Vertically-Integrated, Multi-State Cannabis Operation
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Cannex Capital Holdings Inc. (CSE:CNNX;OTCQX:CNXXF) is well on its way to becoming a leading vertically integrated multi-state cannabis company specializing in boutique cultivation, extraction and manufacturing as well as brand development, distribution and retail. Cannex very much sees the industry evolving into a national consumer branded goods sector where a focus on retail and product brands, underpinned by strong operations and experienced management, will be the defining characteristics of successful companies.
Cannex has its roots in Washington State where it owns the assets of Northwest Cannabis Solutions (“NWCS”), one of the largest and most profitable cultivators and processors in the state. But with the recent announcement of its intended transaction with 4Front Holdings LLC, leading experts in the retail, and important licensing and regulatory side of the cannabis business, Cannex will be expanding operations into Illinois, Maryland, Massachusetts and Pennsylvania. In addition to existing retail dispensaries in these important states, 4Front also brings additional cultivation and processing facilities in Illinois and Massachusetts on top of a very experienced team.
“This is an exciting and transformational step as 4Front and Cannex come together to realize our common objective of building a premier cannabis business focused on operational excellence and integrity across the value chain,” said Josh Rosen, CEO of 4Front. “The operations and leadership that Cannex has demonstrated in Washington, one of the most competitive cannabis markets in the world, are unlike anything I’ve seen in the industry. Leo and his team have developed an amazing set of skills and capabilities that we look forward to transferring to 4Front’s existing portfolio, as well as using to capitalize on new opportunities we develop together.”
In November 2018, prior to Cannex’s announcement of its transaction with 4Front, the Company closed a US$32 million investment from Gotham Green Partners, LLC (“GGP”), a leading and influential investor in the global cannabis investment sector. GGP with offices in New York and Santa Monica, focus on operations and have proven expertise in backing experienced management teams. GGP bring their wide network to the Cannex opportunity and have a strong track record of accelerating growth for their portfolio companies.
“The GGP team has demonstrated its ability to identify undervalued opportunities and then provide wide-ranging support to help accelerate geographic and capacity expansion and create shareholder value,” said Cannex CEO Anthony Dutton. “We believe our sector expertise and operational experience at scale give us a unique and valuable perspective on efficient and optimal capital allocation and we look forward to working with GGP as we expand our operating platform and establish Cannex as a leading multi-state operator.”
- Transformational acquisition of 4Front allows immediate expansion into Illinois, Maryland, Massachusetts and Pennsylvania;
- Near-term M&A expansion opportunities into California, Michigan, Nevada and Arizona.
- Pending license applications in Ohio, Arkansas and Connecticut.
- Industry-leading yields of over 400 grams per square feet at Washington facilities.
- Cannex strategic tenant, NWCS, is largest producer and processor in Washington.
- NWCS grows, produces and sells top-selling Washington flower brands as well as the top edible and derivative products in the state.
- NWCS has developed 16 leading brands and distributes over 300 SKUs to more than 300 Washington retail dispensaries.
- Gotham Green’s $32 million investment gives Cannex exceptional balance sheet strength.
- Management and insiders have significant ownership stake.
Cannabis in the US
According to reports by many analysts including Grand View Research, ArcView Market Research, BDS Analytics and others, the worldwide cannabis market is expected to reach $100 – 150 billion by 2025. Their reports estimate that cannabis consumers in North America will contribute at least $47.3 billion to the overall global market. Cannabis legalization is being adopted by many states throughout the US as they look to curb black market sales, join a booming market and enjoy the economic benefits of excellent tax revenues and job creation.
The popularity of cannabis in the US is growing due to the shifting federal stance towards the plant. In December 2018, the US federal government passed the Farm Bill, which legalized the use of industrial hemp, cannabis plants with less than 0.3 percent THC. It has also created a hemp-derived CBD market that is expected to reach $22 billion by 2022, according to the Brightfield Group.
Pairing Vertical-Integration and Operational Success
Cannex is combining its cannabis operating experience and expertise in capital markets with 4Front’s regulatory and licensing leadership and their strong M&A experience to become a vertically-integrated leader in the US cannabis industry. The company is looking at expanding its operations into all legalized states by acquiring and investing in key brands, cultivation facilities and retailers in each state.
Cannex has acquired Brightleaf Development, a limited liability company that holds real estate assets, property leases, brands and intellectual property , currently being used by NWCS in Washington. Brightleaf’s portfolio includes two facilities located in Tumwater and Elma, Washington, which run Cannex’s wholesale business in the state.
Each facility contains 30,000 square feet of flowering canopy space generating an industry leading yield of over 400 grams per square feet. Additionally, the facilities have a capacity of approximately 19,000 kilograms of cannabis annually. The Tumwater facility has over 40,000 square feet of processing, manufacturing and warehouse space and is the distribution hub for their products to over 250 retailers throughout the state.
