Why Invest in Vext Science (VEXT: CNX; VEXTF: OTCQX) – the TL;DR
- Emergence of Legal Cannabis Retail Market
Retail sales of legal medical and adult-use recreational cannabis are expected to double by 2024. Analysts project that annual sales will reach from between $25 billion to $37 billion by 2024, an amount surmounting other long-established consumer products such as craft beer.
- Pole Position In One of Largest U.S. Markets
Vext Science already holds a prime position in one of the largest legal cannabis markets in the U.S.—Arizona, where its medicinal-use-only market generated an estimated $840 million in total 2020 sales. The company’s Arizona operations include 20,000 square feet of indoor cultivation, 10 acres of outdoor cultivation, a 3,000 square-foot extraction lab, two retail dispensaries under contract, and wide scale distribution of its Vapen™—branded cannabis products.
- Expanding From Just Medical to Recreational
Vext Science’s share price started a sustained powerful climb in early November after Arizona voters approved the legalization of adult recreational marijuana. Most of Vext’s revenues—almost $8 million in third quarter 2020—are generated from Arizona’s medical cannabis market. Expansion into recreational sales adds fuel to this stream of Vext revenue generation. Conservative estimates project that total annual cannabis sales numbers in Arizona will reach $1.2 billion by 2022. However, state analysts project that recreational sales alone will hit $300 million in 2021 and top $1 billion by 2023. Whatever the number, Vext’s revenues will likely realize a commensurate boost, without the need for significant cost outlays.
- Already Profitable and Strong Future Revenue Growth
Vext has been profitable since 2016 and has a clear-cut strategy for ensuring robust annual revenue growth from existing operations and expansion into new markets. While many companies flail in their efforts to enter newly emerging cannabis markets—about 75 percent of licensed operators in Illinois remain inactive one year after recreational legalization—Vext has a tried and true, state-centric approach that is designed to rapidly gear up sales. Along with extensive expertise in plant science, manufacturing, distribution, product development, and branding, the company is highly adept at navigating the convoluted state and federal regulatory regimes that dictate legal cannabis production, distribution, extraction, and sales.
Vext’s strategy targets “limited license” states, which organically impedes competition and helps the company maximize returns.
- Brand DEMAND and Recognition Already in Place
The company’s branded products—Vapen™—are among the top selling in Arizona and becoming widely recognized across the U.S. Tons of social media influencers and artists with hundreds of millions of combined followers can be seen with Vapen™ gear and cannabis consumables on their social media channels. This UNPAID, organic social media presence is how big brands get started. This will certainly boost sales, but more importantly it will have consumers demanding Vext products in EVERY STATE. What budding, new state operator wouldn’t want to partner with a company with such built in demand and media presence?!?!
Vext Science Inc. Going for a Rip
The 2019-2020 bust in cannabis sector stocks left a lingering bad taste in many investors’ mouths. The loss of both real money and expectations certainly makes some investors wary about taking a new stake in the sector.
Fair enough, but we’d posit that avoiding this sector due to recent declines is short-sighted. This is a newly emerging sector, and one that has just gone through the first of what will likely be many booms and busts.
We are not saying that the cannabis sector is on the cusp of a dramatic rebound, but plenty of evidence suggests that the industry is poised for extensive growth. The U.S. retail market for legal medical and recreational marijuana barely topped $3 billion five short years ago. The market soared past $15 billion in 2020 and many analysts believe this figure will easily double by 2025. On a larger scale, some analysts have projected global sales figures of up to $200 billion by 2030. All of these projections represent a whole lot of green, whether in buds or dollar bills.
Additionally, the industry slowly but surely continues to garner increased mainstream acceptance. Medical cannabis use is now legal in 35 states and will be legal for adult recreational use in 15 of these states by mid-2021. Canada, Uruguay, and Mexico recently became the first countries to legalize it for recreational use. A recent Gallup poll found that support for the legalization of recreational marijuana is at an all-time high with nearly 70 percent of Americans in favor.
Given these factors, there is little doubt that the sector will find renewed strength and that many cannabis-related stocks will climb to ever higher valuations in the coming years. The question is: which of the hundreds of publicly traded cannabis companies hold the most promise for delivering the highest returns from their buds?
You’re not going to find the answer by sampling some tasty edibles, but we’ve got some insight on at least one promising microcap company in the sector that you might find interesting. And, whether you agree with our assessment or not, it should help you when considering other companies in the sector. This is because some of the factors driving this company’s success will undoubtedly play a role in the making or breaking of other cannabis company business models.
