- In the cannabis industry, ancillary products and services have attracted significant investment, accounting for the majority of recent financings and M&A according to Viridian Capital.
- The smart money is in. Institutional financing and strong third quarter results for Solis Tek (SLTK) indicate potentially big 2018 with new product lines and inventory prep ahead of Canadian legalization decision next summer.
The smart money is falling in line, and an impressive institutionally backed financing from Solis Tek Inc (OTCMKTS:SLTK) this week could mean a big 2018 for the small cannabis player. This developer of top-echelon growth and production solutions for marijuana companies raised $2.5 million in new cash on Monday, $1.75 million of which came directly from a single institutional supporter and could even prove non-dilutive, signalling the credibility of this financing.
Conspicuously, Solis Tek CEO Forchic may have indicated just how big 2018 could be in Monday's press release, saying the proceeds will "...assure our supply chain execution and maintain inventory levels that can meet customer demand..." In the wake of launching a brand new nutrient line and lighting controller, Solis Tek could be lined up for a quality next few months as orders turn into revenue.
What makes 2018 so important? For one, Canada may be on the verge of country-wide cannabis legalization next summer, and Canadian growers are already ramping up in anticipation. Aurora Cannabis Inc (OTCMKTS:ACBFF) is now up more than 90% this month, fueled by rising revenue and expectations that it can secure a strong position in Quebec’s legalized cannabis market. These are Solis Tek's potential customers, and as they continue to grow, it’s highly likely that so will Solis Tek.
Most traders and investors are well-aware of the boom in cannabis-focused companies and their stocks. The Viridian Cannabis Stock Index, which tracks the performance of 50 publicly traded cannabis companies, returned a tremendous 236% in 2016 as investors and traders anticipated new cannabis markets coming online after the elections in November, and the index climbed another 35% in the first months of 2017.
Companies like Toronto-traded Canopy Growth Corp (TSE:WEED), which grows legal marijuana for the Canadian medical market, climbed almost 200% in 2016 and 122% so far in 2017. The company has done an amazing job of monetizing their business in the last two years, delivering almost $40 million in sales and a massive partnership with Constellation Brands, Inc.(NYSE:STZ) just last month.
But many cannabis companies, and their shares, haven't delivered for investors in the same way. The unfortunate thing is the state of some of these small companies' Income Statements - abyssmal. Zero-to-no revenue with high expenses and a path to revenue growth based only on the "hope" that recreational and medical marijuana go mainstream, and they get a chunk of the business. Finding cannabis companies that are executing well isn't easy, but SLTK is one of the rare companies generating sales, and with bright prospects for 2018.
The problem isn't that many small companies aren't real - many of them have experienced management teams and may have bright futures. It's that investors aren't seeing the results they'd hoped to see--rapidly--since legalizaton in key states like California. In other words, the excitement of 2016 hasn't turned into measurable revenue and stock performance in 2017.
State laws are lining up in the right direction, with almost half of the country having legalized cannabis in one form or another. Legal marijuana generated $7 billion in the U.S. last year, which is expected to grow to $25 billion by 2020, and $50 possibly billion by 2026.
So what's the disconnect? Most of these sales aren't trickling down to the few public companies going after this growing but highly competitive market.
The Market Is Real, But It May Not Be Where You Thought...
What most investors don't realize is that while it may be sexy to invest in companies that grow, process, or sell marijuana, the reality is that the much of the smart money has looked elsewhere, to "Ancillary" businesses, to reduce risk and find big upside.
That is, besides the more established growers, sophisticated funds gravitate towards companies that service or supply the growers, rather than own the growers themselves.
The data speaks for itself. According to Viridian Capital Advisors, 70% of the M&A and capital raises/financings in October in the cannabis space occurred around companies that do NOT touch the plant - so-called "Ancillary Products and Services."
In reality, the smart money is participating in deals around peripheral companies, like those that provide services or products TO the companies that "touch the plant."
Take note of what Scott's Miracle-Gro (NYSE:SMG) has poured into their Hawthorne subsidiary in the last few years - almost $300 mln in investment dollars for acquisitions and development. Grow lighting, for instance, isn't where most cannabis investors would think to look first, but it's an incredibly lucrative space. According to Grand View Research, the global cannabis grow light market is expected to reach $8.6 billion by 2025! Case in point, Scott's acquired a 75% interest in European lighting company Gavita for $136.2 mln in 2016, valuing this non-public company at nearly $200 mln based on their lighting products alone.
Similar SLTK Is Executing, Ready To Rocket With Financing Complete
Solis Tek, meanwhile, is one of THE premier grow-light distributors in the U.S., generating $7.34 million in the first 9 months of this year, and a compelling 12% growth over the same period last year. Solis Tek is one of the few small-cap cannabis companies with a solid business and growing sales - and they don't even touch the plant.
Grow lights are critical to facilitating healthier plants throughout the growth cycle, and Solis Tek has been selected as one of THE top U.S. providers on multiple occassions and by multiple third parties: an independent test of six lighting products conducted by Light Laboratory Inc confirmed that Solis Tek's digital lighting solutions scored highest in terms of overall value for cultivators; and they won the DOPE Industry Awards for "Best Lighting Company".
The company has been making great headway in the industry for the last few years, and with the recent launch of Terpenez, their own nutrient product for cannabis growers, and a second nutrient to follow imminently, the company is positioned for a possibly huge 2018 as more and more states legalize regional cannabis production. This week the company completed an institutionally-supported financing with one institution alone buying $1.75 mln of stock, according to the company. This strong financing has the potential to be non-dilutive, in fact, as much of the total $2.5 mln raised is structured as convertible debt.
What could this mean? First, management has been signalling that demand for recently launched products is significant, and this capital infusion will be used for inventory preperation. Second, preparing and launching their first and second nutrient formulations, the first of which is called Terpenez, puts Solis Tek into an entirely new and high-margin vertical; they're suite of services should be that much more attractive to larger companies like Canopy Growth or Aurora Cannabis. Finally, improving the ownership structure with institutional backers offers validation for other public investors, and SLTK could be read for primetime in 2018.
The real kicker with SLTK is how incentivized management is to execute: CEO Dennis Forchic owns 15% of the company, and insiders combined own about 70% of the company, demonstrating these executives' confidence in the business. As Canada and more states bring marijuana sales online in the next year, SLTK has the right recipe for huge growth.
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