Cansortium Stock: The Most Underappreciated Cannabis Company (OTCMKTS:CNTMF)

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I’ve been doing a number of work within the hashish house just lately and have come throughout some very attention-grabbing and really low cost alternatives. I’d prefer to share one right here and doubtlessly some extra down the highway. Typical microcap stuff applies – for small funds and PAs, trades round $25k/day, displays/supplies usually are not nice (though IR isn’t unhealthy) and there’s one lone analyst who has written some studies on the enterprise. Nonetheless, this is without doubt one of the quickest rising (non-Tier 1 MSO), most worthwhile, highest margin and most cost-effective hashish shares in your entire hashish universe. I additionally consider Cansortium Inc. (OTCQX:CNTMF) is at an inflection level the place we may see a fast enhance in revenues/EBITDA from right here (which we’re already seeing as of Q1 and Q2) ensuing within the inventory buying and selling above $0.75/share throughout the subsequent yr or so. There was zero share worth response after two document quarters to date this yr, and the inventory presently trades at lower than 3.0x my estimate of subsequent yr’s EBITDA, with a powerful progress runway and really enticing takeout potential.

Cansortium Inc. (quickly to be renamed ‘Fluent’) is a hashish firm that produces and sells medical hashish all through the US. The corporate’s core market is Florida the place they’re vertically built-in, participating within the cultivation, processing, retail, and distribution of hashish. Its medical hashish merchandise are supplied in oral drops, capsules, suppositories, topicals, syringes, dried flower, pre-rolls, cartridges, and edibles. The corporate offers its merchandise underneath the Fluent model identify. As of Q2 2022, Cansortium operated 27 dispensaries in Florida, 3 in Pennsylvania, one in Texas and previously a develop operation in Michigan that they just lately exited given the troublesome pricing setting within the state. Within the late 2010’s, Cansortium started promoting medical marijuana underneath the enterprise identify Knox Medical with cultivation, processing and allotting amenities in Florida, Texas, Pennsylvania and Puerto Rico. The corporate re-branded to Cansortium in 2019 and launched the Fluent Hashish Care model alongside an IPO on the Canadian Securities Alternate the place they raised $56mm for growth and commenced cultivation at their Tampa facility. On the time, Cansortium had 10 dispensaries in Florida with plans to develop to 30 (throughout 2019), whereas ending the yr having generated $29mm in revenues. Quick ahead to at present and Cansortium operates 31 whole dispensaries with projected 2022 revenues of $90-95mm. Cansortium may be very a lot a turnaround story that I consider is presently at an inflection level, having struggled underneath the load of prior administration, over-expansion plans and incapability to ship outcomes. Right now, on the again of recent administration efforts, operational enhancements, a rising medical market in Florida and extra managed growth plans, it is attainable we may see revenues and EBITDA considerably enhance from right here.

These will increase are already underway as of Q1 and Q2 of this yr, the place Cansortium reported document quarterly revenues (and progress), document adjusted EBITDA and constructive money from operations. As well as, they’re one of many solely hashish companies value mentioning that has NOT diminished steerage or lowered estimates for the yr. In reality, FY22 steerage could show to be conservative.

Cansortium has a couple of necessary traits that make it a sexy funding within the house: precise scale in one of many strongest markets within the US, vertical integration, and money movement positivity. Cansortium has two giant develop operations in Sweetwater and Tampa and has expanded their Florida cultivation operations from 26,000 sq. ft on the time of the IPO to 136,000 sq. ft at present. Moreover, the corporate is endeavor two initiatives to convey its cultivation footprint up 250,000 sq. ft which needs to be accomplished in the course of the again half of this yr. Cansortium’s mixed manufacturing capability of each their Sweetwater and Tampa amenities is 200,000 grams of manufacturing per week (22,000 lbs.). The amenities owned by Cansortium are extremely environment friendly, using vertical develop operations and able to producing crop equal to a facility with 3x the sq. footage. Early on, Cansortium additionally entered into administration companies agreements for the funding and buildout of the amenities with payouts coming from money generated by the amenities. I consider that technique made a number of sense given the upfront capital wants for cultivation in addition to having the ability to faucet the experience of confirmed cultivators within the state. Now at scale, the corporate plans to finish the yr with 31-32 dispensaries within the state of Florida that are presently underneath development and importantly usually are not factored into the FY22 information. Though 85-90% of revenues are derived from Florida operations, CNTMF additionally has three dispensaries in Pennsylvania and a cultivation facility and retail dispensary in Texas, offering de minimis contribution to revenues. Though the PA dispensaries are considerably latest builds, they’re in favorable places and supply a small chunk of revenues. Cansortium has additionally been rising their affected person rely in Texas, no small feat because the lone star state is without doubt one of the most restrictive in your entire US, neither legalizing medical or grownup use at this stage. Cansortium is considered one of three license holders in Texas, has a 400k sq. ft cultivation facility connected to 1 retail dispensary, and will likely be able to pounce on any change in state legalization. Whereas administration talked about making a professional run in Texas and serving to to vary the legislative setting, it’s attainable that these property could possibly be disposed of to fund additional growth in Florida and pay down debt.