Vext Science Inc.—Taking a Limited License State-Centric Approach
Cannabis industry microcap company Vext Science Inc. (VEXT: CNX; VEXTF: OTCQX) has been on a tear over the past five weeks, with the share price soaring by more than 160 percent. Not only did the company announce a 43 percent year-over-year increase in third quarter revenue, but also a 60% increase in adjusted quarterly earnings before interest, taxes, depreciation, and amortization (EBITDA).
The share price also got a boost because Arizona voters overwhelmingly voted to legalize marijuana for adult recreational use starting in 2021. Arizona, it should be noted, already has one of the largest cannabis markets in the U.S. and, based on medical marijuana alone, generated an estimated $840 million in 2020 sales.
The addition of recreational sales will definitely boost cannabis sales in the state. The question is: by how much? State analysts project that recreational sales alone will hit $300 million in 2021 and top $1 billion by 2023. These estimates are somewhat in line with sales increases experienced by other states legalizing recreational sales. Colorado recreational sales climbed from $291 million the first year of legalization to $1.2 billion in the fifth year. The state of Washington saw first year recreational sales of $185 million soar to over $1 billion by the fourth year.
When you consider that the bulk of Vext’s third quarter $8 million in revenues were generated in Arizona, you can estimate that company revenues will organically expand commensurate with the increase in Arizona recreational sales. And these additional revenues will be realized without the need of significant cost outlays.
The company has an established presence in the state as one of the only pure-play publicly traded cannabis companies. Vext sits on the proverbial catbird seat in Arizona, with:
- One of the state’s top-selling cannabis brands—Vapen™ (stocked by majority of licensed dispensaries)
- Two large retail dispensaries under long-term service, sales, and leasing contracts
- State-of-the-art indoor and outdoor cultivation facilities
- High-tech extraction lab
- Coveted Limited License Possession
- Medical operators in good standing will be first in the state to receive licensing for recreational cannabis operations.
Not only is Vext Sciences fully ready to scale in Arizona with the expansion of recreational sales, the company is also currently building its state-centric business approach in six other states.
Why the Specific State-by-State Focus?
Any company making a move in the U.S. cannabis industry currently needs to take a state-by-state approach because marijuana remains illegal at the federal level. This prevents companies from scaling operations and/or distribution across state lines. It also forces companies to focus on maximizing profits at the state level absent the ability to develop a one-size-fits-all business strategy.
In short, every time a new state enacts legalization there tends to be a mad-dash rush by cannabis companies to set up shop and quickly generate sales. If a cannabis company is not adequately schooled on a specific state’s regulatory regimen and attuned to how best navigate it, the company will likely encounter fatal operational/regulatory roadblocks. As previously noted, there are hundreds of companies currently vying for business in this nascent industry. Anyone can grow, process, and distribute weed—few can successfully do it under the umbrella of myriad regulatory dictates that vary between state lines and may conflict with federal mandates.
The state of Arizona has proven successful for Vext because the company has been working in the state since the early days of medicinal use legalization. The company’s existing medicinal-use dispensary license is expected to give it an early-in-line placement for recreational licensing. And, unlike newer companies vying for cannabis business in the state, Vext is already intimately familiar with the regulatory rules of the road, allowing it to be able to transition to recreational sales with relative ease.
Arizona is known as a limited [cannabis] license state because it tightly controls the number of licenses offered and has multiple layers of regulatory compliance and oversight. This serves to limit the competition and helps Vext maximize potential returns from its investment in the state.
This also explains why Vext does not have a presence in Colorado. As an “unlimited license” state, anyone can set up shop in Colorado. This has led to an oversaturation—more than 14 dispensaries per 100,000 residents versus less than two per 100,000 in Arizona—of retail cannabis operations in the state, which significantly limits any one company’s ability to generate significant returns on their business.
Vext Rapidly Expanding Into Six Other States
Vext is currently bringing its successful business model to six other states. The company has established joint-venture and service agreements to provide working capital, cultivation, processing, extraction, and/or wholesale services to cannabis businesses in the states of Kentucky, Nevada, Oklahoma, California, Ohio, and Massachusetts. Vapen™ is already being actively sold at dispensaries in three of these states, which should provide some returns on the company’s investment in these states.
