Medicine Man Technologies’ dispensary buying spree, Aurora sells out of TGOD & more

By Mike Regan , Equity Research Analyst

It was another busy week in cannabis – at least for one Colorado company.

Medicine Man Technologies (OTC: MDCL) announced the acquisition of 20 dispensaries in Colorado in four transactions – announced across four days.

The structure is interesting in that:

  1. As we discussed in our recent piece on true share counts, Medicine Man Technologies issued another 10.4 million shares, making the Denver company’s pro forma share count now 74.5 million below $8/share and 77.0 million above $8/share.
  2. The share components are subject to lock-up provisions for a year, so those 10.4 million shares can’t be sold by the acquisition targets until May 2021.
  3. The deals are structured with clawbacks for 15%-25% of purchase price should the targets fail to meet certain goals.
  4. Terms of the deals are subject to renegotiation only if revenue deviates by +/-10% from targets.
  5. The deals must close by May 1, 2020, for the first three companies in the chart below and May 31, 2020, for RootsRX – or they must be extended.

The details and multiples of the deals are shown in the table below, in millions of U.S. dollars.

Title Total Paid Dispensaries Paid/Dispensary EV/S EV/EBITDA Margin Sales/Dispensary
9/3/2019 Starbuds  $      31.0 5  $              6.201          1.63X                 5.5X 29.5%  $                  3.80
9/5/2019 dba Starbuds TJ Joudah  $      36.9 6  $              6.150
Total dba Starbuds  $      67.9 11  $              6.173
9/4/2019 Colorado Harvest  $      12.5 3  $              4.167          1.25X  $                  3.33
9/6/2019 RootsRX  $      15.0 6  $              2.500          1.25X                 7.1X 17.5%  $                  2.00
Total   $      95.4                      20  $              4.770

Starbuds at $6.2 million per dispensary; Colorado Harvest & RootsRX at 1.25X Sales 

In two separate transactions, Medicine Man bought 11 Colorado-based dispensaries operating under the Starbuds name for a total of $68 million, or $6.173 million per dispensary. One-quarter of the consideration was paid in shares, with 75% to be paid in cash with an earnout.

In the first Starbuds transaction, the revenue and EBITDA was disclosed. These five stores expect total sales and EBITDA in 2019 of $19 million and $5.6 million, respectively.

This yields a margin of 29.5% – which is very high for any company and especially high for a retailer – and an EV/EBITDA multiple of 5.5X and $6.2 million per dispensary.

No metrics were given for the six dispensaries doing business as Starbuds tied to TJ Joudah, but the consideration per dispensary is nearly the same at $6.15 million per dispensary, which implies the revenue and profitability are similar.

Based on the addresses of the LLCs identified in the filings, it appears the Colorado Starbuds locations in Aurora, southeast Aurora and Pueblo West were not included in these transactions, nor were the company’s five locations outside the state.

Given Medicine Man Technologies’ focus on Colorado, we wouldn’t be surprised to see an announcement about the three remaining Colorado Starbuds coming soon.

Medicine Man Technologies acquired Colorado Harvest and RootsRX for 1.25X targeted 2019 sales. RootsRX had lower EBITDA margins than Starbuds at 17.5% and much lower average sales per store. Perhaps Medicine Man Technologies sees the potential to scale revenue and margins to Starbuds’ level.

Aurora sells out of TGOD, raises CA$87 million and focuses on Whistler Medical 

In an all-Canada transaction, Aurora Cannabis sold its remaining 28.8 million shares in The Green Organic Dutchman (TSX: TGOD) for CA$3.00/share, raising $87 million and knocking TGOD shares down 15% to CA$2.99.

This announcement follows Aurora’s previous sales of TGOD shares – 4.5 million in January 2019 and 6.3 million in October 2018.

Alberta-based Aurora still holds 16.7 million warrants with a strike of CA$3.00 per share.

Aurora confirmed that it does not need Ontario-based TGOD’s supply since it invested in Whistler Medical of British Columbia, noting in the news release that its “interest in TGOD became less important.”

The Green Organic Dutchman had one customer that accounted for 15% of sales in the quarter ended June 30, 2019, though it is unclear if this is Aurora.

Any investors still building Aurora revenue into their TGOD estimates should considering removing it, as it seems Aurora is ending its relationship with TGOD.

This sale also shows Aurora raising CA$87 million in a way that does not dilute its shareholders, nor take on debt.

A takeaway from the MJBizConINT’L investing preconference in Toronto this week: Equity funding may become scarcer after the second-quarter declines in the public cannabis stocks, leading companies to search for alternative sources of capital (such as selling no-longer strategic stakes).

CannTrust letting go 20% of its workforce

CannTrust (NYSE: CTST) is laying off 20% of its workforce (180 people), saving CA$9 million per year but resulting in severance payments of CA$2.1 million.

From this we can surmise:

  • CannTrust currently has 720 employees, down from 900 before its announcement.
  • The affected employees had an average pay of CA$50,000 and are receiving an average of CA$11,667 in severance.
  • The company’s CA$9 million savings is 18% of the reported 1Q19 run rate for cost of sales (CA$9.1 million) and salaries and benefits (CA$3.4 million), which implies that most of the cost of goods is labor.

Mike Regan can be reached at