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As the United States lurches toward potential legalization of cannabis, companies looking for a place in the market are focused on the most lucrative legal markets in hopes of creating a business model that can eventually be replicated across the country. California is clearly the prized market, and that state’s legalization has been a bit of a mess as the state navigates a complicated transition from a mix of black market and legal medical operations to an industry that is fully regulated throughout the state.
One company that is taking advantage of the new California market is Chemesis International Inc. (CSE: CSI). Through a series of acquisitions, Chemesis now is positioned in the state with fully licensed facilities and brands focused on the highest value segments of the market. Chemesis represents a compelling investment opportunity in the burgeoning legal cannabis industry.
Chemesis’ 80%-owned subsidiary SAP Global operates a fully licensed production facility in Cathedral City, California. At full production, the factory can put out 200 pounds of clean, consistent cannabis oil daily. On top of the interest in the production facility, Chemesis fully owns the California Sap line of retail cannabis-based products. The product line includes award-winning CO2 extracts, the innovative Gramqul packaging system for cannabis oil, and a line of vaporizers.
In addition to its own line of products, SAP Global offers contract manufacturing of cannabis-derived products and white label production capabilities. This focus on extracts and associated products is central to Chemesis’ strategy in California. Industry-wide, consumer preferences are moving away from smoked flower and toward oils, concentrates, and alternative delivery methods that rely on extracts. On top of this trend, dried flower prices tend to drop significantly as legal markets mature, trimming margins for cultivators as the product becomes commoditized. To that end, Chemesis has chosen for the time being to not pursue cultivation assets in the state.
To complement its licensed production assets, Chemesis has acquired 100% of Desert Zen Fulfillment, a fully licensed cannabis manufacturing, packaging, and distribution operation based as well in Cathedral City, California. Desert Zen currently distributes a wide variety of products throughout the state. Its proximity to the SAP Global operations provides Chemesis a fully integrated operation in the Coachella Valley, one of the leading California regions in terms of creating a state-friendly regulatory environment for legal cannabis companies.
With an eye on lucrative international markets, Chemesis recently announced the opening of a wholly owned subsidiary called Chemesis Latin America. Reflective of Chemesis’ long term international growth strategy, the name of the subsidiary says it all in terms of market focus. Colombia, Peru, Chile, and Argentina all have recently passed medical cannabis laws, and Uruguay is the first country to decriminalize all drugs. Recognizing the potential of the market, Chemesis is actively seeking accretive opportunities there.
Chemesis is also looking to capitalize on another major trend in the cannabis industry. With investments pouring in to the emerging cannabis beverage sector, the company announced its intentions to develop and distribute cannabis beverages for both wholesale and retail markets. Leveraging the company’s production and distribution capabilities in Southern California, Chemesis anticipates launching initial products there in Q1 2019.
Chemesis is anticipating revenues in the neighborhood of $27 million in the first full year of its California operations, producing a projected net income of about $8 million. Should the company execute on these projections, they would represent impressive financial accomplishments in an industry built, to this point, largely on potential. Keep an eye out for further developments as Chemesis executes on its comprehensive strategy, both in the US and internationally.