Both facilities are leased out to tenants, one of which is NWCS, the largest cannabis producer and processor in Washington State and the Pacific Northwest. NWCS grows, produces and sells the top-selling flower brand and seven of the top 10 cannabis-infused products in the state. To date, NWCS has developed 16 brands and over 300 SKUs, many of which can be found in a majority of the state’s 508 licensed retailers.
Cannex’s upcoming acquisition of 4Front will expand the company’s cultivation footprint and includes three facilities across Massachusetts and Illinois. 4Front’s 94,000 square feet cultivation facility in Chicago, Illinois features 4,300 square feet of cultivation space with the opportunity to expand the facility’s growing capacity to 50,000 square feet.
4Front also has two cultivation facilities in Worcester and Georgetown, Massachusetts. The Worcester facility measures 21,000 square feet and contains 5,700 square feet of canopy space with the option to expand it to approximately 7,700 square feet. The 109,000 square feet Georgetown facility contains 11,000 square feet of canopy space that can be expanded to 49,000 square feet.
In November 2018, Cannex signed a binding letter agreement to combine businesses with 4Front to create a new company, which will own, operate or manage six cultivation and five retail locations. The business combination will provide Cannex with the opportunity to enter the retail vertical with an established and well-known brand that has operational success and experience.
4Front has developed a scalable retail model that includes industry-leading best practices and operations manuals for training and continuing educational support. 4Front was originally structured as a consulting company to provide licensing and regulatory guidance to its clients and it has acquired over 60 licenses across the US, Canada and South America for their clients, and more recently, for themselves. This experience is unique and speaks to their success in multiple jurisdictions internationally.
Currently, 4Front operates five cannabis dispensaries in Illinois, Maryland, Massachusetts and Pennsylvania under the Mission brand, which provides patients with a tailored experience to ensure that they are getting the best personal retail cannabis experience possible. 4Front intends to open additional locations in these states and has licensing agreements in place to open up to 20 retail locations.
Cannex is also in active discussions with various stakeholders to acquire new opportunities in California, Michigan, Nevada and Arizona. Additionally, Cannex has licenses in Ohio, Arkansas and Connecticut that the new company will take over once it’s formed.
Anthony Dutton — CEO and Director
Anthony Dutton is a Principal at Delu Corp., a strategic and financial advisory firm. He has significant public market, corporate finance and business development experience. Dutton was also the co-Founder and former CEO and President of IBC Advanced Alloys (TSX.V:IB) and a founding Director for Trakopolis IIoT Corp. (TSX.V:TRAK) He has a B.A. (Econ.) and an MBA.
Leo Gontmakher — COO, President and Director
Leo Gontmakher is the co-founder of Northwest Cannabis Solutions and has significant experience in cannabis facility design, construction management, equipment sourcing, operations, branding, sales and marketing strategy and software solutions. He was formerly a senior executive at North America’s largest processor and distributor of specialized seafood products. He has a B.A. in Business Management from Arizona State.
David Croom — CFO
David Croom is formerly the CEO of Open Ocean Ventures, a Seattle-based company that provides project management, infrastructure and business services solutions to a broad range of industry leaders. He has previously held senior accounting and comptroller positions at Cray Supercomputers, Microsoft, Amazon and Chevron. Croom is based the company’s Washington office as a part of the operational team.
Jerry Derevyanny — Executive VP of Corporate Development and Director
Jerry Derevyanny was an early employee and General Counsel to Northwest Cannabis Solutions. He is the former head litigation partner at Adler Vermillion & Skocilich, a New York firm, and a former Associate at Kaye Scholer, also in New York. He has a B.A. (Business Administration) and a J.D.
Tom Peters — Director
Tom Peters is the co-founder and Managing Director at Inverness Advisors, a San Francisco-based strategic advisory firm. He is also the Head of Digital Media at Montgomery & Co., M&A at Dillon, Read & Co. in New York and Hambrecht & Quist in San Francisco. He has experience in the M&A advisory and capital raising sectors for emerging growth companies. Peters holds a B.A. and an MBA.
Roman Tkachenko — Chairman and Director
Roman Tkachenko co-founded Direct Source Seafood in 2010 and led it from $20 million in yearly revenues to just under $200 million in yearly revenues. He was also the CEO of Marine Treasures International, a company specializing in international sourcing of frozen seafood from 2013-2017. He holds a B.S. in Accounting from Central Washington University.
Dmitriy Goykhman — Director
Prior to starting DGA Tax, Dmitriy Goykhman worked at Ernst & Young in the real estate, retail and consumer market tax practice groups. He is a licensed CPA and a Chartered Global Management Accountant. Goykhman holds a B.A. in Accounting and an M.A. in Taxation from Pace University in New York City.
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