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California’s Cannabis Landscape Shifting with the Coming End to Prop 215

During the first quarter of 2018, California made $60.9 million in cannabis tax revenue, marking the first wave of the state’s new legalization era. Those revenues broke down into $32 million in revenue from the state’s excise tax, an additional $27.3 million in revenue from sales tax, and another $1.6 million from the cultivation tax. With medical cannabis being exempt from sales tax if the purchaser holds a valid Medical Marijuana ID card, the total injection of revenues is a positive looking forward for California.

However, for California growers and distributors, there’s another shift coming on the horizon, as regulations are redrawn, and old laws fade away. The ground-breaking Proposition 215 was passed in 1996, which allowed for not-for-profit organizations to grow for the purposes of medical marijuana. Now that legal framework is changing, in order to expand and include recreational cannabis, and profit-seeking organizations.

Through these changes, and the upcoming growth spurts expected in the sector, eyes are being focused on the developments of companies operating in California, including CannaRoyalty Corp (CSE: CRZ) (OTC: CNNRF), Cannabis Wheaton (TSX.V: CBW) (OTC: CBWTF), Sunniva Inc. (CSE: SNN) (OTC: SNNVF), MedMen Enterprises Inc. (CSE: MMEN) (OTC: MTTPF), and High Hampton Holdings Corp. (CSE: HC) (OTC: HHPHF).

Because there were several collectives that fell within the old framework, the opportunities are opening up for cultivators to evolve into the more corporate business friendly world. What used to be more mom-and-pop style, is going to need to transition into the new way of doing business—one that will require sharp acumen, access to capital, and legal expertise to wade in these new waters.

There’s a lot at stake, especially when California’s cannabis sales are projected to possibly hit $3.7 billion by the end of this year. Next year is expected to be even more promising, with the potential for $5.1 billion, as predicted by BDS Analytics, which is paying attention to the many new dispensaries expected to come online in the future.

As the single largest market in North America, California’s future will heavily influence the cannabis market as a whole. For the companies involved, that future will be determined by both growing capacities, and distribution capabilities. While consumers find their favourite brands, and develop their tastes, what happens now on the west coast matters for the important fiscal quarters of this year still to come.

PREMIUM CALIFORNIA GROWTH OPPORTUNITIES

CannaRoyalty Corp (CSE: CRZ) (OTC: CNNRF)

CannaRoyalty ramped up its California footprint in the month of May, after commending the California government’s decision to allocate an additional US$133.3 million for cannabis-related programs. The company would end the month by partnering with Posh Green Collective delivery, a California-based licensed cannabis delivery service with a license to sell adult-use cannabis through San Francisco’s equity permit program. The partnership follows after acquiring Rivers Distribution (RVR) for roughly $20 million earlier in the year. CannaRoyalty has made an aggressive push towards securing distribution.

Cannabis Wheaton (TSX.V: CBW) (OTC: CBWTF)

Cannabis Wheaton turned analyst heads in May, after courting a blue stamp of approval from Canadian major banking institution, the Bank of Montreal. The bank raised $100 million for Cannabis Wheaton in a bought deal. The company plans to use the proceeds from the offering on domestic and international operations, capacity expansion, and other general working capital purposes. Earlier in the month, CW entered an exclusive licensing deal with Denver-based Dixie Brands for use of Dixie’s intellectual property.

Sunniva Inc. (CSE: SNN) (OTC: SNNVF)

Back in April, Sunniva received all the necessary State of California temporary licenses for phase one and two for its purpose built state-of-the-art greenhouse cultivation facilities in Cathedral City, California. The company is expecting to leverage its experience with the Cathedral City operation as it moves forward with its 740,000 sq ft Sunniva Canada Campus project in Okanagan Falls, British Columbia. The Sunniva California Campus is planned in two phases, with Phase 1 being 325,000 sq ft, and Phase 2 being 164,000 sq ft. On the California campus, it’s estimated that 30% of all product will be used for higher-margin extract products.