The Vext business model is proving attractive to newly licensed cannabis businesses at the state level because few of them have operational experience, capital to scale, or clear-cut sustainable growth strategies. Consider the state of Illinois, which has issued 75 adult recreational use licenses since recreational use became legal last January 1st. Due to the lack of cannabis business acumen and capital to scale, less than 25 percent have become operational.
When seeking out potential joint-venture partners, Vext looks for vertical integration opportunities that can be scaled with relatively low capital costs. Along with offering partners working and equipment capital, Vext offers partners an established brand, tested operational standards, and expertise/support for cultivation, processing, and extraction. Each deal is structured so that working capital outlays by Vext are repaid prior to profit distribution and operating costs covered on a proportional basis. This ensures a rapid payback of Vext’s total capital investments into each deal. The joint ventures are also structured with a buy-out option that allows Vext to buy out the partner and consolidate the business into Vext’s operations.
Capitalized for Future Growth
Vext Science is sitting on more than CAD$8.4 million in cash, as a result of a recent public offering combined with cash on the balance sheet as of September 30th. This should be more than enough to help it finalize current expansion of operations into the six new states. Given that the company has been operating at a profit since 2016, the company will not need to raise any more cash in the near term. In fact, in light of earnings growth we would suspect that their profit margins will outpace their need for operating cash. Vext Science’s management team definitely knows how to grow a new business and we believe their expertise has brought the company to this enviable position, both by strategic planning and the skilled ability to capitalize on synergies to lower overhead costs.
Stellar Management Team
Team Vext knows what they’re doing. This is evidenced by four years of profitability and earnings growth that is just now starting to kick into high gear. It’s also evidenced by their strategic thinking. Vext was one of the few companies that didn’t jump into what became the wild west of recreational cannabis sales in Colorado. Management recognized the limitations posed by the state’s unlimited licensing structure. Instead, management focused on how to optimize the company’s presence in limited license states, taking advantage of limited competition and enhancing the company’s local position as a sector thought leader. Key Vext management team members include:
Eric Offenberger, CEO/COO—with 30 years of leadership experience in the distribution and manufacturing industries, Eric has a solid track record of growing sales, improving inventory turnover, and in optimizing operational efficiencies. From large public companies to smaller organizations, Eric has been instrumental in helping them grow into market leaders. A certified CPA, Eric knows how to grow money. As president and COO of a steel service center, Eric led six divisions that generated over $350 million in annual revenues.
Thai Nguyen, Founder/Executive Chairman—with 18 years of entrepreneurial venturing in real estate and high-performance automotive products, Thai is a visionary leader in the cannabis industry who focuses on trends, relationships, and its unique culture. Thai recognized the opportunity presented with Arizona’s legalization of medicinal marijuana and formed Vext Science to service one of the state’s early dispensaries, Phoenix-based Herbal Wellness Center. He also founded the Vapen™ brand of cannabis products and gear to be sold at retail and wholesale throughout Arizona, and now in other states.
Denise Lok, CFO—a CPA who previously served as an auditor with PricewaterhouseCoopers, Denise has a broad background of public company financial experience.
Brian Cameron, Corporate Secretary—with previous employment by the British Columbia Securities Commission and Vancouver Stock Exchange, Brian is the managing partner of Cameron & Associates, a corporate finance consultancy with offices in the U.S. and Canada.
What’s Up Next for the Company?
With Vext’s share price climbing from CAD$0.38 to over $1 in less than a month, you’re probably wondering what’s next. Is this action going to retract like the puff of smoke from a TokeMaster? Or has the bowl just been lit? The company’s share price has been in decline since Dec. 22, but in modest increments and with relatively low volumes. Based on the heady climb since mid-November and that the expected retraction is so limited—currently down to CAD$0.96 from the Dec. 22nd CAD$1.04 high—this could be the last chance to hop in at or near these prices.
One would expect profit taking at this point, but it appears that the vast majority of investors believe Vext will climb even higher. Vext insiders, who hold about 45 percent of outstanding shares, are holding tight and it appears that few investors who got in on earlier placements below CAD$.0.50 are letting go. All of this bodes well for the share price and suggests that a new share price floor could be set at or near the current price.
We are not aware of any near-term catalysts that could propel the share price higher but suggest keeping a close watch on future earnings. Going forward, this company is going to be all about earnings and we’re expecting to see powerful growth in the months and quarters ahead.
Disclosure: We are long VEXT