It’s estimated per OMMU information that Cansortium has round a 4% (and rising) share of the Florida medical market. OMMU and different sources will record Cansortium because the sixth or seventh largest participant, nevertheless I consider market share stats are a bit deceptive as gamers #3-5 have solely 1-2 extra dispensaries than Cansortium and just a few bps greater share of flower gross sales within the state. That’s to say that the hole will not be vast for Cansortium to maneuver up the market share ranks, particularly as they’re rising sooner than any of their friends at this stage. For instance, the low finish of the corporate’s FY22 information implies 38% income progress yr over yr, considerably greater than all however a couple of of their friends. Shifting ahead, share features can proceed as Cansortium’s yields will enhance from extra cultivation enhancements, manufacturing capability will enhance, new dispensaries will likely be opened, and CNTMF is lastly producing sufficient stock to completely inventory cabinets.

From the This autumn 2021 / Q1 2022 name:

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Stock shipped in Florida was up 75% in March in comparison with this previous December, reflecting the very best ranges of stock we have ever had. We have now loved constructing stock within the retailer vaults, whereas on the similar time, experiencing document gross sales. So we’re promoting extra and producing extra on the similar time. For perspective, final yr, we might run out of flower at our dispensaries virtually each day. And generally we might not make it previous the mid-day earlier than working out of flower. We merely didn’t have sufficient manufacturing capability to fulfill the demand in our shops and having flower is a key promoting level to draw sufferers via the door to buy every other merchandise. Right now, we’ve an enough degree of flower and total provide for our 27 shops with Tampa and Sweetwater working at max manufacturing.

Further advantages to truly having product embrace having the ability to measure the gross sales cadence, run checks, promote sure manufacturers and usually handle stock higher. It is onerous to know what’s working once you don’t have sufficient product to promote. I consider the stock state of affairs has and can proceed to enhance shifting ahead and will assist CNTMF proceed to take share as Florida is an extremely giant untapped market with important runway for progress. Administration agrees.

From Q3 2021 name:

Okay. It is super. I believe that we have stated earlier than and I’ve stated earlier than to you, which is that if it weren’t for the race for footprint that is happening in Florida, I might not open one other retailer as a result of we might — if we had been in a vacuum, we might spend this yr maximizing our present retailer cabinets to comprehend what these retailer ceilings are. We have not but had — and even at present, haven’t but had the chance to take a retailer and have it at full sturdy stock all day lengthy each day.

…so the quantity of market share is now beginning to be traded round a bit of bit between us. However there are nonetheless extra legislative occasions aside from legalization. And I’ve spoken on this earlier than, I believe a reciprocity, which is a quite simple administrative quantity. If you concentrate on the variety of cardholders from different states that come to Orlando, Miami, Tampa and Jacksonville, only a reciprocity measure, which could possibly be an simply regulatory transfer, which may occur any time now.

…it could possibly be a 30% gross sales enhance throughout the board with out one new affected person. So there are regulatory initiatives that might occur wanting leisure that will dramatically enhance Florida. Then there’s leisure. So I believe what I am seeing is the larger MSOs are right here, traders are right here. Everybody’s right here. Everyone seems to be constructing extra develop house. Florida nonetheless stays a really untapped market. We’re nowhere close to saturation on variety of shops, variety of sq. footage of cover house. It’s nonetheless a fast-growing market.

Importantly, the technique of maximizing the prevailing footprint is a brilliant one given the restricted capital necessities and extra capability that the shops can take up. There may be with out query a land seize happening in Florida, however as a share taker, it could be extra useful for Cansortium to have totally stocked cabinets, be shifting stock and ensuring they’re catering to the shopper base. I can’t overstate the advantages of this as widespread sense will reveal that having sufficient product to promote means…extra gross sales. It additionally means having the ability to push greater margin / greater sale merchandise, run gross sales checks, higher make the most of reductions and enhance information assortment. When requested about progress charges and SSS as of Q2, administration had this to say:

What you are seeing is simply pure stock. We had been capable of accomplish this progress. This firm, like many others, was stock constrained in 2020 and even in ’21, as a result of stock, as a result of it is vertical and we can not acquire our merchandise from every other supply, we needed to develop it to promote it. And so what you are seeing within the This autumn of ‘21 and then Q1 and Q2 is just pure biomass coming online, these facilities that we had to invest and build are coming online. So we were able to put more product in the stores. The demand is still there. We could continue to grow in sales and would anticipate that we could in our existing stores. We haven’t yet reached the saturation point of demand on our existing stores. Now, projections on when we’ll reach that, I’m not able to tell you that, but the fact is that we could continue to absorb more inventory, even probably another 15%, 20% in our existing stores.