MedMen Enterprises Inc. (CSE: MMEN) (OTC: MTTPF)

Cannabis distributors, MedMen made a splash with their RTO at the end of May, making the bold claim that they want to be known as the Apple Store for pot. Based out of Culver City, MedMen’s approach is to give customers a “comfortable, informative and non-threatening environment.” Through the RTO and listing, the company raised approximately US$110 million, through a private placement at an implied enterprise valuation of US$1.65 billion.

High Hampton Holdings Corp. (CSE: HC) (OTC: HHPHF)

Through an approval that is scheduled to be ratified at the end of this week, High Hampton’s Coachella Cannabis Zone is expected to have its Conditional Use Permit (CUP) in place this month. The 10.8-acre land parcel is the first major project under High Hampton’s helm. Through the strength of the company’s politically-fluent management team, its knowledge of the California legal landscape, and backed by a sizeable cash position, several more near-term cash-flow generating acquisitions are expected this year.

THE CALIFORNIA HOMETOWN ADVANTAGE

Stationed in an agriculturally wealthy region, the CoachellaGro facility being developed by High Hampton Holdings Corp. (CSE: HC) (OTC: HHPHF) essentially brings the county’s agricultural product count from 120 products to 121 with cannabis.

In California there are 483 municipal districts, and 58 different counties. Being a former mayor, and still an elected official in one of them, High Hampton CEO David E. Argudo is primed and ready to tackle the remaining 482 cities with his knowledge and background on the lay of the land, and the parties involved with all stages of approval—deliberately steering clear of the conflict laws pertaining to his own municipality.

Argudo’s experience exemplifies the company’s three pillars towards success, which are political experience, cannabis experience, and capital experience. High Hampton comfortably brings all three to the table, through its team. But it was Argudo’s foresight in 2010, which through the first ever tax measure in his jurisdiction on cannabis proved to be the framework for the state standard today.

This is where the advantage for High Hampton comes today. Especially with the approvals surrounding the company’s flagship CoachellaGro project. Last month they received approval of their Conditional Use Permit (CUP) from the Coachella Planning Commission.

"It has been a diligent application process with significant work completed by our executive management team and our experienced Infrastructure Engineers team, and we are very pleased to have received an approval from the Coachella Planning Commission to award a conditional use permit,” said Argudo in the company’s press release following the announcement. “Once the planning commission issues the permit, we can move forward with the selection of a construction team and breaking ground at CoachellaGro."

CoachellaGro will be a state-of-the-art greenhouse facility, estimated to be approximately 194,000 sq ft, with roughly $7.4 million in topline revenue expected within 12 months. If all goes according to plan, the greenhouse will be open and cultivation will begin in Q1 2019.

However, the High Hampton strategy is more than just the growing facility, as evidenced by recent acquisitions of cannabis distribution assets. The march by High Hampton to consolidate the Californian market took a major stride when it acquired California Gold Inc. (CALIGOLD), an established cannabis edibles brand with seven award-winning, multi-strain flavor chocolate bars across California dispensaries. Later, the company entered a binding term sheet to acquire 8 Points Management and its subsidiary Bravo Distro.

“Securing distribution is a crucial if not the most important component of a successful business model for the California cannabis market,” said Argudo in an interview with CFN after the latest acquisition. “In 8 Points Management we have found a well-positioned operator that offers a full-service distribution model for our industry that will help us establish access to major distribution hubs in strategic locations throughout California, including a prominent location in West Sacramento.”

With the fadeout of Prop 215’s jurisdiction, High Hampton sees plenty of opportunities to acquire and transition several intellectual properties and products that have been established over the last 22 years since California’s market could legally sell cannabis-related goods. These brands have already been out on the market for years, but now the consolidation wave is in effect.

High Hampton’s advantage is in its political acumen, as it can steer a company with a waning license under Prop 215, into a new jurisdiction, and keep it on the shelves. Argudo and his team are well equipped to shepherd these brands through the legal hoops, all while building their own revenue streams, and moving closer to the opening of the flagship CoachellaGro operation.

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