Medicine Man Technologies: Positioned For Growth

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About: Medicine Man Technologies, Inc. (MDCL), Includes: ACB, CGC, CRON, TLRY
by: Gainsboro Capital
Summary

Medicine Man Technologies is a cannabis company producing marijuana-based products and providing consulting services.

With the passing of Colorado HB19-1090, recent acquisitions stand to drive value for years to come.

Compared to other operators in the sector, Medicine Man Technologies trades at a discounted multiple despite quality characteristics.

Given bright growth prospects and a mission-driven management team, an investment in Medicine Man Technologies could be well worth it.

Medicine Man Technologies (OTCQB:MDCL) is a cannabis company that produces and distributes marijuana-based products. Located in Colorado, their products range from medicinal use to recreational over a variety of different forms. However, product sales are only a fraction of revenue. Medicine Man Technologies also has marijuana growing products which help diversify the revenue mix, with the potential to add significant value to the company.

Image result for medicine man technologies

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Management

Medicine Man Technologies was founded in 2014 by Andy Williams and Brett Roper. While Roper led the helm strong for four years, he abruptly passed in early December 2018. This prompted the appointment of Andy Williams, the co-founder, to take over the company as the interim CEO moving forward. The move made sense given Andy’s intimate knowledge of the company.

Source: Medicine Man Technologies

We actually had the pleasure of meeting Andy at one of the company’s investor presentations, where we heard some promising forward-looking statements. From what we gathered at the presentation, Andy is extremely knowledgeable in the field with over a decade of experience under his belt. We view him as a valuable asset to Medicine Man Technologies’ success given his excellent leadership skills.

Market Overview

FY18 saw an estimated over $10 billion in domestic marijuana revenues. By 2025, the domestic market for legal cannabis is projected to grow at a compounded annual growth rate ("CAGR") of ~24%. While organic growth between legal states will play a huge part in expanding the market, legalization in the rest of the domestic market is key as well. While some states are closer to others in this progression, it is currently a topic of debate on capitol hill reflecting upside for earlier adoption of cannabis. With Medicine Man Technologies product and licensing sales totaling ~$6.3 million, revenue reflects a very small market share. This displays enormous room for growth in a highly fragmented, developing market which the company has already begun to consolidate. Below is a graph that depicts progress towards legalization on a scale of 1-9, with 9 being the closest to legalization.

Source: Marijuana Moment

Source: Business Insider

M&A Activity

Thanks to the passing of Colorado HB19-1090, Medicine Man Technologies will now be able to pursue long awaited acquisitions, such as MedPharm and Medicine Man Denver. These acquisitions are pivotal to the company, as they have been used to project revenue for FY19. At the time of writing, these acquisitions haven’t been fulfilled but that hasn’t stopped the firm from making significant strides with the law. On June 4th, Medicine Man Technolgies acquired the largest sustainable cannabis growth farm in the United States, Los Sueños Farms.

Since our inception, we have been focused on delivering the best products and cultivation methods, and the addition of Los Sueños Farms will play an integral role in our core business and service offerings" - Andy Williams, CEO of Medicine Man Technologies

Source: Cannabis Business Times

These acquisitions will help the company grow, with the company ideally seeing cost reductions as they scale. We believe the company’s smaller segments such as Cultivation Max (Medicine Man’s fertilizer product line) and Three-A-Light will have healthy upside since they operate in a niche section of the cannabis market.

Financial Overview

Medicine Man Technologies has seen monumental growth recently, raking in $9.4 million with 168% year-over-year growth in revenue for FY18. In their Spring 2019 investor presentation, management projected ~$40-$50 million in revenue for 2019, which would be at least a 200% increase in revenue y/y. While a large portion of it would be inorganic growth, Medicine Man Technologies' underlying business has shown robust performance.

Source: SEC Filings

Medicine Man Technologies is a profitable company, bringing in $2.17 million in FY18 gross profit, with ~$1 million in net income. Competitors such as Tilray (TLRY), Cronos Group (CRON), Aurora Cannabis (ACB), and Canopy Growth (CGC) are all currently unprofitable despite comparable revenues to Medicine Man Technologies’ projected sales. The company currently operates at a 72% gross margin alongside a 10% operating margin. Both have been gradually rising for the past few years, with Medicine Man Technologies becoming profitable in 2018. Additionally, Medicine Man Technologies has a clean balance sheet, with only 237K in leases and 700K in cash.

Source: SEC Filings

Valuation

Currently US Marijuana sales are about ~$10 billion. With Medicine Man Technologies projected to make ~$40 million in revenue, this reflects a less than 1% market penetration rate. If MDCL was able to maintain their 10% operating margin and grow their top-line at a double-digit CAGR, their market share would still be minimal years down the road.

Source: Medicine Man Technologies Spring Presentation Slideshow

Additionally, Medicine Man Technologies is valued at ~10x sales, which is far below its competitors who are in the same ballpark as their FY19 revenue. Given the company’s financial health, robust performance, and bright growth prospects, we believe that the potential reward greatly outweighs the risks. For an investor with some tolerance for risk, and a long-term holding period in mind, an investment in Medicine Man Technologies may be well worth it.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MDCL 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.