The cannabis sector is one of the more exciting potential investment themes, with medical cannabis now approved in over twenty states and recreational cannabis about to be legal in Colorado and then Washington. Publicly-traded stocks in the space, though, are littered with poor choices, with just a few stocks worthy of potential investment, as I have described over the past several months. One of my goals at 420 Investor is to find new companies in the cannabis space, and to assess them for what I call "the three Ps," People, Plan and Pecuniary. When looking at stocks in the marijuana sector, I want to identify companies with strong leaders, a smart business plan and the financial ability to execute.
Advanced Cannabis Solutions (OTCQB:CANN) is one of the newer stocks that I have mentioned before. I was initially impressed with the management team's backgrounds, and I liked their initial focus on Colorado. Readers should make no mistake: CANN is a venture company and not yet generating revenue. My initial review of the company, which did a reverse-merger this summer with Promap Corporation, is that the price seemed too high. Upon a closer inspection, an important technical aspect to consider is the very low float. This can be positive in the future, but it can lead to volatile trading as well. While I am not ready to weigh in on what I think is the "right" valuation, I was even more enthusiastic that CANN merits further attention as they begin to execute on their business model after my recent interview with CEO Robert Frichtel.
Alan: Thanks for taking the time to tell your story to us, Robert. You are leading a new company that just went public through reverse merger. Tell us about your background and how you have gotten to where you are today.
Robert: After spending nearly 14 years as an executive working in the professional staffing industry, I exited that work when the recession hit in late 2001. I elected to become self-employed and started a commercial real estate financing broker helping arrange financing for investment and owner-user properties. When CRE began to soften up in 2008-2009, I began looking for new opportunities. The Medical Cannabis business was in the news often here in CO, the state legislature was starting to craft the rules for MMJ businesses and it looked like a new industry was starting to take root (pun intended). My first thought was to arrange financing for MMJ business owners that wanted to buy their grow space, figuring there would be many properties used for cannabis production and retail sales. While my assessment of demand - for both space and loans - was correct, I quickly learned no banks would provide loans, or for that matter any banking service, to a Cannabis Business. Arranging loans was out.
I did, however, form a company called The Medical Marijuana Business Exchange. This company became a referral source for B2B services for the MMJ business owner. We specialized in finding the best quality sources of goods and services bought and used by the cannabis industry. Thru this company I built out solid referral network and worked with hundreds of clients around the US - in the states where medical marijuana is legal. This company allowed me to meet many of the best and brightest operators and supporting business owners in the industry.
In mid-2013, I was contacted by an investor group asking about opportunities in ancillary MMJ industry. The now VP of ACS, Roberto Lopesino, met with them and we began forming the company now known as Advanced Cannabis Solutions. ACS merged with a public company in mid-August and we formally began operating as a public company in the cannabis space.
Alan: What is the basic business plan?
Robert: Initially, we intend to purchase existing grow facilities and lease them back to the regulated operator on a NNN basis. Future plans include involvement with the design, development, build and lease back to regulated medical and adult use MJ business owners.
We are pursuing several other ancillary business opportunities around cannabis too. Consulting services for compliance help and new market license application are in big demand. Another interesting area for us is customized plant nutrient lines.
Every new state that legalizes MMJ creates hundreds of new opportunities, so we're looking to evolve with the industry's needs.
Alan: What are the economics of leasing out grow facilities? What are the risks and opportunities?
Robert: We've modeled our leases as NNN, long term 10 years +, with ROI requirements above 25%. We're working with high quality operators that have multiple years of experience in the regulated cannabis industry. We know who the best and brightest operators are and are pursuing opportunities with them for our first purchases. We've developed a detailed vetting process to help us evaluate each opportunity.
We believe the risk is manageable and will employ a full time compliance officer to work with our tenants to help ensure full compliance all regulations.
Alan: One of the aspects of your company that impressed me initially is the management team. Tell us about the backgrounds of the key players and how your team was built.
Robert: You're right our team is strong. Each of us has worked in and around the cannabis industry since at least 2010. While that doesn't seem like a long time, and isn't for most industries, with Cannabis it is.
Earlier I'd mentioned the MMJ Business Exchange, the referral source I ran for Cannabis Business operators. That's how we all met. Roberto Lopesino and Christopher Taylor (our CFO) were the people I sent my client referrals to for their required support service. Roberto was helping with varying consulting services and Chris was building out his CPA practice to help MMJ businesses. In working with them as vendors, I got to view first-hand the quality of their work. My clients' loved them and I knew that if I had the opportunity to work directly with them it'd be a good event. So, when ACS began its existence, we came together as the senior management team.
Alan: Your initial focus is Colorado. What are some of the characteristics of that state, and how do you see your geographic focus evolving?
Robert: We like Colorado because of the tight regulatory environment around Cannabis. It's our view that well developed rules help with Federal government conflict issues. Aside from a handful of federal raids, including those that happened a few weeks ago, Colorado has been reasonably left alone by the US attorney. It's perceived that tight regulation around MMJ, and soon to be MJ sales, is helping.
Additionally, we all live here and CO is arguably the largest market aside from California. We feel we have enormous opportunities to pursue here before we'll have to go outside of the state looking for deals. That being said, we have preliminary work and research being done in other markets including AZ, MA and WA. Any well regulated state has great potential for ACS.
Alan: Your recent 10-Q disclosed that the company lost $150K on an option to buy the land near Boulder. What is the status of that transaction?
Robert: While the transaction is still on the table, the accounting rules required the option deposit to be expensed unless we were able to demonstrate that we had the funding to purchase this roughly $6 million dollar asset. We continue to work at raising capital, but we just aren't far enough along yet to make the purchase.
Alan: Tell us about your ownership. It appears that you have a very small public float which is perhaps leading to low trading volumes initially.
Robert: The founders, original investors and management of ACS have roughly 90% of the outstanding shares. The public float is in the 1mm range, with 50mm shares authorized and about 13.5mm outstanding.
Alan: In contrast to a lot of companies in the sector that issue convertible notes with exercise prices at a steep discount to the market, your company has taken a very different approach. Tell us about your debt financing that you are pursuing.
Robert: We currently have an offering being underwritten by Spencer Edwards, a Colorado-based brokerage firm, that is only available to accredited investors. It is a five year note paying 12% interest convertible at $5 per share. Please understand that the yield ACS will receive from deploying capital in CRE used for by Cannabis Businesses is considerably higher than the coupon, thus leaving ACS will a very nice margin. Our entire management team is laser focused on the success of ACS and to produce a notable return for all shareholders. We work to stay away from 'watering down' our shareholders value with unjustifiable dilution.
Alan: Potential investors in the cannabis space have many choices. Why should they consider your company over other alternatives? Also, what's the best place for potential investors to learn more about Advanced Cannabis Solutions?
Robert: The goal of ACS is to become the premier public company in the cannabis space. Our business plan model provides for immediate cash flow and potential profitability while allowing for the flexibility needed to navigate the rapidly growing, ever evolving, highly regulated industry. We work to mitigate many of the risk factors that others in this space must navigate. Our highly qualified management team and our access to the best opportunities for capital deployment will go far in making this a reality and we intend to be a serious first mover in this space.
You can learn more about ACS at our website www.advcannabis.com
Alan: Robert, thanks so much for your time. I know my readers will really appreciate what you have shared, and we at 420 Investor look forward to hearing about your progress. Best of luck to you and the rest of your team.
· Form D Filing (for Convertible Notes)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.