Of note, a quick look at IFRS earnings doesn’t precisely paint the image of profitability. Sadly, one quirk of IFRS because it pertains to hashish is that firms are required to record ‘biological assets’ on the stability sheet which include hashish vegetation within the develop course of that can finally be transferred to stock on the market. The property are topic to quarterly estimates as there is no such thing as a lively secondary marketplace for hashish vegetation, and the property are valued at honest worth much less prices to promote which estimates the anticipated harvest yield in grams for vegetation presently being cultivated and the anticipated promoting worth much less prices to promote. It is a very troublesome course of to endure, is topic to important estimates, and may change regularly, leading to recording features or losses on organic property. These changes end in what Cansortium studies as ‘adjusted gross margin’ which is gross revenue plus or minus the modifications in honest worth of organic property, and plus or minus the realized honest worth of increments on stock bought (principally the price of manufacturing). I view adjusted gross margin as normalized.

For instance, throughout Q1 2021, a big unrealized acquire in honest worth of organic property was recorded which boosted gross margin, whereas in Q1 2022 the acquire was a lot much less, leading to what seems to be like extreme gross margin compression. It is principally six a method, half dozen one other as these prices are both added again or subtracted on the money movement assertion. Consequently, it is troublesome to derive normalized gross margins aside from to say throughout 2021, GMs had been above 60%, and have are available in the identical via the primary two quarters of 2022. I’d estimate these figures to say no barely over time however administration appears assured {that a} >60% GM is an achievable long-term determine. EBITDA margins are equally sturdy within the 30-35% vary, though changes need to be made which I contact on under.

As Cansortium continues to take share, enhance its Florida dispensary rely, and obtain extra income contributions from different states, it wouldn’t be onerous to think about revenues rising at a 30% clip for the following few years. With a powerful model, cultivation buildouts full and minimal capex for brand new dispensaries (principally lighting, millwork, flooring and many others.), incremental margins ought to look very enticing and EBITDA movement via needs to be very sturdy. Ought to new dispensaries carry out according to the present footprint over time and SSS stay anyplace close to at present’s ranges (mid-teens) then outcomes could possibly be even stronger.

Background

As talked about, Cansortium is considerably of a turnaround story with a shaky previous consisting of over-aggressive growth plans, administration and board modifications, and debt restructuring. Below the management of former co-founder and CEO José Hidalgo, the corporate had formidable plans to just about triple their dispensary footprint in 2019, however fell flat on their faces. Capital necessities, steady development delays and cultivation points led to restricted income era together with huge working losses and money burn. The prior administration workforce additionally entertained the thought of increasing into Puerto Rico and Canada which proved to be ill-fated as managing cultivation, processing, distribution and retail operations in a number of nations with restricted geographical proximity is extremely troublesome. Convertible debt of $25mm was issued in 2019 and following one other spherical of diminished fiscal yr outlook, value slicing measures had been undertaken in addition to a board and administration shakeup. Three unbiased administrators had been put in (considered one of which included David Abrams of Harris/Blitzer/Apollo fame), whereas co-founder and Chairman José Hidalgo (moved to Chairman from the CEO function a couple of weeks earlier) resigned together with the COO and VP of Finance. Price cuts had been additionally enacted within the type of workforce reductions and elimination of senior administration personnel and compensation, aiming to save lots of Cansortium round $5mm per yr.

A couple of weeks later, the corporate additionally introduced that it reached an settlement with co-founders José Hidalgo and Henry Batievsky, together with two different former senior executives, for his or her rapid return of greater than 26 million shares of inventory, in mixture, representing virtually 15% of Cansortium’s excellent shares on an as-converted foundation. The co-founders agreed to switch these shares for nominal consideration to the corporate for cancellation or to help within the recapitalization of the corporate. Mainly, the board determined that the founders share issuance was overly beneficiant however let the previous administration workforce stroll away with one thing. Following that, on the finish of 2020, Cansortium additionally introduced they entered into agreements to promote each the Canadian and Puerto Rican operations for undisclosed quantities with a purpose to deal with Florida and continued US operations.

Cansortium continued by restructuring their debt in early 2020 with $13mm of Promissory Notes being restructured to take away amortization and lengthen the maturity, whereas an extra $13mm in near-term liabilities had been paid off utilizing the returned Founder’s shares mentioned above. A capital increase was carried out a couple of months later by way of personal placement whereby Cansortium supplied 10.2mm fairness items at $0.45 per unit, or roughly $4.6 million. Every unit consisted of 1 widespread share and one widespread share buy warrant which entitles holders to amass one share at an train worth of $0.45 per warrant share.

