Green Growth Brands: A Bet On The Future Of Retail Cannabis And CBD

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About: Green Growth Brands Inc. (GGBXF)
by: SKK Investments
Summary

Green Growth Brands has aggressively pushed to establish itself as the leading retail cannabis/CBD company.

The company has also assembled one of the best management teams in the industry (in terms of prior experience).

The rapid growth of both the CBD and cannabis industries provide strong tailwinds for GGBXF.

Introduction to Green Growth Brands

Green Growth Brands (CNSX: GGB; OTCQB:GGBXF) is an Ohio-based company that is involved in cultivation and retail sale of cannabis, as well as the retail sale of CBD-infused topical care products.

The company, formerly known as Xanthic Biopharma Inc., was founded in 2018 by a group of retail industry veterans. GGBXF has quickly assembled one of the best management teams (in terms of prior experience) in the cannabis/CBD industries and has aggressively grown through acquisitions and organic expansion.

GGBXF is currently in the early stages of growth, but there is significant potential for shareholder value creation if the company is able to execute on its vision to apply retail best practices to both the cannabis and CBD industries. We are currently cautiously optimistic on the company given the quality of its management, unique approach to capitalizing on CBD, and quickly growing sales numbers.

Financial Snapshot as of July 9, 2019 (in millions USD, except per share values)

Market cap

487.04

Debt

45.0

Cash

33.6

Enterprise Value

498.44

Share Price (GGBXF)

2.37

Shares Outstanding

205.5m

(Source: Yahoo Finance)

Operating Segments

GGBXF currently has two operating segments:

Multi-State Operator

GGBXF is involved in the cannabis industry as a MSO (multi-state operator). The company has the following assets across all verticals of the cannabis industry:

(Source: GGBXF Management Discussion and Analysis)

The most significant of these (in terms of sales generation) is The +Source, a Las Vegas cannabis dispensary that generates $15 million in annualized revenue.

(Source: GGBXF Management Discussion and Analysis)

While The +Source is GGBXF’s only cannabis dispensary currently in operation, the company plans to continue opening new locations in both the east and west coasts (more on this later).

CBD Skin Care Products

The primary reason we are examining GGBXF carefully is because the company is taking a unique approach to the rapidly growing CBD industry. Instead of focusing on ingestible CBD-infused products (e.g. gummies and tinctures) like many of its competitors, GGBXF is zeroing in on CBD-infused topical skin care products. While this may sound gimmicky, there is credible research that demonstrates that CBD has useful properties in treating acne and other skin problems.

According to a 2014 study published in the Journal of Clinical Investigation, CBD has “combined lipostatic, antiproliferative, and anti-inflammatory effects” that gives it “potential as a promising therapeutic agent for the treatment of acne vulgaris”.

Acne is caused by overproduction in the human body of sebocytes, which are sebum-secreting cells that make up our sebaceous glands. Per this study, cannabidiol inhibits this process, reducing the excessive lipid synthesis that leads to acne.

In order to capitalize on these properties of CBD, GGBXF has developed a line of CBD-infused body lotions, muscle balms, lip balms, and sugar scrubs called Seventh Sense. These are currently sold in Seventh Sense-branded kiosks (which are located in malls)

The experience of these individuals have led (in part) to several partnerships with aforementioned major retailers, which we’ll detail below:

  • On June 27, GGBXF announced an expansion of its partnership with Abercrombie & Fitch (NYSE:ANF) to sell its Seventh Sense therapy products to 160 stores.
  • On January 10, GGBXF announced a partnership with DSW to sell Seventh Sense personal care products at 96 DSW stores – the press release noted that 74.4% of the products on shelves sold during a trial run, “significantly exceeding expectations”.
  • On February 11, GGBXF announced that it had entered into an agreement with Simon Property Group (NYSE:SPG) (the largest shopping mall operating in the United States) that provides it with 108 locations across SPG properties to open Seventh Sense personal care kiosks.
  • GGBXF announced a similar deal several weeks ago with Brookfield Properties (NYSE:BAM) to open over 70 locations. This will “expand GGB’s physical footprint to approximately 280 total locations by the end of 2019”.

Debt Financing

As a nascent company whose operations (in part) center on the cultivation and retail sale of a federally illegally substance, GGBXF has had to raise debt financing on unattractive terms:

  • GGBXF raised ~$65 million USD in a private placement of 12% convertible debentures in September 2018, convertible at a share price of $1.80 CAD.
  • GGBXF recently raised $45 million through a private placement of 15% secured convertible debentures with a conversion price of $7 CAD.

The high interest rates on these debentures are concerning (albeit unsurprising) given the company’s status as an ambitious, cash-bleeding startup. The flip side to this is that if GGBXF can successfully execute and use the cash raised through these financings to generate revenue, management should be able to refinance at more attractive rates.

Valuation

Assessing GGBXF’s valuation is difficult due to the lack of historical financial data (full financial statements are only available for the past two fiscal quarters). Please note that the period ending March 31, 2019 corresponds to GGBXF’s fiscal Q3, which we label as the calendar year quarter (i.e. Q1).

(Source: Author's calculations based on company financials)

The large sequential increase in cost of sales in Q1 2019 was mainly driven by start-up costs related to launching Seventh Sense, which started selling in stores and online in February.

