I am working diligently at putting together a cannabis portfolio for my own investment. I started this once before a couple of years ago when the cannabis industry was new and abuzz. Unfortunately, I contracted a virus while traveling through Central America and was taken out for about 15 months; my portfolio was liquidated. The only good news was my portfolio was liquidated at the peak of the buzz for cannabis. Since then, the industry seems to have collapsed on itself.
I am back and even more bullish on the cannabis industry at this time; simultaneously, the cannabis segment is starting to get interesting again.
A reader asked me to chime in on a smaller cannabis company. Admittedly, I have been focused on the bigger names, and likely, I may be missing out on opportunities. So, after looking at this one company, I think I am going to make a bigger effort to balance the bigger names along with smallish companies that look like they may be gaining footing and moving forward with their plans and becoming profitable.
Enter: General Cannabis (OTCQB:CANN).
As it turns out, the individual had asked me about a company naming just the symbol. There was a bit of confusion and as it turns out, the symbol CANN in Canada is a different company. The reader was asking me about Heritage Cannabis (OTCQX:HERTF) which has the symbol of (CANN.CA) up in Canada.
Nonetheless, I looked at General Cannabis first (and will look at this Canadian company next).
Right now, I am sitting about 22 miles away from this company’s headquarters. I am in Denver, Colorado and they are up in Boulder, Colorado. Colorado was the first state to push forward with legalization – via a citizens vote – adult-use, or recreational, cannabis. This is one of the “epicenters” of cannabis if you will. Colorado has one of the highest per-capita rates for dispensaries in the United States.
General Cannabis has not necessarily carved out a big niche in the cannabis industry, per se, or at least not yet. Despite their stock trading for six years, they are a company still in the, ahem, budding stage. But, they are a company with increasing revenues and just acquired a facility with another on the way. Also, they are actively investing in other operations to include some dispensaries around the country.
The Stock
I usually start my analysis with a stock chart to see what the visuals are telling us. Here is the weekly chart on CANN:
(Data Source: TradingView)
CANN stock went public in the last week of February 2014 and after a couple of fits and surges, is now down slightly. This, after 6 years of active trading.
What is General Cannabis?
General Cannabis is a company with three general lines of business.
They are:
At first glance, you see a bit of diversity in the company. With a little deeper analysis, you can put together some synergies with what General Cannabis is doing and this should continue to lead to success.
Next Big Crop
Next Big Crop is a consulting firm within General Cannabis. This arm of the business helps other companies build a cannabis grow facility as well as assist in the growing of cannabis. They will take a company from start to finish within this process.
General Cannabis has racked up a lot of clients throughout its time. These companies they have aligned themselves with have built facilities that account for 100,000 pounds of flower annually. That is a lot of revenue, and as it turns out is also a lot of interconnectivity that will likely play into the company’s future.
I’m not a big fan of consulting firms on the surface simply because they are not easily and cheaply scalable. But, read on. Next Big Crop becomes a part of the business that allows for synergies.
In the meantime, Next Big Crop does add to top-line revenue. However, it should be noted that the bottom line has yet to be positive.
GC Capital
GC Capital is both an investment banker of sorts for the cannabis industry as well as a lender. GC Capital offers debt and equity investments, inventory and equipment financing, acquisitions, start-up capital, and business loans.
One of the important factors to note is that getting funding in the cannabis industry is nearly impossible simply because of the fact that cannabis is on the federal government’s Schedule I list making it illegal for financial firms to offer financial products to this industry. There has been a lot of talk about a Biden victory being a victory for cannabis and its removal from the Schedule I. To that I always say two words, one person: Mitch McConnell. The Georgia run-off will tell us more as to which party controls the senate and the potential of removing cannabis from Schedule I legalization. Until then, don’t buy any pre-rolls.
