Invictus MD Strategies is a CBD-hemp play to watch as it uplists to Nasdaq

For those seeking to invest in cannabis companies trading on the biggest US exchanges like the NYSE and the Nasdaq, choices are limited to a handful of companies.

While dozens more trade via the over-the-counter market, institutional investors are forced to avoid those names. It can create challenges for OTC-listed names to raise the capital necessary for growth and survival while challenging investment decisions for traders due to limited information about those companies.

Given cannabis should develop into a core industry over the next decade, it stands to reason when a company lists or up-lists (moves from a smaller exchange to a larger one), it merits consideration.

Invictus MD Strategies Corp (TSX:GENE.V) (OTCMKTS:IVITF) began that process this month when it applied for listing on the Nasdaq. With revenue last quarter of $1.74 million, it will come to the big board as one of the smallest companies, but with revenue nearly three times the prior year, growth is trending in the right direction.

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The White Rock, British Columbia, company also cut its loss per share down to $0.11 from $0.15. Its cash position of $23.7 million against $5.5 million in debt provides some flexibility, but the uplisting should help Invictus’ ability to strengthen that cash-to-debt ratio as well as pursue strategic partnerships and gain buy-side institution tracking.

After the listing, Invictus anticipates reducing its share count via a one-to-five ratio, meaning it will issue one new share for every five older shares. Price of shares will also increase fivefold, so there will be no change in value for current shareholders or proportional voting power.

Shares will also continue to trade on the TSX Venture Exchanges and the Frankfurt Stock Exchange.

The listing has been a culmination of a flurry of activity for Invictus over the past several months as the company ramps production and enters the US CBD-hemp market. Invictus recently teamed up with CannAmerica and CBDistribution in a joint venture to acquire hemp biomass for extraction into CBD isolate. The joint venture then immediately acquired a controlling 80% stake in Z3 Sciences.

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For its part, Invictus provided shares worth $3.75 million as well as a $5 million line of credit. CannAmerica’s initial contribution was similar in nature. These proceeds were then immediately used to acquire a controlling 80% stake in Z3 Sciences. The potential total price of the deal is $42.5 million, but Z3 received roughly $14 million in cash and stock up front with the remainder of the Z3 Sciences investment based on revenue targets ranging from $10 million USD to $80 million USD over the next few years.

Z3 Sciences already hold existing hemp biomass extraction contracts that are included in the deal. The CBD extraction and sales in the US will bring immediate revenue for Invictus via the joint venture. It will also enable them to control the entire process from supply to distribution.

Distribution has been a key focus for Invictus. Management has established the Invictus Five Pillars of Distribution:

1. Medical
2. Recreational
3. International
4. Licensed producer to licensed produced
5. Retail

I briefly met with Invictus in Boston this past summer. At that time, the company said it had no intention of doing business in the US, but the December 2018 approval of the $867 billion Farm Bill in the US appears to have changed that thinking. The Farm Bill recharacterized hemp from a Schedule 1 drug (high potential for abuse) to Schedule 5 (lowest-level listed drug).

Mass hemp production is now federally legal, and hemp can be moved across state lines. The market potential is anyone’s guess. Current estimates place it in the $20 billion to $25 billion range within four years.

Medical and recreational cannabis containing more than 0.3% THC, the psychoactive cannabinoid found in cannabis, is still the bread and butter of the company. The company is targeting up to half of all production to be medical cannabis.

Pursuant to that goal, Invictus’ wholly owned subsidiary Acreage Pharms recently entered into a five-year supply and distribution agreement with Germany company Deutsche Medizinalcannabis for 10,000 kg of drive cannabis flower.

Additionally, on January 18, 2019, a wholly owned subsidiary of Invictus received a sales license from Health Canada under the Access to Cannabis for Medical Purposes Regulation (ACMPR) for its Delta location in Mission, British Columbia.

Invictus operates within a series of subsidiaries and partnerships. It’s important to understand its current subsidiaries.

Acreage Pharms Ltd., West-Central Alberta, 100% Ownership: A licensed producer under the ACMPR, it has constructed a 6,800 square foot purpose-built production facility with an expansion of a 27,000 square feet purpose-built concrete and steel facility within the 60,000 square foot secured perimeter that sits on 150 acres of land.

AB Laboratories Inc, Hamilton, Ontario, 50% Ownership: Occupying a cultivation space of 16,000 square feet, AB Labs is a licensed producer under the ACMPR.

AB Ventures Inc, Hamilton, Ontario, 33.3% Ownership: A newly incorporated company formed to develop a second licensed expansion facility through its common ownership with AB Labs, 100-acre acquisition closed in May 2017, and once licensed under the ACMPR, will be used for future cannabis cultivation.

Future Harvest, Kelowna, British Columbia, 82.5% Ownership: Manufactured by growers, Future Harvest is a hydroponics and fertilizer manufacturer and supplier. As demand grows, Invictus has implemented a plan to meet needs.

Based on industry averages, Invictus should be set up to production nearly 19,000 kg of cannabis before the end of 2019 with a plan to grow that to over 60,000 kg in the future. Invictus holds several key partnerships as well on the retail and clinical front.

Strategic Retail Partners

Strategic Clinical Partners

Invictus recently terminated a merger agreement with partner GTEC holdings; however, the companies will maintain their strategic collaboration for the adult consumer market. As part of the agreement to terminate the merger and continue as partners, Invictus extended a $2 million convertible loan to GTEC at an interest rate equal to prime plus 5%. In return, Invictus holds the first right of refusal to fill up to 30% of GTEC’s orders when it is seeking to purchase cannabis.

As of its most recent financial filing, GTEC was still pre-revenue, so while it is beneficial to have a captive buyer, you don’t want them to be a buyer with your money. The company anticipates at least 35 retail stores, so if the current recreational demand outstripping supply in the recreational market of Canada continues, Invictus should find a nice outlet for its adult-use supply.

In a highly competitive market with low barriers to entry, over time Invictus will need to find a niche to set it apart from the competition. Fortunately, the company’s small size and the huge demands of the medical and recreational market should afford it strong revenue growth for several years. A strengthened balance sheet would go a long way toward assuaging investor concerns of expansion without diluting the current share count.

Being granted a listing on the Nasdaq would act as a huge step in that direction, which is what makes Invictus a name to watch.

At the time of publication, Tim Collins had no positions in the stocks mentioned.

Follow Tim Collins on Twitter @RetroWallSt

Story by ProactiveInvestors