The turnaround efforts began to bear fruit in Q1 2020 the place Cansortium grew revenues over 80% YoY and generated constructive EBITDA for the primary time within the firm’s historical past. Present CEO Robert Beasley was appointed to the function in September 2020 following a ten-month stint as a Senior Advisor to the Board. I’m a fan of Beasley to date and contact extra his background under.

Capital Construction

As of this writeup, Cansortium has 252.2 million widespread shares carrying one vote per share, and a couple of.7mm Proportionate voting shares carrying ten votes per share. The choice incentive plan has an extra 16mm choices excellent together with 38mm warrants at a one for one conversion, for a complete of 308mm totally diluted shares. The weighted common train worth of the choices is $0.52/share, and the warrants have varied strikes, all greater than at present’s share worth.

Cansortium additionally entered right into a credit score settlement with a syndicate of lenders throughout 2021 offering for a mortgage as much as $71mm. The mortgage matures in 2025 and bears curiosity at 13%, callable in 18 months. The Time period Mortgage consisted of a $50 million tranche priced with an authentic challenge low cost of three% plus 12.5 million warrants to amass 12.5 million widespread shares with an train worth of $1.20 per share for a time period of 4 years after the cut-off date; in addition to a $21 million tranche priced with an authentic challenge low cost of seven% with no fairness element. Topic to sure situations, the mortgage will be elevated by as much as $20 million. If nothing else, this financing speaks to the shortage of enticing financing choices within the trade, which aren’t bettering. I requested about potential refinancing and I believe Cansortium can be eager about exploring all choices. Nonetheless, with charges rising and hashish nonetheless federally unlawful, there aren’t any nice choices for the time being. Of notice, two former board members (together with David Abrams) participated within the financing. Based mostly on the low finish of CNTMF’s 2022 EBITDA information, leverage is available in at 2.8x.

Lastly, in April of this yr Cansortium accomplished non‐brokered personal placement that features a 10.0% unsecured convertible debenture within the principal quantity of $3mm, in addition to 3,076,923 pre‐funded widespread share buy warrants at a worth of $0.39 per Pre‐Funded Warrant, for mixture gross proceeds of $4.7mm. The Debenture will come due in 2032 and is convertible into widespread shares at a conversion worth of $0.79 per widespread share. Every Pre‐Funded Warrant shall entitle the holder to buy one widespread share at an extra train worth of $0.40 per widespread share (for a complete widespread share challenge worth equal to $0.79) for a interval of 12 months from the date of issuance.

Notes on the Florida Market and Regulation

There are a selection of states that haven’t but legalized medical or grownup hashish use and have positioned heavy restrictions on the quantity of THC in varied merchandise in addition to the situations required for sufferers to acquire medical marijuana (seizures, epilepsy, most cancers, terminal diseases). Florida’s foray into medical gross sales started when these bans had been lifted totally in 2019 by Governor Ron DeSantis who signed a invoice lifting the ban on the sale of medical marijuana. Texas, as you may think about, is probably probably the most restrictive state within the US on the subject of hashish and has barely budged on among the rules I simply talked about. Right now, there are 22 Medical Marijuana Remedy Heart (MMTC) license holders in Florida, chargeable for lots of of dispensaries throughout the state.

Florida is an exceptional medical use market with over 740,000 registered medical sufferers. The state generated over $1.0 billion in medical gross sales throughout 2020, $1.3 billion in medical gross sales in 2021, and is on tempo for over $1.5 billion throughout 2022. Presently, Florida provides round 150-170k new medical card holders per yr, and with a inhabitants of twenty-two million incorporates inside it a major TAM for each medical and grownup use. The estimated affected person rely represents one thing like 3-4% of Florida’s grownup inhabitants. Trade estimates forecast the Florida market to double in measurement by 2026 and attain almost $3.0B in revenues throughout that point. Trulieve (OTCQX:TCNNF) is an MSO and the main scaled participant in Florida with over 50% market share all through their 100 dispensaries and almost $1.2B in revenues. Curaleaf (OTCPK:CURLF) is an in depth second. Whereas limitations to entry are comparatively low for the precise development of the retail shops (resulting in the numerous growth you’ve seen amongst almost all MSOs), limitations for licensing, approvals, permits, and regulatory affairs are fairly excessive from each a time and assets standpoint.

