Based in London Ontario, Indiva is a medical-grade cannabis producer that supplies both the Canadian medicinal market and the recently legalised, adult-use, recreational market.
The company has a solid management team, with a master grower that is industry known and respected. Their facility is GMP-compliant and this fits well with their international expansion plans in the EU.
They have a fully funded 40,000 square foot facility due to be operational in Q1 2019 and have a processing facility to produce their range of branded products. In addition, they are applying to open retail outlets in Ontario and will have the ability to open a retail store at their facility as per the last Provincial regulations.
Indiva's only cultivation and production facility are located in London Ontario. The facility's location is a unique proposition in itself, as it is situated just off Highway 401, which is extremely close to the urban areas, and a large university. Ontario recently ruled that the Licensed Producers are allowed to open one retail store at every one of their cultivation facilities.
This makes the super-store at their facility even more worthwhile as they have both ample power and water, and are very close to their retail target market. A big tick.
The indoor facility, a 10,000 square foot facility that was retrofitted, has a current production space of around 8,000 square foot. They have a license from the ACMPR for 40,000 square feet and their additional 30,000 square foot production facility is now well underway.
Fully funded at a cost fo $13.7 million, the facility is due to open in Q1 2019. The expansion will include 8 additional flower room, extraction, and processing facilities, and an R&D laboratory for the development of brand IP.
Once complete, it would bring Indiva's production capacity to around 4,000 kilograms per annum. They received their cultivation, processing, extraction and manufacturing licenses in 2017, and took forever to get their sales license.
This they received in August and allows them to ramp up sales and customer acquisition. It also allows them to sell online through their own Indiva eCommerce Store.
The indoor nature of the facility means that the cannabis produced is a premium grade, medicinal quality, that can now be replicated to create premium-quality products to the recreational market.
Although Indiva states that its products are for both markets, it would be fair to say that their primary focus and attention is on the recreational market. This is the primary reason for the expansion of the production facility, to be able to produce their range of recreational products targeting the recreational user.
Their Product Range
Although they are going to produce their own range of flower, oils and other ancillary products (like pre-rolls and vape cartridges), their primary focus is bringing market leading US products to the Canadian market.
Seattle-based Deepcell Industries is a technology development company focusing on material science, microfluidics, and cannabinoid molecule discoveries. Through this, they have developed a cannabis-infused range of products under the "Ruby" brand.
DeepCell has pioneered the use of Crystal Fusion™ process as their first commercially-ready nanotechnology available for license. This patented technology attaches CBD and THC to sugar and salt.
Any combination of THC and CBD (combined or alone) can be created. These products are known as "flexible edibles", which is predicted to be a massive market, once Canada legalises extracts in late 2019 – an event some call "real legalisation" as extracts make up the fastest growing sector of the fastest growing industry on the planet.
Ruby Cannabis Sugar was named a Dope Magazine "Product We Love," and "high-quality and discreet" by Culture Magazine.
In April 2018, Indiva paid $1.5 million to take a 15% stake in Deepcell. In addition, it acquired the exclusive manufacturing and distribution rights for Canada. This means they will produce every single one of the Deepcell range at their soon to be completed production facility.
The Nevada-based Bhang Corporation licenses the most-awarded line of cannabis chocolate bars on the planet, as well as a premium collection of vapes, gums and mouth sprays. Developed by Scott Van Rixel, a professional chef and Master Chocolatier with 25+ years of chocolate-making experience, the artisan chocolate bars pair the best in fair-trade, sustainably-sourced cacao with adventurous flavours and high-quality, cannabis oil.
Indiva invested $1 million into Bhang in return for 4.9% in April of this year. As part of the transaction, the two companies formed a Joint Venture for the Canadian market, with Indiva controlling the venture.
Indiva will have an exclusive license to manufacture all Bhang products for the Canadian market and exclusive export rights to the booming global market. In return for this, Indiva has committed $5 million to build the required production capacity and infrastructure to develop this relationship.
