An interesting dynamic has emerged in the cannabis stock space: companies have slowed down, reduced headcount, cut investments, and tightened up production despite what looks very much like a boom in demand for cannabis. The result has been a shortage of pot in California, rising weed prices, and missed opportunities. However, we would highlight one company that seems to be heading in the other direction entirely: Cannabis Strategic Ventures (OTCMKTS:NUGS).
A couple months ago, NUGS announced that it was adding headcount and expanding production. Not only has it seen an 800% jump in sales volume since then, but it has also seen a sharp rise in the pricing the company gets on a per-unit basis for its cannabis.
Against the Grain
The simple answer here has to do with the coronavirus health emergency. Most pot producers thought it would hamper demand. Instead, we have seen precisely the opposite, which has strongly benefitted companies like Cannabis Strategic Ventures, who bet on that outcome from the start.
In March, the company announced that it was expanding operations and had installed 768 high-powered grow lights, allowing for an increase in the number of plants cultivated per year and an increase in yield relative to previously allocated cultivation capacity. In April, NUGS announced that it was launching its own brand, and then followed that up with an announcement that it was expanding its production capacity by 2.5x.
That news was quickly followed by reports that it was selling out of all of its inventory on a weekly basis and that the pricing received by the company had moved sharply higher – both signs that expanding was the right idea, and more of it was likely called for.
The Next Step for NUGS
Now, that aggressive posture is on display once again, as NUGS just announced last week that it has issued a Letter of Intent to obtain a new 300,000-square-foot greenhouse facility for cannabis cultivation. Negotiations are underway, and further details will be released soon.
According to the release, the new facility would more than double the Company’s cannabis production capacity.
“In this environment, the market is going to take as much as we can produce given our steady evolution in product quality, and we see those conditions extending for quite some time,” stated Simon Yu, CEO of Cannabis Strategic Ventures. “That strongly points to strategic value in expansion. We have seen recent strong improvements in output, pricing and sales volume, and we are aggressively interested in expanding capacity to capitalize on micro and macro factors to drive more value for our shareholders.”
The company has announced that the LOI represents an offer to obtain a cannabis cultivation facility with a 300,000-square-foot, ready-to-grow greenhouse in excellent condition. But, if you want more details, you’ll have to wait with the rest of us – which is typical. Any LOI is part of a negotiation. If the property is attractive, publicizing where and what it is will only create the potential for unnecessary competition on the bid side, raising the price.
However, NUGS management did go on to note that the acquisition would “would more than double the Company’s total output potential”, and that “Given current trends, management believes this would also result in an increase in total sales by more than 100%”.
Yu continued, “More than doubling our production capacity doesn’t just mean a proportionate jump in sales. It also represents an additional bonus in terms of market positioning, putting us at a volume level that would likely create additional relationship opportunities with major distribution partners.”
This final point is a perfect way to sum things up: growth is not just about selling more. It’s about moving up the rungs of an ecosystem. Every company – especially those in an industry like this – are implicitly competing with one another for access to prime end-market product placement at dispensaries of one sort or another.
By embracing “more” and “bigger” when everyone else was thinking “less” and smaller”, NUGS has apparently moved up several rungs in the ecosystem of the California cannabis marketplace as a producer with big potential.
That’s a big reason we have seen 2020 sales projections from the company more than double in the past two months: it has accessed a higher position in the market and now has access to more customers because distributors know they can consistently get access to what their customers want in an otherwise tight and inconsistent market.
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Published at Tue, 23 Jun 2020 03:59:55 +0000