There may be additionally a land seize happening in Florida from each an growth standpoint and retail/market share standpoint within the type of product discounting. Whereas I wouldn’t usually be too excited a few retail race to the underside, I consider its transitory as finally the very best high quality flower, manufacturers and ideas will survive (and have to make a margin to exist). As well as, I don’t consider a single state like Florida has a TAM large enough to justify steady loss making corresponding to a software program firm with a $100B TAM. The state will rationalize over time, however the land seize standing may also end in consolidation, which I view as a constructive for Cansortium. Trade consultants have additionally claimed that Florida licenses are probably the most precious in your entire trade. It is because every MMTC licensee can open a limiteless variety of dispensaries, cultivation and processing amenities all through the state, a attribute distinctive to the Florida program.

Whereas that could be the case, limitations stay excessive. Importantly, in 2017, the Florida medical marijuana regulation established a cap on the variety of medical marijuana dispensaries capable of function throughout the state, whereas additionally requiring that every dispensary be vertically built-in, which means they have to additionally handle cultivation, processing and distribution for the dispensaries. That is most probably a kind of silly political guidelines (that has been challenged many instances however by no means overturned) that can most probably fall by the wayside as soon as hashish is de-scheduled and authorized on the Federal degree, opening the doorways for capitalism to come back in and do its factor by chopping up every a part of the provision chain over time. For now, nevertheless, these rules present limitations to entry when it comes to capital necessities, along with the authorized, technical and operational abilities wanted to file the paperwork to acquire a license, entry capital to fund a develop operation, or begin to construct a retail footprint. Though Florida has but to legalize using hashish on an grownup use or leisure foundation, I consider it is just a matter of time till all states comply with down that path.

Lastly, most firms don’t disclose their retail unit economics, however I perceive them to be stable with four-wall shops estimated to value between a couple of hundred thousand {dollars} as much as one million or so (relying on sq. footage) to construct with the potential to generate $3.5-6mm in annual revenues at 20-30% EBITDA margins. The unit economics enhance additional if you’re vertically built-in, have your individual cultivation and environment friendly strategies of distribution. Federal legalization and interstate commerce will undoubtedly change a number of issues, however for now, geographic benefits inside states are actual.

Administration

Cansortium is led by Robert Beasley who’s an lawyer by commerce and has accomplished important work within the hashish house together with serving to early-stage licensees acquire their licenses and navigate the regulatory panorama. Should you’ve accomplished work throughout the hashish trade, you’ll have seen that a lot of the administration groups don’t have direct backgrounds in hashish (how are you going to?) however moderately have very totally different though sometimes complementary backgrounds and skillsets. I’ve seen sturdy backgrounds in authorized, funding banking or finance, and numerous retail operators. There are additionally your share of unhealthy actors and a few administration groups which are simply filled with it as there are in any new progress trade. Beasley has an attention-grabbing background as he principally helped create the legislative and rulemaking course of in Florida because it pertains to hashish and has additionally designed and constructed a lot of dispensaries giving him a novel angle as an operator. Beasley began a regulation agency in 2001, specializing in industrial litigation and administrative regulation, and in 2015 he turned concerned in legislative efforts to convey medical hashish to Florida. When the primary 5 licenses had been awarded within the state, he acted as a authorized guide to these license holders and helped join them with capital sources. He finally turned chair of the board of a kind of firms, which launched him into an much more lively function within the hashish enterprise. Consequently, he’s each skilled and educated concerning the trade, and for those who take heed to the calls he offers far more colour round operations and technique than many executives in hashish. I like the way in which he’s serious about the retail enterprise, progress in Florida and slowly increasing into different states.

Previous to Robert Beasley, the corporate was run by co-founder José Hidalgo, who struggled to scale the enterprise, couldn’t increase non-dilutive capital, and didn’t handle via the buildout of the corporate’s aggressive growth plans. Though issues like development delays are troublesome to plan for, aggressive steerage, over-promising and under-delivering led the board to make a change in 2020. A sensible transfer, particularly given the numerous alternative within the state of Florida.

I view administration compensation as very reasonable and see nothing egregious surrounding base comp or incentive pay. The board is a unique story. The bottom director compensation in 2021 was above $200k, with many different board members receiving over $500k in whole compensation. Though the board compensation has modified since the newest administration info round, I might view these degree of compensation as egregious, particularly for a microcap firm on the verge of a turnaround. Put merely, the board wants work, with principally no retail, operational or hashish expertise (there’s a pharmacist and nuclear scientist on the board), nevertheless it’s considerably telling that they’ve managed to show this enterprise round (albeit because the Florida rising tide lifts all boats) with no deeply skilled board.

