- American Cannabis Company changing its business model.
- Boots on ground allowing it to discover industry problems it can solve.
- Company positioned well to provide the picks and shovels for the emerging cannabis industry.
DENVER, CO/SEEKING ALPHA/February 5, 2018/ American Cannabis Company (OTCQB:AMMJ) has been primarily a consultant in the cannabis industry, but with its interaction and boots on the ground, has found opportunities to develop products and services to solve the growing number of problems and challenges companies in the sector face.
The bulk of its revenue is still derived from consulting, with its other products and services accounting for a smaller part of the picture, as States in the U.S. and Canada as a whole become more favorable to the use of marijuana for medical and recreational purposes.
Being a picks and shovels company in the pot market, American Cannabis has an enormous opportunity that is its to grab in the face of soaring market demand. This is one of the reasons it’s changing its business model – in order to secure consistent long-term growth in a market that will remain volatile for some time.
For the quarter ended September 30, 2017, American Cannabis generated revenue of $990,313, up from the $236,900 in the same reporting period of 2016. For the nine-month period ended September 30, the company had revenue of $2.560,251, against the revenue of $1,220,952 in the same reporting period year over year.
For the quarter, consulting services represented $916,676 of overall revenue, with product and equipment accounting for $73,637.
Gross profit for the quarter was $825,812, up from $132,166 year over year, and for the nine-month period, gross profit was $2,116,469, up from $635,562 in the same period of 2016.
Net income in the quarter was $375,138, or $0.01 per share. Net income for the nine-month period was just under $500,000, against the loss of $382,276 in the same reporting period of 2016.
One item to look for in the future is the reporting on ‘consulting services in exchange for joint venture,’ as the company announced in the fourth quarter it was changing it business model to participate in more of those types of deals.
Changing business model
In an interview in November 2017, recently appointed CEO Terry Buffalo discussed the changing business model of the company in regard to the exchange of equities in place of fees for some of its business deals.
Mr. Buffalo said the new would entail “offering equity in exchange for fees for our services.” That will occur by deferring or completely offsetting revenue.
The purpose behind that change was in order to have its customers consider them as more of a partner rather than a consultant alone.
Expectations are that will provide a more consistent revenue, earnings and cash flow performance over the long term.
Along with the various aspects of its consulting business, the company also has branded products like The patented Satchel™, SoHum Living Soils™, Cultivation Cube™, and High Density Cultivation System™.
The Satchel is a product made in response to the heavily regulated pot industry concerning protecting children. It is basically a child-proof exit package in the form of a pouch. SoHum Living Soil is a soil you add water to. The high-end product is reputed to generate superior yields. The High Density Cultivation System is designed to utilize space in the most efficient manner, and the Cultivation Cube is a standalone and scalable cultivation system.
With the company apparently attempting to become a one-stop shop, it has lost some of its momentum in the products and equipment part of its business, which could be a major plus for the company if it can turn that segment around.
That said, for now the consulting business of the company is the major catalyst for growth, and with the numerous hurdles companies face in the U.S. from differing guidelines and laws from state to state, demand for expertise in guiding companies through the regulatory hurdles will only increase in the years ahead.
There is also the need for expert advice for the cannabis business itself, with few in the U.S. having participated in that market before. In that area the company can “provide business planning and market assessment services, assist state licensing procurement, create business infrastructure and operational best practices.”
With its various areas of expertise, it looks like the adaptation of its business model to more of one of partnership could work out very well for American Cannabis.
Examples of recent deals
To give an example of how the new business model is being implemented, we’ll look at a couple of recent deals American Cannabis entered into.
The first is with California-based Cloud 9 Apothecary, where it has landed a consulting contract, while also acquiring an equity stake in the company. It was noted that at the time of the deal the project was “non-operational and in the development stage.”
The project is located in Desert Springs, California, and includes a “closed-loop greenhouse containing a 22,000 square foot canopy of premium cannabis cultivars.”
Cloud 9 Apothecary said it plans on scaling operations organically.
Another deal made in early January 2018 was with California City Cannabis Company, based in California. American Cannabis Company agreed to acquire an equity stake in this company as well. This project is also currently in the “non-operational and in the development stage.”
This project involves the building of a park on about 20 to 25 acres in California City, California. It is believe the property will hold as many as 16 greenhouses with 25,000-35,000 square feet per unit. The canopy limit will be 22,000 plants. Expectations from California City are it’ll reach capacity within three years.
It currently has permits for medical cultivation and extraction, and sees no regulatory issues with it eventually converting all the licenses to recreational use.
Beyond the obvious production value, the location is considered strategic for large cities in Southern California.
In the short term, the changing business model of American Cannabis Company may result in decreasing revenue, depending on the terms of each contract it enters into, because of taking an equity position in many companies it sees as having long-term potential and viability.
How much of the revenue is directly offset or deferred hasn’t been revealed, so we must assume it’ll be less than it has been in the past. That said, I expect a lot more deals to be made, so while the company may not generate as much revenue per consultant deal as it has in the past, the volume of deals could produce more revenue, while getting the additional future potential associated with the equity it holds in numerous companies.
It’ll also be important to see how its product sales increase or decrease going forward, as that segment of the company has had declining sales. While meaningful, the consultant segment and equity positions have a lot more long-term potential. If the company can boost product and equipment sales, it’ll help accelerate its overall performance, and surprise strongly to the upside.
With much of the market focusing on the more interesting production side of the business and the fierce competition there, companies like American Cannabis have been operating under the radar, and are perfectly positioned to take advantage of the rapidly growing cannabis industry.
There is some risk in the business model of the company. The benefit of taking equity in companies is obvious, as it ties the companies together in partnerships that are beneficial to both if they succeed. On the other hand, if some of them fail, it could be a powerful negative catalyst that could be very disruptive to American Cannabis.
For that reason I’m looking for it to make a lot more of these types of deals with vetted companies in order to mitigate the risk of any one or two failures having a disproportionate impact on the performance of the company.
To me, American Cannabis is at the right place at the right time, and barring major mistakes, it should enjoy significant growth in the years ahead. Even under less favorable market conditions in the recent past it has been able to be profitable. I see no reason why that won’t continue to be the case.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Contact: Gary Bourgeault