The largest producers in the Cannabis industry often steal the spotlight with impressive sales figures and the capacity for tonnes of output, but at what expense? It just so happens to be some of the ancillary companies that are harnessing the chance to dominate their respective niches, and their payouts will be hefty. We’ve noticed some companies looking towards providing more progressive cultivation options and selling the relative supplies needed and we’ve even seen the rise of cash advances for growers. Most are smaller operations, like KushCo Holdings (OTCQB: KSHB) for instance, who is only focusing on the sale of packaging and containers and yet has been growing at an alarming rate. The opportunities seem to be endless as the Cannabis industry continues to pile high in valuations.
One of the most well-respected niches, originating from Europe, is Hydroponics. This is when a cultivator replaces the soil with a nutrient-heavy water base. Most LP’s are still hanging onto their out-dated growing styles, while the growth rate on a hydroponic plant is 30-50% faster than that of a soil-plant grown under the same conditions. The yield of the plant is also much greater. Plants with adequate oxygen in their roots also absorb nutrients faster. The hydroponics industry currently sits in the billions and is expected to grow at 6.5% CAGR between now and the year 2024. Scott’s Miracle-Gro (NYSE: SMG) seems to have their finger on this pulse. Although they are primarily known for their lawn and garden products, including fertilizers and weed killers, they are now tackling the Cannabis market by supplying hydroponic operation kits and much more. Market data shows that the investment seems to be paying off for the company, as sales have been increasing rapidly and are predicted to grow another 100-200% in 2019.
Streaming is a type of financing common in the mining industry. Essentially, the investor provides funds for expansion and in return, they get either a portion of the additional product that is produced or a portion of the revenue derived from the additional product. In Auxly Cannabis Group’s (TSXV: XLY ) (OTCQX: CBWTF) case they invest in smaller cannabis companies that need funds to expand their growing facilities and in return Auxly receives a portion of the additional cannabis produced. Auxly also takes a small equity share in companies they are partnering with.
The company is partnering with a number of up and coming cannabis companies, has total annual yields of over 230,000 kg of cannabis between all of their partners and also works through licensing joint ventures. The company currently does not produce revenues as these streaming deals take time to provide a return on investment. The company currently sits with $20 million plus in cash reserves, so it doesn’t look like they will have any trouble waiting.
It’s these younger plays in the market that pose great opportunities for anyone looking to enter into verticals that should, over time, continue to grow with the overall industry. These companies seem to be taking a smarter route, and instead of entering an already saturated industry, they are choosing to support it with essential services, and quite frankly what we think are very critical ideas, such as the hydroponics cultivation market. Either way, as most ancillary companies are smaller they will be traded on the over the counter market, which usually deters the masses. They are definitely something to keep an eye if they continue to dominate their niches!
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6 years experience in Capital Markets with a degree of Entrepreneurship and finance Ryerson University. You can find Alex on his free time, pursuing his multiple business endeavours, with his family, or playing music around the city. Feel free to follow him @alexxsimonelli
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