GC Capital has the ability to target just the cannabis industry with capital. General Cannabis is well connected – remember, they have helped build up a couple of hundred companies’ facilities that produce some 100,000 pounds of flower per year – valued at $131M annually at Colorado’s wholesale prices (See Below).
General Cannabis has just closed funding of some $3M in investment/lending facility for them to work with via Hershey Strategic Capital LP as well as Shore Ventures III LP with one Adam Hershey being named to the Board of Directors for General Capital.
General Capital does not split out its revenue between the various parts of the company so there is no telling what this division will bring in for revenue. But, there is revenue to the company as a whole so, I imagine that this will add positively to the bottom line.
I like the synergies I have been finding the more I research General Cannabis. GC Capital will be able to lend money to companies in the industry as well as make strategic investments within the industry. The legality and access to capital have been a thorn in the industry’s side since Colorado legalized in 2014 – and, subsequently other states in the country. If there is continued success in this part of the overall business, I would think GC Capital could raise a lot more money and fund a lot more companies in their needs.
Seven Five Farm
SevenFive Farm is a cultivation facility in Boulder, Colorado. General Cannabis purchased the company in May of this year via stock.
According to the company, SevenFive Farms’ product sells out completely on every harvest. (There would be rolling harvests throughout the year since this facility is an indoor/hybrid grow facility.)
The SevenFive Farm is a 17,000 sq. foot facility that grows approximately 3,000 pounds of cannabis annually. The company plans to continue to sell these products wholesale while at the same time General Cannabis will be using this facility to sell to consumers with some of the dispensaries they are investing in, or purchasing.
This is where I became a bit intrigued. If SevenFive Farm is selling out of its products on a regular basis, then they obviously have a product that is of very high quality and will be in demand. Now that General Cannabis has control of the farm, and since they have sales avenues, being able to market a product to the consumer will add to top-line revenues and also bottom-line margins with a higher premium product. Good move, I would think.
However, General Cannabis has a lot of expertise in building facilities. The company has provided building services and consulting services to enough companies that those respective companies now produce some 100,000 pounds of flower annually.
But, building a building and marketing a product directly to consumers is a bit different. While on the one hand, SevenFive Farms is a company that sells out on a wholesale basis to its clients, packaging a product, and selling it directly to consumers requires a different level of expertise. I have not found any news announcements that the company has directly addressed this key aspect.
At the same time, I am highly encouraged that SevenFive Farms’ flower sells out all the time. Once General Cannabis gets this avenue moving forward, I can see the same results from this division of the company. Then, building upon that will enable the company to increase revenues significantly should General Cannabis want to expand their square footage and grow potential.
Further, and this is something that I found very promising as well, wholesale prices of cannabis in the state of Colorado are up some 30% YoY from $990.00 to $1,300.00 per pound (Nearly double the price in two years from $759.00).
(Data Source: Colorado Department of Revenue – Author’s Chart)
As an investor, I’m interested in increasing revenues. There has been a continual increase in the price of wholesale flower here in the State of Colorado after bottoming just a couple of years ago; albeit, quite a bit lower than the peaks when cannabis first became legal.
After so many years, a lot of the fringe and marginal companies operating in the state are no longer operating. Given that, there is not as much of a glut in the quantity that drove prices downward. I feel confident that prices will continue to increase, but I do not believe that we will see prices move above their all-time highs for a few years. General theories of economics start to prevail that as price moves higher and higher, more entrants will enter the market putting a “cap” on price increases.
Nonetheless, General Cannabis is operating in a well-established venue with prices that are currently increasing. This will translate into increasing revenues. At $1,350.00 per pound, with 3,000 pounds of production capabilities – and the company selling out all of the time – I expect to see an additional $4 million in revenue from General Cannabis. Margins should improve, however, we have no idea what these margins are going to be here in the state of Colorado.
In the meantime, General Cannabis has also purchased Cannasseur, a vertically integrated cannabis company just outside of Pueblo Colorado. The information that is available is that the purchase has been given approval by the state, but, General Cannabis is still awaiting approval by the county.