GGBXF’s revenues should ramp up very quickly due to the aforementioned agreements the company has made recently with mall operators to open CBD kiosks and continue opening cannabis dispensaries.

The following images are projections provided by GGBXF’s management:

(Source: GGBXF Investor Presentation)

Although these projections appear rosy (and uncertain given that the performance of the CBD kiosks remain to be seen), we are optimistic that the company will be able to scale up quickly. Assuming the company generates $150m from its marijuana operations and $50m from its CBD kiosks in 2020 (less than half of projected figures), Green Growth Brands can generate $200m in 2020. However, note that these are very rough estimates and subject to significant variability given that GGBXF’s dispensaries and CBD kiosks are still in a roll-out phase.

We remain cautiously optimistic on GGBXF’s future given immense consumer interest in CBD and the company’s excellent management team (more on this later). The following shows search interest in CBD over the last five years:

(Source: Google Trends)

In addition, the Schottenstein family (an Ohio-based family with significant interests in DSW and American Eagle Outfitters (AEO)) is one of the backers of GGBXF, which provides the company with a ready source of capital and/or operational expertise (when required). However, the exact nature of this relationship is unknown and hasn’t been (as far as we are aware) publicly disclosed.

Future of CBD in the United States

The trajectory of the CBD industry in the United States is still uncertain given regulatory concerns and questions about CBD’s efficacy, but we are optimistic about CBD’s potential for a number of reasons.

First, CBD is considered safe by the World Health Organization. According to a report published by the WHO in November 2017, "there is no evidence of recreational use of CBD or any public health related problems associated with the use of pure CBD".

In addition, there is an immense amount of public interest in CBD. The WSJ, Bloomberg, New York Times, and a bevy of other major news organizations have recently published pieces on the compound. Part of the reason why CBD is generating so much buzz is because it does not have any of the intoxicating properties of its cousin THC, rendering it (mostly) free of the stigma associated with cannabis.

The industry will also benefit a great deal from the Agricultural Improvements Act of 2018, which we’ll describe below.

2018 Farm Bill

The Agricultural Improvements Act of 2018 (also known as the 2018 farm bill) was signed into law on December 20, 2018. The parts of the bill that are most relevant to CBD are as follows:

  • Industrial hemp cultivation is now legal nationally. Hemp is a strain of the Cannabis sativa plant that can be refined into textiles, plastics, clothing, paint, animal feed, etc.
  • Legalized hemp is restricted to 0.3% THC; any hemp that contains more than this amount of THC is still illegal at the federal level.
  • This legislation also explicitly allows for the interstate movement and commercial sale of hemp-derived products.

The act also expands the research efforts enacted by the Agricultural Act of 2014 by re-extending protections for hemp research and including hemp under the Critical Agricultural Materials Act.

This legislation fully legalizes GGBXF’s CBD-related operations, which won’t have to bear burdensome taxes and restrictive regulations (unlike the marijuana side of the business).

Analyzing Green Growth’s Management Team

We feel that a close analysis of management is necessary to thoroughly understand GGBXF. The following is a short summary of GGBXF's senior management team:

  • Peter Horvath – Peter Horvath is a retail industry veteran who spent 19 years at Limited Brands, 4 years as President of DSW (leading its IPO in July 2005), and 4 years as CEO of Mission Essential, a defense contractor.
  • Ed Kistner – Ed Kistner is the CAO (Chief Administrative Officer) of GGBXF. Kistner and Horvath are described as working as “the right and left hands of a single leader”. He previously worked in senior roles at DSW and L Brands.
  • Brian Logan – Brian Logan, CFO of GGBXF, spent 19 years in different finance roles at Abercrombie & Fitch, most recently as Group Vice President of Finance.
  • Kellie Wurtzman – Kellie Wurtzman, Head of Stores, has worked in various capacities at companies including Virgin Entertainment Group, Victoria’s Secret, and Luxottica.
  • Randy Whitaker – Randy Whitaker, COO of GGBXF, spent 16 years at Victoria’s Secret and three years at Belk in various senior roles.
  • Jann Parish – Jann Parish was appointed the Chief Marketing Officer of GGBXF on June 25. She previously worked as the CMO of Victoria’s Secret and in various marketing roles at Calvin Klein, Tommy Hilfiger, and L’Oreal.

The makeup of GGBXF’s management team signals the company’s vision of applying retail industry best practices to the cannabis and CBD markets, which are still fairly immature.

Final Thoughts

Green Growth Brands is one of the more interesting CBD/cannabis plays – we feel that the company’s ambitions of selling CBD-infused beauty and personal care products at mall kiosks across the country has significant potential (given CBD’s anti-inflammatory and sebostatic properties) and its cannabis retail operations have shown top-line strength.

In addition, the company’s experienced management team and connections to one of the country’s most prominent retail scions (the Shottenstein family) indicate that GGBXF is a legitimate (albeit unproven) company that is making a strong effort to become one of the leaders of the consumer-facing, retail side of the cannabis and CBD industries.

However, this remains a speculative investment opportunity given the company’s youth and lack of a track record. Thanks for reading and we welcome all comments and feedback.

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