Next Green Wave Advances as a Leading Cannabis Conglomerate in California with Another Strategic Acquisition
Next Green Wave Holdings Inc. (CA: NGW – $0.64 & US: NXGWF – $0.48), has continued its aggressive move to become an innovative cannabis conglomerate in California with another acquisition. The Company purchased SD Cannabis “SDC” at a price tag of up to $27 million CAD, contingent upon SDC achieving performance milestones.
SDC has eight cannabis brands with 45 CBD and THC products in market since 2018 and a social influencer network with a reach of over 25 million people worldwide. Moreover, SDC has the scientific expertise to protect and promote its brands as it develops extraction and manufacturing methods that focus on maintaining the quality and natural benefits of cannabis. Its processing technology captures all of the active available cannabinoids in the plant and then integrates those ingredients into products without adding artificial or dangerous fillers.
SD Cannabis has the option to receive $600,000 USD in cash or NGW stock as part of the acquisition, with the balance being in stock. All stock issued is held under a 36 month rolling escrow agreement. Through this structure, NGW saves its cash reserves for the construction of its cultivation facilities in Coalinga, CA or possibly for another acquisition if such an opportunity arises. The deal also shows how confident SDC is in both itself and NGW, as components of the deal are based on the 20 day volume weighted average price (VWAP) of the share price or at $1.00 USD.
Only $4 million USD on top of the $600,000 USD is guaranteed upon closure of the deal with the rest being based on the execution of eight definitive partnership agreements and annual sales targets being met over the next two years. The expectation is that in year one, revenues for SDC will be $20-$40 million and in year two, in excess of $40 million. So this deal will substantially add to NGW’s financial performance in the near-term, and that is before considering any possible synergies.
Synergies Between SD Cannabis and Next Green Wave’s Existing California Operations
When looking at the potential synergies between SDC and NGW, one can understand why SD Cannabis was willing to take the bulk of the acquisition amount in NGW shares with it heavily weighted towards contingent payouts. Ryan Lange, co-founder of SDC said that “Next Green Wave is arguably one of the leading cannabis innovators in California” and that “This transaction will allow the SDC team to capitalize on its decades of cannabis expertise in California and to rapidly expand our brands, distribution channels and manufacturing expertise across the state and into international markets”. We think he is right, and it foreshadows the potential to accelerate growth for both parties once SDC’s business has been integrated under the larger NGW umbrella.
Management at Next Green Wave and SD Cannabis both have the same goal of being the top cannabis consumer products goods company in California and understand that premium branding and social influencers will be imperative to reach their demographic. SDC has exclusive licensing relationships with multiple individuals and teams across a wide spectrum of categories including musicians and artists, BMX, motocross and skateboarding, an animal rights activist, and a craft brewer.
While the branding and social influencers are the most obvious benefit to this deal, SDC’s experience in cannabis manufacturing and extraction processes will be invaluable to NGW. SDC’s team will become the Head of the Extraction and Manufacturing unit within NGW’s 3,240 sq. ft facility; the same facility in which Intrexon (XON:NASDAQ) will be doing its R&D activities.
SDC’s extraction and manufacturing methods will have an immediate impact on NGW’s products that are expected to be brought to the market within three months. Investors should be excited about this for two reasons. First, this is yet another confirmation by the Company that revenues will be substantial starting in Q2. Second, internal forecasts for revenue are likely to increase thanks to the superior distribution, sales and price points that SDC immediately brings to NGW products.
Strategic Investment in Organic Medical Growth
After announcing the MOU a few weeks ago, Next Green Wave this week signed the definitive agreement to take a strategic investment in Organic Medical Growth (OMG), a Canadian based company focused on producing and commercializing CBD products derived from medicinal and industrial cannabis in Colombia.
This deal gives NGW access to the Colombia cannabis market which has an estimated potential to supply 6 million patients. Through OMG’s current distribution channel of 7,300 pharmacies, Next Green Wave has the opportunity to license its collection of brands and products into the Colombian market.
“We are excited to become a strategic partner of OMG as they position themselves to be a leader in the production and distribution of medical cannabis in Colombia,” stated Leigh Hughes, CEO of Next Green Wave. “With the likes of PharmaCielo Ltd. and Khiron Life Sciences Corp gaining recent global exposure in the cannabis world, it is clear that Colombia has brilliant potential for a low-cost, high-margin business model. Our partnership will benefit both parties by accelerating OMG to become a leader in the Colombian market whilst giving Next Green Wave future licensing opportunities and distribution beyond the California market.”
Under the terms of the Investment Agreement, Next Green Wave will participate as follows:*
• Invest in 2,000,000 common shares of OMG at CAD$0.25 per share for a total amount of CAD$500,000 under a subscription agreement with OMG;
• Receive an additional 4,300,600 common shares representing 10% of the share capital of OMG post it’s first round of financing, in exchange for NGW’s provision of collaborative and commercial strategic support services under a services agreement, as described further below;
• Receive an option to purchase 2,395,000 shares of OMG CAD$0.50 per share, or such other number of shares equivalent to 5% of the share capital following its first round of financing.
* Note that the agreement is based on the expectation that OMG will complete its Initial Public Offering (IPO) in 2019.
Conclusion: Deal Was Well Received By Market as More Investors See the Near Term Reach of NGW
Next Green Wave can be summed up in these four segments:
1. Cannabis cultivation and manufacturing facilities in a strategically placed location between Los Angeles and San Francisco in California.
2. The development of its proprietary cannabis strains in partnership with Intrexon.
3. Access to 7,300 pharmacies and six million patients in Colombia through the strategic investment in Organic Medical Growth.
4. Immediate access to SDC’s brands, technology, distribution and social network.
NGW has prided itself as a seed-to-sale cannabis company focused on the lucrative Californian market. Construction of the facilities in Coalinga and the Intrexon partnership help with the seed side of the business model. Acquiring SDC will bring a massive boost to the sale side by obtaining brand recognition through influencers while also being able to leverage each other’s cultivation and manufacturing technology. SD Cannabis brings a cool face to NGW through its branding and social relationships, but behind the scenes it also has a very serious scientific side to ensure development of the best quality products.
We really like how the SDC deal is structured. Beyond the first $4 million USD worth of shares, dilution only occurs upon successful achievement of milestones. Revenue growth should far outpace share issuance. The market appears to agree with our assessment as the stock price increased 9% in Canada on March 12 after the news was released, continuing a multi-day run that has seen NGW move from $0.55 to as high as $0.78 before a pullback to $0.70. Our target price is $1.61, but we can envision this target being met, necessitating an increase, in the following quarters when NGW demonstrates high revenue growth and a clear path to profitability while aggressively going after the Californian cannabis market. Smallcaps Recommendation: BUY.
|Smallcaps Recommendation: Buy||Price Target: $1.78||Latest Company Report (pdf)|
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