Description

Introduction and Background

Please note this stock is a microcap with limited liquidity, so it's primarily actionable for PAs and small funds.

Greenrose is a microcap cannabis operator in two states: Arizona (True Harvest) and Connecticut (Theraplant). 

Due to a wash out of SPAC stocks in general, limited investor awareness, negative sentiment in the cannabis sector, and a bias against smaller MSOs (multi-state operators in the US), Greenrose trades at 3x 2022 Adj EBITDA, a meaningful discount to the peer group MSOs. The company is guiding to 2022 revenues of $120-$140mil and Adj EBITDA of $75-$85mil.

The company de-spaced on 11/29/21 with the acquisition of Theraplant and closed on the acquisition of True Harvest on 1/3/22 as the second part of the de-spacing process. As a newly public company, they have not announced any quarterly earnings. They will be announcing 4Q 2021 earnings in the coming months, but that earnings report will only include a 1 month period for the Theraplant operations. When they report the 1Q 2022 earnings, they will be reporting an almost full quarter of operations that include both Theraplant and True Harvest. The company is a “show-me” story at this point as they have not reported revenues and earnings at this point as they are a newly public company that is expected to scale up operations dramatically in 2022.

As the company demonstrates the revenue and EBITDA ramp during 2022 and beyond and investors become more aware of the story, we believe the market will award it with a higher multiple. If not, there is a high probability that one of the larger MSOs acquires the company at a price much higher than the current price.

Interested investors can look at the latest company presentation and a recent sell-side initiation report for to get familiar with the company:

https://www.greenroseholdings.com/static-files/6c13a917-fe74-4bf7-bdf3-e62b324bc289

https://www.greenroseholdings.com/static-files/aadb9194-b26c-496e-b8a5-7588f5933291

Capital Structure

Share count

16.56 shares outstanding

2.55 penny warrants to lender

8.86 True Harvest potential earnout shares (assuming earnout targets are met to be conservative)

28 mil shares fully diluted (excluding warrants which are struck at $11.50/sh)

Cash $8.4

Total debt $144.3 (assumes convertible debt is not converted because they convert at $10/sh)

Total net debt $135.9

Note: We’ve excluded the warrants (struck at $11.50) in the share count because we are only underwriting a price target of $9.50 over the next 12 months. A more detailed capital structure can be found on p12 of the company presentation.

Investment Considerations

Connecticut operations

Greenrose’s Connecticut (CT) subsidiary Theraplant is the crown jewel of the company. 

CT is a very attractive cannabis market. It’s currently a medical market that is scheduled to start recreational sales in 4Q22. 

They have a 65k sq ft cultivation and production facility which has 60k sq ft of canopy. They have the potential to build out to 500k sq ft of capacity. The current pricing under the medical market regime is around $2700/pound for flower at wholesale. If MI and MA are a guide to pricing when a market converts from a medical market to a rec market, wholesale prices could reach $5000/pound for flower by the end of 2022 and next year.

Currently, there are only 4 total incumbent licensed cultivators in the entire CT market: Theraplant, Curaleaf, Green Thumb, and Verano. Curaleaf has a

The retail landscape in CT is just emerging. The 4 incumbent licensed cultivators have a huge advantage in the retail licensing process. These 4 licensees can open an unlimited number of dispensaries under a social equity licensing regime, where the operator can partner 50%/50% with a social equity applicant to obtain a retail license. It would not be surprising if these 4 players move quickly to secure retail locations and become the dominant players in the market. As in other states, retail dispensaries need to obtain a local municipality approval as well as having the state license in order to operate in a particular municipality. Some bigger cities such as New Haven, Bridgeport, Stamford, etc. are open to having stores but there are a lot of cities that have opted out of stores at this point. The first movers will have the advantage of grabbing the best locations (due to zoning and other restrictions). Once the retail footprint is built out, it creates a competitive moat because latecomers will find it much more difficult to find suitable real estate. Greenrose is trying to open 5-7 stores as soon as possible and expects to continue to expand to additional locations in the future under this social equity regime.

