Cannex Capital Holdings Inc (CNSX:CNNX)(OTCMKTS:CNXXF) CEO Anthony Dutton shares news of the company’s strong financials. Dutton explains that the company’s deal to purchase Jetty Extracts is still on track and that Cannex hopes to close on that acquisition by the end of September. Dutton believes that successful US operations require a multi-state platform and the Jetty deal gives Cannex a presence in California in addition to its existing Washington State holdings. Cannex is adjusting to the evolving cannabis market, increasing its extraction and production of derivative products such as edibles, to anticipate where demand in the cannabis space is moving. Dutton believes investment in the US cannabis market is becoming less risky with legalization happening at the state level.

Transcript:

James West: Welcome back to Midas Letter Live. My next guest is Anthony Dutton, CEO of Cannex Capital Group, trading on the CSE under symbol CNNX. Anthony, welcome back.

Anthony Dutton: Thank you very much. How are you?

James West: I’m doing well, thanks. You guys put out some financial results that are not too shabby, to say the least.

Anthony Dutton: No, we’re very, very pleased with those results, actually, and I think the positive EBITDA is something that a lot of people haven’t seen a lot of in the cannabis sector. So we’re very pleased that our first financials out show a very strong underlying operation.

James West: Yeah, you bet. So what was the main driver of revenue in this last quarter?

Anthony Dutton: Well, just to revisit the structure of our company, James, I’ve talked about this before on Midas Letter, but we own, through our holding companies, the assets of the largest processor/cultivator in Washington State, a company called Northwest Cannabis Solutions, and we stream out from them all of their, essentially their net income less working capital. So that comes out by way of rents on buildings and operations that we own, it comes out by way of markups on materials that we supply to them – lighting, packaging, fertilizer, so on and so forth. So that is ultimately what generates the Cannex revenue.

The operational revenue of the business, well, we did put it in our consolidated financials – you see that we did refer to it in our MD&A, and last year they did approximately $27 million USD in top line revenue, making them the largest operation in the State of Washington.

James West: Wow, that’s fantastic. And so, how is it going with your acquisitions of Jetty Extracts?

Anthony Dutton: Yeah, no, that is on everybody’s lips, obviously. It’s something that we’re pushing on pretty hard. There are no issues other than just the typical things you would expect to see around a complex cross-border transaction. We have, you know, good updates, good developments on that, and we hope that we’re going to close it by, I would guess here, the end of September.

James West: Okay, that’s fantastic. We have a tremendous video on the library that we’re going to release as soon as that’s complete, obviously.

Anthony Dutton: No, I look forward to seeing that. I know you got phenomenal work. They really enjoyed having you there, by the way.

James West: Thank you, thank you. So the last time you raised money was the $48 million financing?

Anthony Dutton: That’s correct. So we raised that in the earlier part of this year; we came to trade on the 14th of March. The raise was originally going to be a $25 million raise; we closed the book at 48. It was done at $1.00, which is approximately where we’re trading today, so I think what the market is waiting for is exactly what you’ve already brought up, James. You know, the play in the US is about having a multi-state platform, and you know, right now, we obviously have a very strong operation through our holding companies in Washington State.

But what the market is looking for is, you know, expanded vision in the United States: an expansion into additional states. So we’ve already obviously made the step in California; we view that Jetty what we’re referring to as a beachhead. We really do want to build around Jetty and become a dominant player in the State of California, and then also, as we said publicly, we want to be in a couple of other states, you know, hopefully by the end of the year. We’re very, very focused on our acquisition strategy or our partnership strategy, and we are looking at a number of different opportunities, and we hope to be able to talk about them in more detail, you know, relatively soon.

James West: Sure. So tell me: how has Jetty been making out in California? I mean, I know that they were in a sweet spot, they were selling pretty much everything that they were capable of producing, and most of the dispensaries were finding themselves challenged by the new testing regime that came into effect July 1st, and something like 80 percent of the growers in California can’t get through that process. So I’m just wondering, how has that affected Jetty’s business in the meantime?

Anthony Dutton: Well, in the earlier part of this year, like with most other companies in California, you know, they had a bit of a challenging start. Nothing to do with the company fundamentals, but everything to do with the regulatory transition from the old regs to the new regs. And so as you’re already pointed out, the rollout of the dispensaries, the bottlenecks of testing, you know, have proven to be a challenge for the whole industry.

To Jetty’s credit, they saw a lot of this coming, and they did some pretty, I think, strategic and smart defensive moves in terms of building up inventory and having product ready to be distributed to the dispensaries that are coming online. So relative to other companies, from what we can tell – and obviously we don’t have the complete data – but we think that Jetty are doing very well. They had a very strong July, and August is looking equally as strong.

But that being said, we had to be very, you know, conscious of the fact that California is still a market in transition, and there are going to continue to be, you know, bumps along the way. But that being said, they have a very strong brand, they have a loyal following, they have fantastic buy-in from their consumers. So I think long term, Jetty are exceptionally well-positioned.

James West: So between – I mean, Washington State, you’re already the biggest supplier of cannabis in the state, correct?

Anthony Dutton: Well, we are the biggest supplier of cannabis flower, and we’re also the biggest supplier of the derivative products. In Washington, the breakdown of the market is about 70 percent flower, maybe 65 percent flower, 35 percent derivative products; we’re weighted a little bit more heavily towards derivative, about 55/45, 55 being flower. We see the market evolving not only in Washington but everywhere, for that matter, in this rage of derivative products: vapes, edibles, tinctures, patches, you know, things that are made from the extracts, from the processing of the actual cannabis oils. So that is really where we’re focused on California, because Jetty Extracts does not have any cultivation, and ultimately, we think the bigger play here is going to be what we’re referring to as ‘consumer packaged goods’ or ‘consumer branded goods’. And those are going to come out of the extraction, processing, and value-add manufacturing platforms that we’re building.

James West: Mm-hmm. I saw John Boehner’s interview recently, I looked at it again on CNBC where he’s, you know, he’s joined the board of a cannabis grower in the US and he’s essentially reversed his position against the legalization of cannabis and is now advocating for the legalization of cannabis on multiple fronts. Has that sort of change in the legislative landscape trickled down to, from where you sit, at all? That you’re seeing a momentum increase towards broad-based Federal de-prohibition of cannabis?

Anthony Dutton: That’s a lot of questions in that one question, but essentially, the answer is yes. You know, a year ago, when we were going to out to meet mostly institutional accounts, the number one question that they had was, you know, what is the political risk of entering in the US? Today, that’s no longer even really a question. I think most people are much more comfortable with the regulations as they stand today, and are pretty optimistic that things are going to change over time. And John Boehner, you know, paraphrasing him, he said, you know, ‘The thinking on cannabis has changed, and I have as well’. And I think that is kind of reflective of a lot of people in the cannabis sector. With more education and more understanding, I think they’re realizing that this is actually a very vibrant sector. It creates tax revenue, it creates jobs. You know, there’s a number of people who are talking about the decrease in things like violent crime, drunk driving, opioid addiction, opioid overdoses.

So I think on balance, you know, the net positive of cannabis are far outweighing any kind of negative issues that people may still be focused on.

James West: You bet. All right, Anthony, that’s a great update. We’re going to leave it there for now. We’ll come back to you in due course; thanks for the update.

Anthony Dutton: Okay.

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