The following segment was excerpted from this fund letter.
Grown Rogue (“GR“) is a craft cannabis cultivator founded in Oregon, which then expanded to Michigan. It grows good quality indoor cannabis in two facilities in Oregon (one which it originally operated and one shuttered facility taken over from Acreage post their retreat from the state), an indoor facility in Michigan, and it has an outdoor farm in Oregon (more as a long term, high optionality investment than as a profit driver – more detail below).
What attracted us to GR is their core competence and commitment to it – they are good craft growers first and foremost. Unlike many large MSOs, they do not need to engage in a large program of cost-cutting to try to take costs out of the business because their focus assured that those costs would not be in the business in the first place.
GR did about (all dollar figures in the discussion of GR refer to USD) $18mm in revenue in FY 2022 (ending October 31, 2022) and we estimate it did about $1.5mm in free cashflow on a “normalized” basis that takes out certain startup costs and capex at their Michigan facility (which is now as built out as they intend for the time being, so no incremental capex is expected). Its market capitalization is around $19mm at the time of this writing, giving it a trailing cash flow multiple of approximately 12.5. (although because the stock is so illiquid, it is volatile in percentage terms – when this letter was initially being drafted its market cap was below $18mm). What do we see as the defining strengths of the business?
- GR’s business is straightforward: They grow cannabis with good quality and sell it at a reasonable margin. Because Oregon is a mature market and Michigan is rapidly maturing, we think there is some reasonable chance that revenue and cashflow could be flat to marginally lower in 2023 as Michigan pricing pressure is potentially unmatched by Oregon’s modest domestic price recovery. Over the course of a pricing cycle, we are comfortable that GR can maintain a healthy margin even if it fluctuates year to year. Regardless, the main future value driver for GR will be taking its craft capabilities into new territories with more favorable pricing, as we discuss below.
- GR’s Management is Operations-Focused and Runs Lean: A Zoom call with Obie Strickler, GR’s CEO, will provide a glimpse of his relatively Spartan office and the SG&A expenses for the company are in line with his office’s ethos.
- Large MSO Distress Benefits GR: As we explained in the commentary above, pricing in many markets is rapidly approaching a point where large MSOs cannot make money, but which allows a company like GR to generate better margins than in their current markets. We believe that continued large MSO distress will create opportunities for GR to enter new markets and leverage on the capex spending done by others, and we see this as the primary driver of value going forward. Indeed, we believe this so much that this is where we are spending the vast majority of our time in helping GR – finding opportunities for GR to enter into new markets by mainly leveraging its human/skill capital and not its financial capital.
- GR Has Significant Underlying Potential With Interstate Commerce: GR’s modest investment in attaining as high a level of craft in outdoor cannabis as they do in indoor cannabis creates great optionality because high quality outdoor cannabis from the Rogue Valley, one of the premier cannabis outdoor growing regions in the US, has the potential to trump low/mid quality indoor facilities east of the Mississippi when interstate shipment is allowed. While not critical to our views, this provides a nice bit of potential bonus in the future.
Recently, GR secured a $2mm convertible loan investment led by Mindset Value, which is run by Aaron Edelheit. Aaron is a friend of the Bengal team and is aligned with our view on GR. The loan carries a very reasonable interest rate in light of market conditions (indeed, at 9%, it is likely better than what many large MSOs can manage nowadays), and is convertible at CAD$0.20 (a sizeable premium to the CAD$0.12-. 14 trading price of the equity at the time), with participants also receiving ~6.7mm warrants at CAD$0.25. This capital provides a nice buffer for GR to be able to take advantage of distressed opportunities because, even if those opportunities are capital light, there are still costs associated with them in the way of opex.
In 2023, we will be looking for GR to start generating revenue from at least one new market as it continues its craft mission.
The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our Fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. This letter is not a recommendation to buy or sell any securities.
The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors who fully understand the risks of such an investment after reviewing the relevant private placement memorandum (“PPM”). Bengal Impact Partners, LLC (“Bengal Capital” or “we”) is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. Perhaps most importantly, Bengal Capital has no obligation to update any information provided here in the future, including if any positions discussed are sold or purchased, or if different positions are purchased.
This document does not constitute an offer of investment advisory services by Bengal Capital, nor an offer of limited partnership interests of our Fund; any such offering will be made solely pursuant to the Fund’s PPM. An investment in our Fund will be subject to a variety of risks (which are described in the Fund’s definitive PPM), and there can be no assurance that the Fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot assure any level of future results.
We make no representations or guarantees with respect to the accuracy or completeness of third party data used or mentioned in this letter. We provide services, such as strategic consulting services, to certain entities mentioned in this letter and may in the future provide such services to more in the future, or to companies not mentioned in this letter. While we may sometimes advise on issues regarding corporate communications, we do not believe any of the services which we provide are “stock promotion” – we have not been and will not be compensated for the mention or discussion of any of the companies discussed herein. We disclose such arrangements to investors in the Fund and will continue to do so.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.