If a customer at any of the popular recreational outlets in California were to ask, "What's your best pre-roll?" there is high probability that the answer would be "Tarantula." That "happy" blend has helped to make ICAN the top infused brand in California with roughly US$3.3 million in sales January to July 2019, according to BDS Analytics. Since acquiring the brand and its Oakland operations, announced July 31 this year, ICAN (CSE: ICAN, OTCQB: ICNAF) has expanded its presence from 225 to 275 stores in California with the momentum to reach 300 by end of this year. Building on its brand equity, the company is bringing the popular ICAN brand to that other major recreational market, Nevada, with plans for a presence in more emerging friendly states.
The chart below tells a compelling story. In 2018 the newly merged companies independently produced a combined US $6.5 million of revenue and the new ICAN is well funded for at least 12 months. Sales are forecast to grow from $9.0 million in 2019 toward $25 million in 2021. It's not an unrealistic target given past successes in brand recognition, and the current sales pipeline and momentum. As to profitably, ICAN historically, and plans to continue to, operate within and a gross margin hovering in the 30% range. In a totally beaten down market, the winner and losers are becoming clear. ICAN is a winner because it's doing a better job of further penetrating existing markets where the real revenues are with a focus on quality.
And then there is ICAN's amazing new state-of-the art patented rolling machine, the first of which has been delivered to the company's Oakland operations. It's so advanced ICAN is not currently disclosing its design and full capacity but be assured it has been painstakingly crafted by engineers from a top tier Silicon Valley pharmaceutical automation engineering firm with clients that include Fortune 100 companies such as Genetec, Telsa, Baxter and Johnson & Johnson. The prototype automated machine is able to produce 600 pre-rolls per hour and requires two personnel to operate, with much higher capacity in next versions of the product.
ICAN's initial game plan is to leverage its well-known brand and introduce other products/SKUs into the California market. "We have this existing channel that knows, trusts and loves the ICAN product and brand," says ICAN Chief Strategy Officer Gus Boosalis. "By introducing additional products into that channel, we'll continue to have organic growth in California, and next we're going to introduce the brand to the Nevada market through our licensed cultivation and manufacturing facility. In addition to building our market to California and Nevada, we've had interest from parties that are well established and well-funded that want to license the brand into other emerging states, such as Michigan, Massachusetts, Colorado and Arizona. Once the key components of this company are set, we'll have the ability to scale quickly as a result of our proprietary rolling machine."
The low hanging fruit for ICAN is the infused pre-roll market where it has the #1 product by a wide margin and is also the #3 best seller. Having this kind of reputation from a loyal customer base bodes well for the future adaption rate of the company's addition SKUs and gives it a leg-up as it expands into in other markets. The pre-roll market is estimated to be 492.8 million pre-rolls sold in 2018 across the United States and Canada, and it's gaining momentum. This past July, consumers in California alone spent $25 million on pre-rolled, a 46% increase compared to July 2018.
Boosalis says there is still plenty of room for future growth in the overall California market when you consider about $3.1 billion of revenue from the licensed market stacks up to an assumed $8 billion in the non-licensed black market, "and the state government definitely wants to tax that revenue, so there is a motivation for more and more licensed stores." Currently there are 620 licensed shops in California.
By 2022, the "legit" market in California is projected to jump to $7.7 billion. Nevada offers a large rotating new customer base with 40 million tourist each year. Flagship stores have helped the state's year-to-date sales through July reach $396 million, a 22% increase from 2018. 2020 revenues, primarily from the 11 states where recreational adult use is approved, is expected to reach $15 billion, en-route to $25 billion by 2025, according to New Frontier Data. At this point 33 states have approved medicinal use. This means 68% of Americans live in states where medical use is legal and 25% live where recreational use is legal.
A History of Quality
ICAN itself started with its own licensed manufacturing and cultivation facilities in Nevada in 2016, then had its eyes set on GanjaGold in Oakland. "We put together the separate deals through late last year, the early part of this year. It made a lot of sense to combine everything under a single umbrella. So, we combined our assets in Nevada, including the real estate, into ICAN and then brought in the Oakland store with a legacy California brand that has a strong market recognition as a connoisseur brand of pre-rolled," said Boosalis.
