3 Events That Defined Pot Stock Emerald Health Therapeutics' 2018
The marijuana industry has had a year like no other before it. In October, Canada became the first industrialized country in the world to legalize recreational cannabis. Then, during midterm elections in November, two more states joined the previous 30 in approving medical marijuana. Not to mention, voters in Michigan approved a recreational pot proposal making the Great Lakes State the 10th overall to have legalized weed use for adults.
The excitement surrounding the marijuana industry is readily apparent. Many pot stocks have soared since the beginning of 2016, with investors expecting a sales and profit surge in the years to come. But with the promises stage now passed (given that cannabis is legal in Caada), attention turns to identifying which companies can deliver tangible results and be long-term winners.
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Emerald Health Therapeutics' most defining moments this year
One such pot stock to catch the attention of investors is British Columbia-based Emerald Health Therapeutics (NASDAQOTH: EMHTF), which aims to become a top-10 producer by annual output when all is said and done. There were three noteworthy events that defined the progress made by Emerald Health in 2018.
1. Expanded license capacity at Pure Sunfarms
Last year, the biggest advancement for Emerald Health was its announced joint venture with Village Farms International (NASDAQOTH: VFFIF) to retrofit existing vegetable-growing facilities spanning 1.1 million square feet to grow cannabis. This joint venture, known as Pure Sunfarms, is capable of generating 75,000 kilograms in peak annual capacity at the Delta 3 facility, and could easily use 3.7 million square feet of leased land adjacent to its existing 1.1 million square feet to further grow its annual output.
In September, Emerald Health announced that Health Canada had approved the joint venture's fourth amendment (i.e., license approval) to expand its cultivation capacity at Delta 3. In plainer English, Emerald Health and Village Farms now have the OK to cultivate 550,000 square feet of their 1.1 million square feet in total grow space. With this new allotment of grow space put to work in mid-October, the duo now anticipates the entire facility will be operational and growing cannabis by sometime in 2019.
In short, there have been no production or licensing delays, which is great news for Emerald Health and Village Farms.
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2. The formation of a new joint venture
Emerald Health is always looking for new ways to expand its product line beyond just dried cannabis, which has been shown to be a highly commoditized product in some adult-use-legal states. That's what makes the company's announced joint venture with Emerald Health Bioceuticals (a company related by common ownership, per the press release) so exciting.
The 51%-49% joint venture will be known as Emerald Health Naturals (EHN), with Emerald Health Therapeutics investing $5 million for the 51% stake. In return, Emerald Health receives exclusive distribution rights to Emerald Health Bioceuticals' product line, which consists of non-cannabis, non-psychoactive nutritional supplements designed to support the body's endocannabinoid system. As with most alternative products, these nutritional supplements are likely to have considerably better margins than traditional dried cannabis, and will therefore play a key role in lifting operating margins over the long run.
Emerald Health also notes in its press release that market research shows approximately 60% of legal-weed users also use natural health products. In essence, it's the perfect opportunity to cross-sell for the company and its new partner.
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3. A notable acquisition
Emerald Health also went shopping this year, although you probably didn't hear about its acquisition given that it wasn't of the half-billion or billion-dollar variety, like some of its peers' deals.
In May, the company announced its intent to acquire Agro-Biotech for 90 million Canadian dollars ($67.7 million), half of which would be in cash, and the rest in Emerald Health's common stock. The allure of the deal was Agro-Biotech's 75,000-square-foot licensed facility in Quebec. In particular, it's the fact that Agro-Biotech would be using hydroponics (i.e., a nutrient-rich water solvent) to grow its cannabis plants. Since this facility already has access to low-cost energy and water, it should be capable of high-margin production.
When Emerald Health acquired Agro-Biotech, which became official over the summer, it had completed about 20,000 square feet of the facility, which put it on track to produce 3,000 kilograms of weed a year. But when complete, this facility could exceed 10,000 kilograms of annual output.
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The big question
Of course, the big question is whether or not Emerald Health deserves to be in investors' portfolios in 2019. To that end, I'm not certain.
Although the company has the potential to easily surpass 100,000 kilograms in peak annual production with its Delta 3 facility, the Agro-Biotech acquisition, and its Metro Vancouver facility, it'll need a lot more than just sheer production to woo investors.
Wall Street will be looking for Emerald Health to sign additional long-term supply deals, remain on time and on budget with its capacity expansion, and push into higher-margin alternative products. Right now, the company isn't anywhere near profitable on an operating basis, and it probably won't be worth a look by investors until it is.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.