One of many board members, William Smith of The Smith Group, owns 1.4mm proportionate voting shares (52% of the category, 6% of the voting rights) in addition to 35.6mm widespread shares (15.8% of the category, 14.1% of the voting rights). His possession/board settlement with the corporate dates again to the corporate’s inception, the place Smith has served as a supply of capital and supplied some type of strategic oversight. In attempting to determine who he’s, I requested for an viewers with him which IR balked at. From what I’ve gathered, he based a couple of TV stations (WPAN) in Florida and is a non-public investor exterior of that. Years in the past, following the sale of his TV property he was residing in Florida and was launched to the previous administration workforce by way of a pal who gauged his curiosity in investing in a hashish associated enterprise. Since then, as talked about, he’s been behind a number of the financings you’ll examine within the filings whereas the corporate was trying to scale. Previous to his share possession and previous to his becoming a member of the board he served as an over-paid guide to Cansortium. Should you learn the ‘Consulting Fees’ part of the administration info round (by way of the 6/30/22 Administration Data Round), you will see that Invoice Smith has been paid over $3 million {dollars} thus far as a part of varied agreements with the corporate. Nonetheless, he additionally had a hand in bringing Robert Beasley on as CEO, with whom he had a previous relationship whereas Beasley served as a guide to Cansortium. At a excessive degree, I consider he’s innocent, not concerned in day-to-day operations and extra so figuring out what occurs strategically within the occasion of a possible acquisition, for instance. I have no idea what share of his web value is tied to his funding in Cansortium. Though future fairness raises are attainable, I’d think about as the corporate’s largest shareholder who has been concerned with this enterprise for years, he’s not extremely eager about diluting his possession stake in a significant approach particularly as the corporate has now reached some extent of actual scale and money movement positivity. As well as, I wouldn’t view it because the worst factor on the earth to have a considerably everlasting capital, very incentivized giant shareholder right here, particularly whose cash is most probably not going anyplace within the brief time period.

Notably, an necessary a part of Invoice Smith’s share possession includes one thing known as an ‘equity price guarantee’ or ‘floor price obligation’. With out stepping into the weeds, Smith’s firm, Can Endeavour, supplied a mortgage to Cansortium throughout 2018 within the type of a promissory notice. The notice was restructured in 2020, pushing the maturity to the top of 2022 and offering for the issuance of extra widespread shares to Smith. These widespread shares, along with the unique widespread shares issued throughout 2018 in reference to the unique promissory notice are topic to a worth flooring of $0.65/share. I’m engaged on getting the precise particulars of the assure (IR was very imprecise, administration pushed our name again to subsequent week), however I consider within the occasion the corporate is bought for let’s say $0.30/share, Invoice Smith can be entitled to obtain $0.65/share for his stake. The value assure expires in Could 2023. I perceive the ridiculousness of issuing such a assure, nevertheless it’s a minimum of attention-grabbing to me given the present share worth of $0.17, which sits materially under the fairness worth flooring in addition to each single financing transaction entered into by Smith.

Valuation

There may be presently a persistent bias towards smaller hashish firms when it comes to their valuations in comparison with the most important firms within the house. A part of the low cost revolves round lack of knowledge (as with most microcaps) however I consider the reductions in some instances are unwarranted as smaller firms usually instances have greater income progress, alternatives for margin growth, equal entry to capital and higher aggressive positionings inside their geographies. Check out this very informative chart (as of 8/27) I discovered on Twitter from somebody with the deal with @cashflow_free. I apologize if it is onerous to see, however you may go to his Twitter and discover it. Cansortium sits within the Tier 3 bucket, and issues get attention-grabbing once you have a look at their income progress charges, EBITDA margins and valuation in comparison with the remainder of the universe.

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*Of notice, it seems to be just like the chart (in addition to the corporate as of Q2) is together with leases as debt for Cansortium, which elevates the enterprise worth. Excluding the leases, I get an EV of $99.4mm.

Utilizing the low finish of this yr’s information for $90-95mm in revenues and $25-28mm in adjusted EBITDA, Cansortium trades for a completely diluted EV/EBITDA of lower than 4.0x. I estimate they’ll do a minimum of $35mm in EBITDA subsequent yr, pushing the valuation down additional to 2.8x. My estimates for subsequent yr embrace a dip in income progress in addition to some margin compression. I view this as overly conservative given new dispensaries coming on-line, elevated cultivation capability and continued contributions from PA dispensaries. I do know these usually are not nice companies, the regulatory setting is unsure, and the stability sheet isn’t stellar, however I consider Cansortium is mispriced. Common peer multiples for firms in Tiers 1-4 aren’t any decrease than 6.7x. The whole hashish universe trades at 8.5x. Even excluding probably the most egregiously valued companies inside Tier 3 displays a ten.5x common a number of. Have been Cansortium to commerce even a couple of turns greater to the bottom comp set a number of of 6.5x EBITDA, (utilizing the low finish of Cansortium’s present yr estimates) upside can be important.