The founder of the Oakland operation, Alex Patel, is a well-known engineering pioneer who started from the ground floor in 2009. "Alex worked as a receptionist of a compassion club, to being a salesperson of different brands to working storefront, to being a broker of flower, all the while learning every facet of the industry and became an industry-known connoisseur of the product, a product visionary and great touch point of the culture," says Boosalis.
Patel later embarked on making his own original and branded products and introduced the Tarantula. This would be the first product of its kind that was focused on top-shelf products, infused with concentrates and coated with a layer of keif. The product shattered conventional price points and breathed new life into what a pre-roll can be. This achievement has nurtured ICAN with tremendous brand equity.
By the end of 2018 ICAN's Oakland operation grew its reputation of being a premium product company in 95 of 300 licensed stores in California, then after the state expanded to 600 licenses, ICAN jumped into 225 and is now heading for 300 by year-end. Customer have grown fond of the brands for a few reasons, according to Boosalis.
"What Alex did from the outset was worry about the quality of the flower but he also paid huge attention to the quality of pre-roll, the structure, the infusion, the consistency, to smoke well with no canoeing. We spend an hour per pound to de-stem and grind our flower using our in-house proprietary grinding technology. Our quality controls with the newly installed machine brings consistency throughout the process. We needed to lock this down before we engage in any licensing deals."
ICAN's Oakland operations also brought transparency into its product lines, with proper pricing so customers know what to expect from pre-rolls ranging in price from $12 to $22: Blue is indoor, Green is greenhouse and Red is outdoor. "Infused" means the paper has oil infused on it, so it is much more powerful in terms of potency. According to Boosalis, the infused market is about 20-25% of the pre-rolled market, and ICAN is working to capture more of the demographic by leveraging its success in the infused pre-rolled market. "The plan will give us shelf space, which will increase our same-store sales once we roll this out. We can also automate pre-rolled, offering a manufacturing service."
Currently the ICAN/GanjaGold Oakland operations include a 32,000 sq. ft. fully licensed cultivation facility and fully licensed 2,700 sq. ft. manufacturing facility with state-of-the-art proprietary, custom pre-roll manufacturing equipment recently installed on-site. In Nevada, ICAN owns a 4,000 sq. ft. fully licensed cultivation facility with 10,000 sq. ft. of expansion space onsite. There is a fully licensed 3,000 sq. ft. manufacturing facility with additional 2,000 sq. ft. of expansion space. In terms of real estate, this is housed in a 100% owned 17,000 sq. ft. facility building on a 1.5-acre parcel fully zoned and permitted.
Share Structure
ICAN currently has 135 million shares outstanding post Oakland acquisition, with a reasonable 11 million warrants and 13 million options. In the July 31 news release, the Oakland operation cost $12.4 million in all equity as ICAN issued 40 million shares at $0.31 with a one-year hold to July 31, 2020. It now looks like Ganja will earn another 40 million-share milestone payment at the same terms with the completion of the rolling machine delivered before the end of the year for a consideration for US$24.8 million, bringing the share count to 175 million outstanding, so the prudent investor may want to wait until these shares, which also have a one year hold, are distributed before jumping in.
The Takeaway
It will be fun to watch the growth of ICAN and the expansion of its brands unfold, especially if you are sitting on some cheap stock, which you may want to pick up this point. What's appealing is the existing track record and sensible growth in already accelerating markets where it has strong brand recognition. The simple strategy now just relies on execution: growth in number of dispensaries that shelves its brands, and growth per dispensary with new SKUs. The expansion into emerging states relies on licensing deals due to cross-state restrictions and scalability will be enabled with its high-capacity rolling machine. As Boosalis insists, people have come to expect premium quality from the ICAN brands—and they do not intend to disappoint them.
Disclosure:
1) Knox Henderson: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: ICAN. My company has a financial relationship with the following companies mentioned in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector.
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