Investing in Cannabis Extraction: 5 Companies to Watch
One of the big trends for the cannabis industry is extracted products, which are used to provide alternatives to smoking or vaping cannabis flower, including edibles and concentrates. In some markets, the share of flower has declined to 50% with these derivatives making up the balance.
Flower sales still dominate, but extracts make up the fastest growing segment of the cannabis industry.
Even in Canada, despite substantial limitations on formats of concentrates and the exclusion of edibles, extracts are a major growth driver for the LPs.
Extracting cannabinoids like THC and CBD as well as terpenes can be done in a variety of ways. Some of the more popular methods include hydrocarbons like butane, CO2, alcohol and even water. Rosin extraction is done without any solvents. Some considerations for which method to use include safety, taste, efficiency and cost.
The machinery used to perform extraction is sold by many companies, including global public companies like Waters (NYSE: WAT). The industry has seen some early cannabis-focused equipment makers emerge too, though they are all private, including Canada-based Advanced Extraction Systems, Apeks Supercritical, Eden Labs and MRX.
For public company investors looking to capitalize on this theme, there are just a few different ways to participate in the growth of the popularity of extracts (beyond investing in a brand). In this review, I share a brief look at five companies that are leveraged to extraction, including CannaRoyalty, Kush Bottles, Neptune Wellness Solutions, Quadron Cannatech and Radient Technologies. Please keep in mind that I am not recommending purchase of any of these.
1. CannaRoyalty: Big Growth in Vape Carts
CannaRoyalty (CSE: CRZ) (OTC: CNNRF) has extraction as one of its primary focus areas, which also include research, testing, branding and distribution. CannaRoyalty has assembled a portfolio of royalty agreements, equity interests and other investments and licensing agreements in the United States and Canada.
The company shared a highly informative presentation of its businesses in November. With respect to extracts, the company earns royalties on products sold by MüV, which include a vape pen and cartridges. It recently announced the acquisition of Kaya Management, the manufacturer of Bhang vape pens in California (described in this presentation).
It also has a licensing agreement with AbsoluteXtracts of California to expand its brand to Washington and Canada. Wholly-owned DreamCatcher Labs produces cartridges. The company is also a joint venture partner with Rich Extracts in Oregon, thought that deal hit a recent roadblock when the CEO of that company was arrested for drug trafficking.. Finally, it is developing The Terpistry, which will focus on creating a platform targeting extract-based products. Several of its other entities have exposure to extraction as well.
2. Kush Bottles: Into Vapes and Terps
Kush Bottles (OTC: KSHB), which is a client of mine at New Cannabis Ventures, has developed a substantial packaging business but recently gained significant exposure to extracts through the purchase of CMP Wellness, a distributor of standard and custom vaporizer products, including pens, cartridges and accessories, including MediPen.
The deal, which doubled its revenue, closed in Q3. The company’s 10-K filing with the SEC provided a pro forma that showed CMP Wellness revenue for the full year to be $12.4 million of the total pro forma revenue of $25.7 million the company would have reported had they been combined for the full year.
Kush Bottles has also developed a line of terpenes (Terps on Terps), further extending its exposure to the extracts trend.
3. Neptune Wellness: Pivoting From Krill to Kush
Neptune Wellness Solutions (TSX: NEPT) (NASDAQ: NEPT) has historically been focused on Omega-3 extracted from krill.
The company recently hosted an analyst day in New York City that shed more detail on its plans, including this presentation. Neptune intends to focus on processing and delivery forms solutions and to also create its own brands, similar to what it did in the krill business.
4. Quadron Cannatech: Next-Gen Extraction Machines
Quadron Cannatech (CSE: QCC) (OTC: QUDCF) is a Canadian company focused on automated extraction and processing solutions. It is creating a closed system, with proprietary cartridges (that don’t interchange with other devices but require the purchase of a specific device instead).
Its Cybernetic unit provides the intellectual property for automation and process manufacturing and serves over 40 clients. Soma Labs Scientific creates CO2 supercritical extraction systems and generates revenue from a three-year research agreement with Odorchem (which sells odor neutralizer products). It hopes to have two mobile units in the field by the end of 2017. Greenmantle Products is going to be providing customized vaporization devices in Canada and the United States. It has forged a distribution relationship with Lucid Labs in Washington.
5. Radient: Experienced in Food, Expanding to Cannabis
Radient Technologies (TSXV: RDI) (OTC: RDDTF) is applying its technology to the cannabis industry and has a strategic relationship with Aurora Cannabis (TSX: ACB) (OTC: ACBFF), which is a client of New Cannabis Ventures, as an investor and a potential customer intending to use Radient’s technology to extract CBD from industrial hemp, should that become legal in Canada.
It just began focusing on cannabinoid extraction in late 2016. Initial research suggests to the company that microwave assisted processing (MAP) can reduce extraction times, improve efficiency, attain throughput of up to 1500 kg/day and retain cannabinoid and terpene profiles. The company has filed a license to become an LP, with a goal of producing cannabis oils. It also has a pending application for a Dealers License.
Bottom line: While it has historically been difficult for investors to participate in the move towards extracted cannabis, there are now several companies that are leveraged to this trend.
Next up: Don’t get caught holding these stinkers when the rally ends. Talk with you in two weeks.