Medicine Man CEO reiterates 20%-30% EBITDA margins, announces delivery & lounge initiatives
The overall thesis of our Deep Dive remains the same: An impressive, traditional CPG management team experienced in consolidating industries will expand margins via consolidation of premier operators in Colorado – and then repeat the playbook in other states.
The key takeaways and information from the new presentation:
- Dye reiterated the existing pro forma revenue 2019 revenue of $170 million and 20%-30% EBITDA margins.
- New sales tactics are being developed, specifically related to e-commerce, same-day and next-day delivery, consumption lounges and a loyalty program.
- Shane Sampson, a former chief marketing and merchandising officer of Albertsons, now holds that role at Medicine Man.
- Pro forma intercompany sales are $26.1 million. This means the cultivators and processors listed on page 4 of our Deep Dive (except for Green Equity SAS in Colombia, whose acquisition has been abandoned) had $26.1 million of products sold to the processors and retailers listed, which will now all become intracompany cost of goods sold as Medicine Man vertically integrates. It also shows that these companies already had commercial relationships with each other, reducing the integration risks.
- Pro forma nonflower, non-B2B sales were $46.5 million, or 27% of the total pro forma $170 million.
The company’s next task is actually closing on previously announced acquisitions, which will require raising additional capital for the cash consideration of at least $96 million. In an online presentation, Dye termed the acquisitions “on track.”
With pro forma EBITDA of $34 million-$51 million, the company should be able to borrow the needed capital, especially given that the Colorado market continues to grow.
Colorado adult-use sales grow 16% for 2019; slowing on tough comps not a surprise
We released a new data set – tracking sales data for Colorado’s medical and adult-use markets to complement the more rapidly available recreational-market data from our partner, Headset.
Overall, the Colorado market grew 13% in 2019, including 16% for the larger and faster-growing adult-use market and 2% for the medical sector.
Colorado growth rates will face tough year-over-year comparisons starting this summer, so slower growth rates would not be surprising.
We also updated the government sales data for Nevada through November 2019, showing 17.0% year-over-year growth.
Acreage’s creative expensive capital raise has potential strategic implications for Canopy Growth
In case you missed it, we did some detailed analysis of Acreage Holdings’ creative separation of and borrowing against the rights to sell its brands internationally.
While expensive at a 22% overall interest rate (10% cash and 9.5% in shares on the IP loan and 2.55% for the credit facility), this deal could give the company leverage over Canopy Growth by potentially complicating its global marketing should the previously announced acquisition plan come to fruition.
The dilution adds at least 7.1 million shares – and likely 22.1 million – depending on the future sales and warrants striking at $5.80, which our comp table adjusts dynamically with the current share price.
Loans secured by real estate – not leasebacks – at 12%-13.5%
Corroborating Acreage’s 12.5% cash interest rate, low double digits seems to be the going rate for loans for smaller cannabis companies as well.
Mortgaged cannabis real estate has proved to be rare, as banks avoid such lending, but this could be changing.
Sol Global Investments (CSE: SOL) announced a $15 million construction loan, expandable to $20 million, at 13.5% with a five-year term. It is secured by a mortgage on the planned construction of an 88,327-square-foot cultivation facility in Florida.
It strikes us that the construction project will not actually “touch the plant” until it is finished, so perhaps that is a way to convince more conservative lenders to finance cannabis operations.
However, those lenders would then have to secure a refinancing once production begins.
As we noted at our December Investor Intelligence Conference, this will put the capital cost of such loans into the interest expense line after EBITDA. All else being equal, such a move will lead to a higher EBITDA margin than financing via sale-leasebacks, which put the cost into a rent expense.
Avoiding bombastic claims will reduce cost of capital
Companies that communicate transparently with investors will have a lower cost of capital as they build a reputation of integrity.
Here’s an example of what not to do:
Sol Global cherry-picked one metric that is factually accurate for the past seven days but is misleading and inaccurate for the preceding three months.
Smart investors see through such outlandish claims, and any (very) short-term benefit for the company is more than offset by the erosion of management credibility, which ultimately increases the cost of capital.
Sol Global’s news release about the above-mentioned loan notes that its subsidiary One Plant Florida “sold 77.3% as much flower as Curaleaf, with only 3.57% as many dispensaries as Curaleaf.”
Sounds impressive, right? What is One Plant doing in its one store that takes industry leader Curaleaf 21 stores to accomplish?
The data shows that One Plant actually sells 4X the smokable ounces per store than Curaleaf does, not 21X. And, conversely, it shows that Curaleaf sells 6X the milligrams THC per store than One Plant does.
Key here is that Curaleaf focuses on milligrams while One Plant focuses on flower.
Which focus is better for high returns on invested capital? How do either of these fit into an attractive investment narrative?
That is a different discussion.
Here’s the math:
According to our downloadable data set for the Florida market, which we update weekly, One Plant indeed sold 286 ounces of marijuana in smokable form for the week ending Feb. 13, while Curaleaf sold 369 ounces. This is the 77.3% (286 / 369 = 77.3%) One Plant focused on.
But Curaleaf sold 2,023 ounces in the week ending Feb. 6 and has sold an average of 1,944 since Nov. 7, 2019, (the week One Plant opened its single store). One Plant’s average for the same period is 272 ounces, for an average of only 14% of Curaleaf (272 / 1,944).
Who knows why Curaleaf’s ounces dropped off for one week, but that looks like an outlier and should not be used to support a competitor’s flower-focused investment thesis.
What actually is impressive is that One Plant’s single store has sold 272 ounces per week on average, 4X Curaleaf’s average of 69 ounces per week per store. This metric does seem to support One Plant’s assertion that it focuses on premium flower.
Of course, this assumes that ounces is the relevant metric.
Submit questions for financing landscape webcast
- Where activity is taking place – and who’s investing in whom.
- Key facts and figures about capital raises and M&As during the second quarter.
- How these investment moves are changing the North American cannabis landscape.
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