The marijuana market has undoubtedly seen unprecedented gains over the years. As the market continues to mature and becomes more saturated, we believe there will be a price crunch on product. By price crunch we mean that marijuana producers will overtime be forced to lower their product prices, which in turn will lower margins. Companies will need to find innovative ways to lower their cost of production in order to maintain their margins.
As more cannabis producers receive cultivation licences, there will only be a few options that licensed producers can employ to increase their bottom-line and market share. The most obvious, although not the best decision is to increase the product’s price. Increasing a products price is not the best strategy to increase profits because consumers will look for cheaper options. This strategy could possibly result in lost revenues. The best solution is to employ new technologies to reduce operational expenses such as the cost of production. Focusing on energy consumption would be a strategic place to begin, as marijuana cultivation is a very high energy-intensive industry. Energy expenses for indoor grow operations can deplete upwards of 50% of the operational budget. The consumption of energy for an indoor grow operation is about ten times that of a typical office building. Implementing an energy solutions strategy to their operations, cultivator could lower their cost per gram and ultimately increases a company’s profit margin quite significantly.
The rise of concerns and impacts derived from the intensive consumption of energy in the cannabis industry have recently been echoed in an article titled “The Marijuana Industry’s Dirty Little Secret”. In this article, it states that in an average home in Boulder, Colorado uses approximately 630 kilowatt hours and a cannabis cultivation facility of 5,000 sq.ft , by comparison, uses 41,808 kWh. To put this into perspective, this is enough electricity to power sixty-six homes. It is also stated that in Denver, 4% of all the electricity goes to the cultivation of cannabis. Powering a cultivation facility doesn’t come cheap as Chief Executive Officer Jeffery Mascio of Cannabis One Holdings (CSE: CBIS) stated , “For a vertically-integrated company like Cannabis One Holdings, electricity costs eat up a significant portion of revenues. “We’re making money, but it costs a ton just to keep the lights on.” Cannabis One Holdings is cutting its energy costs down which will allow the company to expand in other markets. Cannabis cultivators on both sides of the border are taking important steps towards implementing new technologies and methods to become energy efficient in their operations and reduce their costs to cultivate. The author of the article also stated “Right now, such costs may be manageable—cannabis is in high demand and prices per kilo are high. But as the market is saturated, that price is sure to drop, squeezing producers’ margins”. This quote further confirms our thesis stated at the beginning of this article on saturated markets and shrinking margins.
Another increasing issue in the cannabis industry is the ever-growing complaints about the odor’s emitted from cannabis production facilities. In a recent article from Vice titled “Weed Is Legal But Its Dank Smell Is Under Attack” it stated that according to the Globe and Mail, both marijuana behemoths Canopy Growth Corp (TSX: WEED) and Aurora Cannabis (TSX: ACB) have received complaints, and there have been more than 250 complaints about Canopy’s 1.3 million square-foot Aldergrove, BC facility.
There is a way to collectively invest in the Marijuana boom and both the energy reduction and odor compliance concerns that accompany the cannabis industry. Already generating significant revenue, Ortech Consulting and Efficiency Engineering are two subsidiaries of Kontrol Energy (CSE: KNR) (OTCQB: KNRLF) which service odor assessment, air quality & energy management for the cannabis industry.
Through its operating subsidiaries, Kontrol Energy has recently been engaged by multiple licensed producers, and to date, the company has signed three contracts. Due to industry competitive purposes, Kontrol Energy is unable to disclose its market participants, although there is a case to made that its contracts could be with Canada’s largest producers.
Kontrol Energy has been very active lately and there are a few things investors should pay attention to. Firstly, Kontrol Energy reported their fourth quarter results which totaled $4.1 Million, up 100% to the prior year, and annual revenues of $10.7 Million, up 56% over the same period last year. Growing revenues is a key factor when investing and we anticipate the company will continue to increase its revenues exponentially annually. In March, Kontrol Energy announced that the company entered into a Letter of Intent (LOI) with an electricity efficiency company that generated $6.5 Million and EBITDA of approximately $700,000 over the last 3 years. The transaction is anticipated to be completed shortly. This is an important development that will drive further revenues for Kontrol Energy and add additional shareholder value. Another catalyst investors should look out for is the acceptance for DTC Eligibility. On March 12th , Kontrol Energy announced its application for DTC Eligibility of its shares (OTCQB: KNRLF) on the OTCQB market in the United States. Nine weeks have past since the company’s application, and we anticipate the company is not too far from receiving approval for DTC Eligibility.
Trading a current value of only 1.8 times revenue, we believe Kontrol Energy is a great company and currently undervalued relative to its peers. As companies in the cannabis industry begin to shift their focus on reducing energy costs and emissions. Kontrol offers investors a unique and diversified approach to the cannabis sector and are not completely reliant on the cannabis market for their growth. We expect Kontrol Energy will continue to execute on its aggressive growth plans slated for this year, which as a result should provide tremendous shareholder value.
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