canada. In preparation for the legalization of cannabis derivative products in Canada, Choklat has been executing on a multi-faceted expansion strategy and has non-infused products available in 150+ retail outlets across Canada, including an increasing number of Safeway and Sobeys stores in Western Canada.
Another reason to be excited about Choklat is related to the work that it is doing in the US. Namaste has been highly focused on this opportunity and Choklat has also applied for and received its FDA number for the sale of non-infused chocolate bars in the US. We believe that this focus will provide the company with an attractive opportunity to capitalize on the US market. Once cannabis is legalized at the federal level in the US, the chocolate company can easily pivot its model to include THC products and we are bullish on the long-term opportunity as it relates to Choklat.
CannMart is Executing on a Multi-Faceted Growth Strategy
We believe that CannMart is the most attractive division of Namaste and expect it to be the most significant growth driver for the business on a going forward basis. The work that CannMart has accomplished on the brand side of the business is significant and we believe that this trend is just getting started. As Canada’s recreational cannabis market matures, we expect the market to understand the value associated with the brands and believe that the market is missing out on something big.
A few weeks ago, CannMart Labs announced an exclusive licensing agreement with Phyto Extractions to use their trademarks for certain cannabis products (cannabis vaporizing pen cartridges and batteries, cannabis capsules, and cannabis tincture bottles and jars). Namaste is adding these Phyto products to its CannMart online marketplace as it continues to focus on aggressively expanding its online product offering.
Prior to the Phyto deal, CannMart announced a licensing and manufacturing agreement with TREC Brands. Through TREC, CannMart will be focused on bringing high quality products to TREC’s brand conscious customer base under the WINK cannabis brand. We expect the brand to generate significant traction on the CannMart platform and are favorable on this aspect of the story.
During the last year, Namaste has been executing flawlessly on a number of important growth initiatives. When looking at the opportunity, we believe that the company has significant potential catalysts for growth and is trading at a discount when compared to its peers. We are impressed with how the management team has been able to drive the story forward and are most excited about the opportunities associated with CannMart.
Over the next year, we expect to see a significant increase in the number of brands that fall under the CannMart umbrella and believe that the market does appreciate this aspect of the story. As Canada’s cannabis market continues to evolve, companies like CannMart are well positioned to benefit from the changing landscape of the industry. From a capital standpoint, the business is well positioned to capitalize on unique growth opportunities and we find this to be significant.
Valuation Metrics are Attractive at Current Levels
At current levels, Namaste is trading at a significant discount to its peers and is trading at 3x current assets. With more than $ 49 million of cash on the balance sheet as of August 31, 2019, Namaste is well positioned from a funding standpoint. Access to capital has been a major pain point of the cannabis industry and this is an area in which Namaste is well positioned. We believe that Namaste has substantial potential catalysts for growth and is an opportunity that our readers need to be aware of.
Although it is challenging to value a cannabis company in the same manner as for a food, technology or clothing business, the liquidity metrics (current ratio and cash flow) that are commonly used for these types of businesses can be applied to Namaste. When using these metrics to analyze Namaste, we determined that based on these metrics the company appears to be an undervalued opportunity and we find this to be significant. Namaste is led by a management team that has been able to effectively and efficiently use its cash on hand and we believe that this is one of the most important aspects of the story.
During a time where companies are struggling to raise capital to fund growth initiatives, Namaste is well positioned, and we believe this is a testament to the strength of the management team. Going forward, Namaste is well positioned for growth and is an opportunity that is high on our radar.
Pursuant to an agreement between StoneBridge Partners LLC and Namaste Technologies Inc. (N)(NXTTF) we have been hired for a period of 180 days beginning October 1, 2019 and ending April 1, 2020 to publicly disseminate information about (N)(NXTTF) including on the Website and other media including Facebook and Twitter. We are being paid $7,500 per month (N)(NXTTF) for or were paid “0” shares of restricted common shares. We own zero shares of (N)(NXTTF), which we purchased in the open market. We plan to sell the “ZERO” shares of (N)(NXTTF) 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 (N)(NXTTF) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.