Green Growth Brands: It Seems Very Expensive

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About: Green Growth Brands Inc. (GGBXF)
by: Wilsonville Capital
Summary

Green Growth Brands runs two business segments. The largest segment in terms of revenue is focused on cannabis cultivation, production, and wholesale.

It seems beneficial that the company has already acquired a good number of licenses to cultivate, produce and sell several types of cannabis in Nevada, United States.

The gross profit before fair value adjustments equals $1.17 million, 37% of the total revenue. Other peers report larger gross profit margin.

Green Growth Brands reported $3.14 million in three months ended December 31, 2018. With this in mind, assuming forward revenue of $15 million seems very reasonable, and the company trades at 52x, which seems very expensive.

Market participants should not be able to justify such a high EV/Sales ratio, as other competitors with better gross profit margin are trading lower.

With the acquisition of many cannabis operators, Green Growth Brands (OTCQB:GGBXF) seems to have seduced the market. The value of the shares has exploded up by 200% in a very short period of time, and the company decided to use the shares to buy more businesses. It seems to be a quite smart move. However, investors should be careful. GGBXF seems to be trading at 52x sales, which seems very expensive as compared to other competitors in the same industry. Keep in mind that the gross profit margin of the company does not seem as good as that of other cannabis operators. With this in mind, market participants should not be able to justify such an elevated price.

Business Model

Headquartered in Toronto, Canada, GGBXF runs two business segments. The largest segment in terms of revenue is focused on cannabis cultivation, production, and wholesale. As shown in the image below, this segment reported $3 million for the period from November 9, 2018 to December 31, 2018.

(Source: Management Discussion and Analysis)

The second business segment is doing CBD-infused consumer product production. The company sells CBD-infused personal care and beauty products, free-standing stores, and other products. In the time period from July 1, 2018 to December 31, 2018, it reported only $0.064 million.

(Source: Management Discussion and Analysis)

GGBXF presents its CBD-infused brand, Seventh Sense, and CAMP with the following words on its website:

(Source: Company website)

(Source: Company website)

It seems beneficial that GGBXF has already acquired a good number of licenses to cultivate, produce and sell several types of cannabis in Nevada, United States. While the amount of properties and inventory is not large, these licenses show that the company is already in business. It is not a small amount of work. Keep in mind that the industry is quite new. Not many companies own licenses:

(Source: Management Discussion and Analysis)

Acquisition Strategy

The company seems to be growing its assets very fast by acquiring and merging with other cannabis operators. GGBXF’s long-term strategy was stated as follows very recently:

“Over the next 12 months, the company intends to expand its retail and wholesale cannabis businesses as well as its CBD consumer products business through a combination of strategic partnerships, merger and acquisition activity, and organic license capture. The company's objectives are to establish retail cannabis locations, or otherwise apply for such licenses, in various states within that time frame, pursuant to state laws.”

- Source: Management Discussion and Analysis

This strategy worked in 2018. The share price increased quite a bit as market participants increased their interest for this name. As shown in the image below, the share price increased from below $1 to more than $3:

(Source: Seeking Alpha)

The last cannabis operator that has been targeted by GGBXF is Aphria (OTC:APHA), which, in February, rejected an offer of 1.5714 Green Growth shares for each Aphria share. The image below provides further details on this matter:

(Source: Seeking Alpha)

Without assessing the valuation of APHA, the fact that GGBXF is using shares to acquire other businesses tells a lot about the current valuation of GGBXF. Usually, companies acquiring other businesses using their own shares are overvalued.

Balance Sheet, Acquisitions And Equity Structure

The balance sheet reported on December 31, 2018, shows a massive increase in the amount of assets. In June 2018, the company reported $4.7 million, and this figure was equal to $138 million in December 2018. Investors should understand well that this increase was due to the reverse takeover transaction that took place in November 2018.

(Source: Company 10-Q)

After the reverse merger, GGBXF reports $31.4 million in cash and short-term investments of $17 million. It seems a good amount of financing to develop the business in the future or acquire other companies.