The facility has approximately 12,000 sq. feet of grow space; just slightly smaller than SevenFive Farms. But, there is also a retail dispensary involved.
Also, the press company announced that the top line, EBITDA, and bottom line will all be affected positively by this acquisition.
It should be noted that Pueblo, CO, has one of the highest rates per capita of dispensaries – and by extension, usage – in the state of Colorado. But, Pueblo has a pretty small population of only 168K in the entire county (the entire state has 5.7M).
One of the things I like about this is that the dispensary will be able to sell SevenFive Farm’s products. General Cannabis will be able to slowly build up a customer base from the SevenFive products while minimizing costs. These synergies are important and will improve the bottom line.
The Cannabis Industry In Colorado
Since General Cannabis operates in Colorado, here is the chart on Total Retail Sales of Cannabis in Colorado from 2014-Present:
(Data Source: Colorado Department of Revenue – Author’s Chart)
This is total sales inclusive of recreational and medical cannabis in the State of Colorado. As you can see, there has been a slow, steady progression upwards over the past 7 years of cannabis legalization in Colorado. There is also a notable increase in the past few months as there has been a notable increase in the price of cannabis in the past few months.
Now that price is starting to increase, this chart is heading higher at a much more rapid pace. My expectation is that as time goes on, price will move upwards. This will improve the overall revenue potential of companies working here in Colorado, including General Cannabis.
General Cannabis Revenues
Generally, General Cannabis has seen increasing revenues. That will continue and I expect a big pop upwards as this company starts to add the bottom line to its two most recent acquisitions. For now, here is the annual revenue:
(Data Source: Company Data – Author’s Chart)
In a segment of the economy that is increasing, as the chart above on Colorado’s revenues show, an increasing revenue picture is a solid indicator that the company is on track. Believe it or not, you don’t always get that. (I cover a lot of cannabis companies and cannabis in Canada is printing higher and higher revenues via retail sales and yet some companies are declining in revenue.)
The revenue snapshot above for General Cannabis is going to be obsolete very quickly. General Cannabis added SevenFive Farms in their mix just this year and that will start to show up in the revenue picture with income and earnings. Also, once the Cannasseur acquisition is complete, there will be that addition to the revenues and earnings.
In the meantime, without these two new additions in the mix, here is the EPS picture for General Cannabis that is also showing a general positive upward trend.
(Data Source: General Cannabis – Author’s Chart)
Right now, the company is on track to become profitable soon. With the two additional acquisitions, there will be an additional push upwards making General Cannabis profitable. The environment is very conducive to these increasing earnings with the State of Colorado trending higher and higher with its overall retail sales picture as well as the price of flower increasing over time.
Keep in mind, Cannasseur was stated to be EBITDA and bottom-line positive and will immediately add to the revenue picture at General Cannabis. That deal has yet to close; I expect that to happen early next year. When it does close, my expectation is that the company hits positive EPS.
Conclusion
I like this company a great deal. But, my perspective is from the outside looking in. Had I been an early investor, I may not like this picture so much. General Cannabis has been using its stock to purchase additional operations. That has diluted the overall picture and anyone who has been sitting on the stock for a period of time has felt a little bit of angst, I am sure.
At the same time, there is the investment/lending arm of the company that will add more to the top line. General Cannabis has helped a lot of companies build a lot of facilities that are producing a lot of flower. These companies are now potential clients of the lending and financing arm. With success here, GC Capital will likely be able to find more capital to do additional deals. Along the way, my expectation is that GC Capital may be able to bring in more capital to allocate on behalf of investors. This will continue to improve both top line and bottom line.
I believe that General Cannabis is going to print positive earnings in its upcoming earnings report. Given the lowish price, I expect the market to take this news abruptly and push the stock price upwards.
For these reasons, I am heavily bullish on General Cannabis. I will be adding this company to my portfolio.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CANN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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