The Canadian Recreational Market
As mentioned above, Indiva is focussing on the adult-use market and following the award of their sales license in August, have now made application to open at least 10 retail outlets in Ontario. Two retail stores in London and Ottawa and pending applications for Toronto.
Just like MedMen, they understand the power of building retail stores that deliver a unique customer experience.
Their onsite super-store is going to be key to developing a brand presence and awareness and they are working with a world-class design team, that have designed stores for Nordstrom and Louis Vuitton, in order to create the right environment to complement their premium-grade brands.
The jewel in the crown of the management team is Pete Young – founder and Master Grower.
Pete has been involved in the legal medical cannabis market in Canada since the inception of the MMAR over 15 years ago. Pete is an award-winning grower and the founder of the London Compassion Society, which has helped hundreds of patients through the MMAR over the last 15+ years.
With a background and experience in developing unique and award-winning strains, he is the key to Indiva's future product pipeline and the development of Genetic IP.
The President, CEO, and Founder – Niel Marotta is an accomplished executive. Niel was a top-performing fund manager at a prominent US firm, where he managed a portfolio of over $1 Billion across several industries.
He also served as Vice President for a TSX listed natural resource focused company. Subsequently, Niel worked as an investment banker and has been involved in financings and M&A transactions exceeding $1 Billion.
In addition, they are supported by a strong management team with years of experience and importantly, a track record of success. Pete Young is without doubt one of the key USP's for Indiva and we are very favourable on his involvement.
Given that Indiva only received their sales license in August, they have not had any revenue to date. Now that they have secured this license, they have an arrangement Wirth the London Compassion Society to bring their 1200 patients on board (via Pete Young's involvement in the Society). This would accelerate their medicinal program and compliment their recreational strategy.
With cash in the bank of $27 million and Debt facilities of $5.3 million and their fully-fully-funded production facility expansion, they have more than enough capital to drive expansion in the coming years.
In December of 2017, they signed a supply agreement with Swiss-based MedoPharm for medicinal grade cannabis. They are also in active negotiations with German distributors and other production partners across the EU.
We are expecting a significant ramp-up of revenue in the coming quarters and especially when retail outlets are live in Ontario in Q1/Q2 2019 (currently Ontario only allows sales of cannabis through its Ontario Online Store).
When considering the market cap (in US dollars) of Indiva relative to its closest peers, it is easy to see why this stock has so much further to grow into. Although this is going to be heavily linked to their ability to significantly ramp up recreational sales.
When you then consider the Price to Book (Net Asset Value) Indiva is far more attractive than both Emblem and Vivo (formally ABcann Global). As I have mentioned, this stock is very undervalued and cheap compared to its peers and this creates a great investing opportunity.
The Bottom Line
Since listing on the Toronto Venture Exchange (TSX) in December of 2017, the stock has been under pressure. However, we view Indiva as a great opportunity for investors and are very bullish on the stock for the following reasons.
They are a solid small-cap stock that is currently executing very well on its strategy of supplying premium grade brands to the Canadian recreational market (when extracts are finally legalised in October 2019). In this regard, their expansion to the London production facility is on time and on track.
In September of this year, they signed an agreement with MediPharm Labs to outsource their extraction. The deal, known as the Concentrate Programme Agreement, is for an initial term of 3 years and will allow for the extraction of Indiva flower to concentrated oils (for the production of extracts and other products).
This also creates a wholesale opportunity for both Indiva and MediPharm Labs (with permission from Indiva) to supply the Canadian market. This is a very smart move and positions Indiva very nicely for the oncoming "real legalisation".
An experienced management team, boosted by the inclusion of one of the industry's most respected and award-winning growers in Pete Young. And their aggressive retail store expansion plan, driven by the opportunity to open a super-store at the production facility in London.
This is a speculative opportunity that offers investors huge upside, although this will ultimately be determined by both execution and subsequent market share growth.
We are buying Indiva under $1 and have an overweight position in the Paper Portfolio.
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