In sum, Greenrose has 50% share of the wholesale market that is about to convert from medical to rec sales, which may double pricing in the medium term. They have one of the 4 coveted incumbent licenses, which offers them the ability to increase cultivation to 500k sq ft and establish an unlimited number of retail dispensaries. Greenrose was lucky in being able to lock in a purchase of the CT asset during a down market and prior to a med to rec conversion and got a great deal on the purchase via the SPAC structure. 

CT is a strategic asset for larger MSOs who are operating in adjacent states or are looking to acquire assets in an attractive limited license state in the eastern corridor. Acreage and Trulieve both have a small retail footprint in CT now. They will likely want to get cultivation to become vertically integrated. Greenrose’s strong cultivation and production facility, as well as any retail locations, would be a natural fit for them. The other Tier 1 and Tier 2 MSOs will want to enter the CT market as well since some of them have adjacent operations in NY or MA, such as Ascend Wellness, AYR Wellness, etc. This would be a relatively small purchase and highly accretive even at much higher prices than the current price.

Arizona operations

Arizona is an attractive cannabis market that recently commenced recreational sales in Jan 2021.

Greenrose has a 74k sq ft cultivation and production facility. Now that they have full control of the facility, they are enacting additional measures to optimize cultivation, production, and sales. They produce flower at the high end of the market, which is more immune to price pressures than the lower tier market. They are producing at $400-$600/pound and realizing wholesale prices in the $3400-$4000/pound. We expect prices to moderate over time as the market matures over the next several years. They have 16k sq ft of cultivation built out and are scheduled to build out another 16k of cultivation by mid year. 

Potential Shango Acquisition

They may acquire Shango in an upcoming deal to enter the CA, NV, OR, MO, MI markets, but the timing or likelihood of that acquisition, as well as the deal terms are TBD. We believe they may be able to renegotiate better terms for the acquisition, if it ends up happening. While the company has financing capacity to make acquisitions for growth, for the purposes of our analysis, we have not included any additional acquisition other than the CT and AZ assets they currently own.

Valuation

We have a price target of $9.50/sh based on 5x EBITDA for 2022 of $80mil, which is the midpoint of the management’s guidance. We believe that by the end of 2022 when the market starts to focus on 2023 projections, the price will be a lot higher as the Connecticut recreational market takes off and the company is able to achieve much higher revenues. The sell-side estimate for 2023 is $176mil in revenues and $115mil in EBITDA. These estimates do not incorporate any retail dispensary sales in 2023. We expect that the company should be able to commence 5-7 retail dispensary sales in 2023 or possibly earlier.

By the end of 2022, once the company has proven out its revenue and EBITDA potential, it’s not inconceivable that a larger MSO will acquire the company. A take-out price of $9.50/share, which represents a multiple of 5x trailing EBITDA and 3.5x forward EBITDA, is a very attractive multiple for any of the larger MSOs in the space. We believe this would be a very attractive acquisition price for the acquirer that leaves a lot of upside that can be captured by expanding cultivation and processing capacity and rapidly expanding retail locations in CT.

Here are the company’s projections for 2022:

Included below are some comp sheets to get a sense of industry trading multiples. Here is a comp sheet from the company presentation in January, which are a bit stale:

Here is a recent comp sheet for the MSOs from 2/27/22:

Risks

• Cannabis industry legal and regulatory risk at the federal and state level

• Microcap risk

• Operational risk

Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purposes only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author and/or his employer has a position in this stock and may trade this stock.

Catalyst

• Continued investor outreach. The management team is doing non-deal investor outreach to institutional as well as retail investors. Interested investors can reach out to the third-party IR firm Gateway IR. There may be additional blocks of stock available for purchase as some of the pre-existing investors of the two companies they acquired may be looking for an exit. Additional shares coming on to the market should improve liquidity.

• Passage of the SAFE Banking act or other similar federal legislation, which seems possible this year, would massively rerate the entire MSO sector. By some estimate, the multiples would more than double as the current institutional ownership of the sector is less than 4%.

• Scaling of operations in 2022 and beyond

• Potential acquisition by a larger MSO