Earlier than I get roasted on the money movement assertion, I might ask readers to try to normalize for a much less restrictive value of capital in addition to a normalized tax fee. I do know that’s not fully honest. However for those who’re not acquainted, at a excessive degree, flower-touching hashish firms are taxed on gross revenue, unable to deduct regular enterprise bills according to non-cannabis firms. Consequently, tax charges vary between 65-75% for many publicly traded hashish firms, severely impacting money movement and, as a aspect notice, additionally creating giant deferred tax liabilities for some as firms can elect to defer funds. Whereas I don’t consider this funding will depend on favorable regulation to work, I believe it’s considerably unfair to imagine Cansortium (or any hashish firm) should pay 75% tax fee into the foreseeable future. Nonetheless it’s additionally most likely unfair to provide them credit score for future normalized free money movement. However I believe it is necessary to notice what is going to occur to the profitability profile of those firms if federal legalization takes place. Lastly, capex wants are lower than bigger operators as a share of income, and upkeep capex for retail amenities is low (principally lighting and millwork inside), which ought to increase unlevered free money movement shifting ahead.

As talked about, unit economics for the dispensaries usually are not disclosed but, I’m engaged on getting them. A few of these companies, even the most important MSOs don’t even maintain issues like particular person retailer degree P&Ls which is sort of loopy to consider. Conversations with trade operators did reveal the substantial profitability of some dispensaries across the US, though particular person outcomes rely upon issues like vertical integration, geography, market progress, location and types. The tough math or common (relying on sq. footage) is one thing like 50-60% gross margins, 10% labor, 30% extra opex (lease, provides, overhead). 4 wall margins appear to be sturdy and with restricted buildout prices for a smaller dispensary $250-500k, fast ramp up intervals and common income per retailer of $2.5-$4mm, payback instances and money on money returns will be enticing.

Of notice, in December 2020, AYR Wellness, a big MSO, acquired Liberty Well being Providers, a Florida based mostly operator, for $290mm. On the time of the acquisition, Liberty had simply opened their twenty eighth dispensary with plans for one more 14 by the top of 2021. Right now, Liberty operates 49 dispensaries within the state of Florida. The value paid represented (albeit when sentiment was significantly better) a 94% premium to Liberty’s inventory worth on the time of the deal announcement. Breaking down the maths a bit additional, AYR paid over $10mm per dispensary (on the time) or $7.0mm for the complete 42 deliberate dispensaries within the state of Florida. On the time of the acquisition, Liberty was doing lower than $60mm in revenues, reflecting a valuation of round 5.0x revenues. AYR additionally had this to say about Liberty’s dispensaries on the M&A name:

“We expect to significantly improve the dispensaries productivity in Florida, which currently stands at a run rate revenue of about $2 million a year, well below the top performance in this state at $4 million to $10 million.”

Utilizing the identical math for Cansortium, with 27 dispensaries projected 2022 revenues of $90-95mm, and Florida representing 85% of revenues, every dispensary needs to be doing on common round $3.0-3.3mm in revenues. On the similar 5.0x gross sales a number of, Cansortium inventory can be valued round $1.30 on Florida operations alone. Whereas Cansortium has remedied their stock/product availability points, apparently, Liberty’s shops had been additionally seen as underperforming on the time of the deal attributable to product unavailability and develop inefficiencies. Though it’s not precisely apples to apples, and New Jersey is now an adult-use state, a few of AYR’s shops in New Jersey (previous to adult-use) had been doing $10mm per retailer. Simply wild numbers. I now place much more weight on administration’s feedback about maximizing the prevailing retailer footprint with extra stock absorption obtainable. That will characterize a possible extra 23% income progress simply by rising stock absorption, with out taking over one new buyer or constructing one new retailer. I consider Cansortium needs to be positioned in the identical/related bucket as AYR’s Florida operations, and consider that adult-use gross sales may drive the identical sort of alternative. Moreover, conversations with trade operators additionally revealed that dispensaries can sometimes be valued at round 1.5x revenues. That is an estimate, refers to a number of mother and pops, and has little or no transaction precedents. In different phrases, I’d view 1.5x revenues the worth to pay for a struggling operator. Utilizing that math, in a particularly conservative state of affairs and as soon as once more not accounting for added Florida progress or any of the optionality described under, Cansortium shares can be valued round $0.40/share for the Florida operations alone.

Utilizing the license worth strategy to valuation can be considerably illustrative of the potential worth. I’d estimate that Cansortium’s Florida licenses alone needs to be value almost the whole lot of Cansortium’s market cap. I’d estimate an excellent baseline to be $75-100 million for the licenses alone. Quite a few precedent transactions, some relationship years in the past, level to Florida vertical integration licenses being value between $50-60mm. Planet 13’s buy of Harvest Well being Florida medical license for $55mm is one instance. Planet 13 has but to start cultivation pointing to the worth of Florida operations being value greater than $55mm over time. Nature’s Method additionally bought a license in 2019 for $67 million. In late August, Inexperienced Sentry, a non-public hashish operator, acquired all of MedMen’s Florida operations for $63 million. Included within the buy worth was an MMTC license, 14 dispensaries and a small cultivation facility. As talked about, the Texas license may additionally fetch between $60-80mm as Cansortium is considered one of solely three licensees in a state that has but to legalize even medical use.