Having mentioned this feature, the property and equipment is only worth $1.38 million, and inventories and biological assets are only worth $1.8 million. It means that the company is still building its cultivation facilities and the inventory is not large. GGBXF may need to take a long time until it becomes a serious competitor in the industry. The image below provides the list of assets:

(Source: Company 10-Q)

The company has a long list of intangibles and goodwill. These assets comprise of 42% of the total assets, which may not be ideal. These are assets registered after the acquisition of other businesses. Accountants may have many issues while assessing their valuation, which the market usually dislikes. With this in mind, let’s understand the previous transactions.

Before the reverse merger, Xanthic acquired 100% of the membership interest in Nevada Organic Remedies LLC for $56.75 million. The lines below provide further details on this transaction that took place on September 4, 2018:

(Source: Company 10-Q)

As shown in the image below, it was Nevada Organic Remedies LLC which reported the largest amount of intangible assets and goodwill. Nevada Organic was founded in 2014. It was a vertically integrated medical and retail marijuana company based in Las Vegas. Nevada Organic was private when it was acquired by Xanthic. As a result, investors may not be able to know a lot about these intangibles and goodwill. This is not ideal. The image below provides further details on this matter:

(Source: Company 10-Q)

The liabilities don’t seem worrying at a total of $27.5 million. GGBXF reports a note payable with 6% interest. The amount of cash reported in the balance sheet seems sufficient to pay this debt. The image below provides further details on this matter:

(Source: Company 10-Q)

The equity structure is not particularly simple. It includes common stock worth $114 million and warrants worth $16.4 million. The image below provides further details:

(Source: Company 10-Q)

Income Statement

The income statement is not as useful as that of other cannabis operators. In the last half of 2018, GGBXF reported $3.14 million with cost of goods sold of $1.9 million. As a result, gross profit before fair value adjustments equals $1.17 million, or 37% of the total revenue. Other peers report larger gross profit margin. The images below provide further details:

(Source: Company 10-Q)

With that, what seems very worrying is the large amount of losses and expenses. With $7 million in general and administrative expenses, $5 million in legal and professional fees and interest expenses of $1.8 million, net losses are equal to $17 million. That seems too elevated. While growth investors usually care about gross profit margin and growth, they should take a look at the net losses on this name. The company seems far away from reaching breakeven point. GGBXF may need a long time to become profitable. The image below provides further details:

(Source: Company 10-Q)

Warrants Outstanding And Shares Outstanding

As of December 31, 2018, the company reports 27.4 million warrants with an average exercise price of $2.18. Investors should understand that stock dilution could be an issue on this name. 15.5 million warrants were executed recently, which increased the share count and reduced the stock’s intrinsic valuation. The image below provides further details on the warrants outstanding:

(Source: Company 10-Q)

Taking into account the recent increase in the number of shares, the issuance of shares to pay recent acquisitions and the exercise of warrants, the share count equals 182.26 million. This is shown in the image below:

(Source: Company 10-Q)

With all these figures in mind, assuming a share total of 209 million seems very reasonable. As of March 9, 2019, at $3.65, the total market capitalization equals $762 million. Adding debt of $21 million, the enterprise value equals $783 million. The company reported $3.14 million in three months ended December 31, 2018. With this in mind, assuming forward revenue of $15 million seems very reasonable, and the company trades at 52x, which seems very expensive.

As shown in the image below, other competitors are trading below 52x sales. Peers report better gross profit margin and are larger corporations with much more accumulated know-how. It seems very clear that GGBXF is very overvalued, and investors should not be able to justify its share price:

(Source: YCharts)

Conclusion

GGBXF should not be trading at 52x sales. It seems too expensive. Market participants should not be able to justify such a high EV/Sales ratio, as other competitors with better gross profit margin are trading lower. The fact that the company is using shares to acquire other businesses is very significant. Companies with cheap shares usually don’t use shares to acquire other businesses.

Disclosure: I/we 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.