WeedMD: A Look Back at The Last 7 Months

This week WeedMD investors received a taste of the future when the company announced they were beating estimates posting $8M in Q2 revenue. I thought I would do a quick Sunday morning post looking at the overall execution the company has demonstrated in the first half of 2019.

Also a Retail Play: Pioneer Cannabis

In early January, WeedMD announced a partnership with Pita Pit to create a franchise model for cannabis retail outlets. They then followed up the plan in April agreeing to terms with Ontario cannabis retail lottery winner Guruveer Sangha to open their first store in Burlington, Ontario. The first location opened this month on August 2nd, a 4,000 square foot location – one of the largest in Ontario, with a surrounding area of approximately 1.7 million people.

They Received a $39M Loan from BMO, A Tier 1 Bank

On April 1, WeedMD announced they received up to $39 million of secured debt financing at an expected interest rate in the 5-6% per annum range over a three-year term. Something we feel gets lost in the cannabis investment community, is that BMO has conducted due diligence on the entire business and deemed it safe enough to accept the reputational risk. Something very few cannabis companies have received.

They Are Growing Outdoor Cannabis On 1 Million Square Feet Right Now!

On May 31, WeedMD announced they had received the license to grow outdoors. This is significant because a) the company already had the clones in a greenhouse ready to plant and b) they can grow all the biomass they need for their extraction play, CX Industries. WeedMD is currently growing on approximately 1M sqft and plans to go upto 4M sqft in just outdoor production in the coming years.

WeedMD Instagram Account (@WeedMD)

Also an Extraction Play, A Big One: CX Industries

On July 23rd, WeedMD announced the launch of CX Industries, a wholly-owned subsidiary specializing in extraction, toll processing and third-party product formulation from WeedMD’s fully-licensed Aylmer, Ontario facility. CX Industries will have the capacity to process more than 200,000 kgs of biomass at its peak production in 2020. They have already announced their first deal to supply cannabis and CBD products to Ignite Brands in late July.

Indoor Capacity is Continually Growing

In the first half of 2019, WeedMD was growing in approximately 110,000 sq ft of hybrid greenhouse. Earlier this month, the company announced licensing approval to double the current licensed capacity with another 110,000 sqft of hybrid indoor greenhouse. They plan to follow this with another 308,000 sqft of straight greenhouse production, which is expected to come online in Q3 of 2019.

Shares Aren’t Underwater with Convertible Debt, And There is No Large Share Unlocks Or Warrant Overhangs like Most of the Sector

The balance sheet is relatively clean with the loans and borrowings representing the debt facility they received from BMO:

Q1 Financial Statements, WeedMD, Balance Sheet

And shareholders don’t have to worry about getting slapped in the face with warrants and options being exercised, as the discount wouldn’t be considered “cheap paper” by any reasonable investor.

Q1 Financial Statements, WeedMD, Note 10

Q1 Financial Statements, WeedMD, Note 11

Outside of 1.7M options at 60c, the majority of the options and warrants are in line with todays current market price. Something rare in the cannabis space.

They Are Undervalued to their Peers, Really Undervalued

According to Echelon’s Cannabis Weekly Report, based on 2020 EV/Sales ratios, WeedMD is the most undervalued cannabis stock of the following sample:

Conclusion

When it comes to great investment opportunities it really boils down to 3 things:

  1. Is the company a great operator?
  2. Are they a strong capital allocator?
  3. Are they shareholder friendly?

We sincerely believe WeedMD nails all three. We are proud of WeedMD and will champion them as long as they continue to execute and have such an attractive risk/reward profile.

They are growing their business at a responsible pace, they aren’t overpaying for insider owned companies/assets (self enrichment), they don’t have a convertible or warrant overhang, and they are fully funded at the bottom of their sales ramp just looking up.

WeedMD is a client of theDeepDive. We aren’t saying this so that you can roll your eyes and say “paid promotion, I don’t care.” We are extremely proud to get to represent them. Typically companies looking for paid promotion are looking to hand over their cheap paper to retail for real hard earned cash. WeedMD is an exception. They are clearly overlooked and one of the few companies that is lining up to have strong enough fundamentals to bring smart investors into the sector who typically ignore cannabis.


FULL DISCLOSURE: WeedMD is a client of Canacom Group, the parent company of The Deep Dive. The author has been compensated to cover WeedMD on The Deep Dive, with The Deep Dive having full editorial control. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.

Small Cap Steve

SmallCapSteve started blogging in the Winter of 2009. During that time, he was able to spot many take over candidates and pick a variety of stocks that generated returns in excess of 200%. In the time since, he has taken a heavy focus in the cannabis space with a particular affinity for multi state operators, for which he has become a known thought leader.

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