Placing all of it collectively:

Texas license per share @ $60mm: $0.20/share (taken with a grain of salt)

Michigan and Pennsylvania operations / licenses per share @ $28mm: $0.09/share

Florida operations per share @ 6.5x 2023 EBITDA: $0.60/share

(-) Debt: $56mm (excl. op. leases): $0.18/share

(+) Money: $9.0mm: $0.03/share

Fairness Worth (excluding Florida license worth): $0.74/share or 335% upside

Lastly, it’s value mentioning that towards the top of the 2021 Annual Assembly, in the course of the Q&A session, the one query requested was concerning the board’s receipt of a proposal by a enterprise capital agency, Iconoclast Ventures, to amass all of the excellent shares of the corporate. Iconoclast was based by Jake Bergmann (who requested the query), one of many co-founders of Surterra Wellness, the third largest hashish operator within the state of Florida. Given the share worth of Cansortium has declined 80% this yr, simply as the corporate has righted the ship and set to expertise important progress and profitability from right here, I seen the potential bid on the time as very opportunistic. As well as, trade conversations revealed that there was no formal provide letter, no financing in place, and considerably unprofessional in presentation. In reality, there was such little substance to the ‘offer’ that it was not materials sufficient to reveal. I solely spotlight it right here as affirmation of the attractiveness of Cansortium’s property and aggressive place. I doubt Surterra would be the final takeout provide they obtain.

Last Caveat

The whole hashish sector is being pushed by flows and sentiment. It is sort of wild. On one hand, I just like the non-correlated a part of issues as these shares do not typically commerce according to the broader financial system/market (though a recession would clearly damage the patron), however however, valuations may stay depressed and even dip farther from right here. I believe many traders ideas SAFE banking and federal legalization would have handed at this stage, and the truth that it hasn’t has led to a number of capital leaving the house, and a few giant hashish funds shutting down. Capital markets have all however dried up as properly, with capital raises down 66% from 2021 (fairness capital raises down 97%) and M&A quantity down 80% YoY. This has clearly put important stress on hashish shares – as if there wasn’t already from 2021 – and this yr has been significantly brutal. It may stay that approach if folks quit hope utterly that SAFE banking will ever go. One educated investor within the house stated we may expertise a ‘nuclear winter’. If that had been to occur, mixed with an precise extended recession, we may see a wave of bankruptcies as there are already loads of operators who’re struggling underneath the load of pricing, growth and debt hundreds (in addition to giant deferred tax funds). Consequently, the most important danger to the thesis includes not seeing any close to time period share worth enhance, no a number of growth, and no M&A exercise the place Cansortium could possibly be explored as a takeout goal. In a multi-year bearish state of affairs the place SAFE banking does not go, no capital enters the house, establishments are frozen out and capital markets dry up, I might seemingly rethink my bullish tone. It is also attainable that some firms buying and selling at 3x – 4x – 5x EBITDA may see their valuations drop additional, however like every disaster a few of these enterprise could have alternatives to get stronger and proceed to take share. Together with Cansortium, I’ve made it a precedence to deal with the operators with first rate stability sheets, money movement era, decrease tax funds, sturdy manufacturers and situated in nice markets or protected states. Towards that backdrop, my biased opinion is that Cansortium would nonetheless function a really sturdy acquisition candidate which makes it much more attention-grabbing proper now.

Optionality

  • Cultivation capability will increase / yield enhancements
  • Florida opening up grownup use legalization
  • Further dispensary openings in Florida
  • Acquisition provide / takeout
  • Texas license being bought
  • Further dispensaries in Pennsylvania
  • Sentiment enchancment!
  • Dangers

  • Hassle scaling – mitigated with latest efforts
  • Federal legalization introduces important competitors – powerful to keep away from however CNTMF has scale in Florida, and legalization can be the tide that lifts all boats
  • Steadiness sheet inflexibility – there will likely be options right here together with elevated time period mortgage and refinancing finally
  • Potential dilution – I consider dilution is behind them at this stage
  • Single state operators don’t obtain greater multiples – don’t want a better a number of for this to work out properly
  • Massive particular person share possession – I don’t consider this will likely be an issue as the person has been concerned for a very long time, is on the board and will need to see a constructive end result
  • Competitors – CNTMF is in a protected state and would make for a powerful acquisition goal
  • Can’t do something in Texas or something with the license – stays to be seen however administration thinks in any other case

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