Wednesday, August 27, 2014
Organigram has been trading nicely since going public on Monday of this week.
The stock opened at $2.40/sh when it commenced trading and we are encouraged by price performance thus far. The stock is currently trading at $2.25/sh, relative to the pre-IPO value of the company, which was $0.85/sh.
OGI.V – 3 Day Price Performance
Organigram's CEO, Denis Arsenault, was recently interviewed on CBC. The interview provides a quick summary on Organigram, some insight on how end demand is tracking and a brief overview of the company's competitive advantages. To view the interview, please click here.
The Organigram story continues to be very well received and has been getting a disproportionate amount of interest in the market. This is not a huge surprise given the company's unique competitive advantages, tight share structure and a heightened degree of interest in Canada's rapidly unfolding medical marijuana sector.
Congratulations to the Organigram Team on their IPO, which thus far has been a great success.
For those Verdmont clients who participated in the Pre-IPO financing, please contact your Verdmont representative to get our current investment view on Organigram.
Friday, August 22, 2014
Organigram will begin trading this coming Monday August 25, 2014. The symbol will be OGI and it will trade on the Venture Exchange in Canada. A news release associated with the go-public transaction can be found here.
Verdmont Capital participated in the company's recent pre-IPO financing and Organigram is one of our preferred investments in the Medical Marijuana sector. A detailed overview as to why we like Organigram can be found in a previous posting to Verdmont Capital's news site, which can be viewed here .
Please keep in mind, our view on Organigram is relatively long term in nature. We are by no means instructing investors to pile into the stock on Monday. As with all speculative investments, make your own decision and evaluate the risks prior to investment.
Thursday, August 21, 2014
Verdmont Capital was featured in the Globe and Mail this past weekend. To view the article, please click here.
We thought the piece was well done by the Globe and Mail. We would imagine there have been a few internal discussions as to how the paper should present the rapidly unfolding medical marijuana industry. The topic is quite dynamic and how it plays out has social, political, economic and public health related ramifications. Accordingly, we thought the Globe nicely hedged its bets by updating the public about the industry’s potential from an investment standpoint, while also indicating the need for caution when evaluating various opportunities.
The article sums up our view quite nicely, but we should clarify that we do not see many similarities between the technology sector of the late 90’s and the current medical marijuana industry. The only argument we were making was in response to the notion that the technology “bubble” was a great example of how investors should stay clear of an industry in the early stages of development. Quite the opposite really, as there was a lot of wealth generated during that episode and it also left us with some amazing companies that are still thriving today.
Sure, as with all emerging industries, there are many optimistic projections being made that are backed by assumptions on assumptions. That’s really just part of the gig and not a tell-tale sign of intentional misguidance. The marijuana complex is no different than any other early stage segment of the market that investors are positioning themselves in. Look at the “alternative energy” complex for example. The name of the sector itself implies one big assumption. Is something an alternative energy source if it isn’t economic? If it isn’t, how can it be billed as an alternative? Investors jump into wind and solar based on questionable environmental “science” and often invest in companies that won’t be profitable into the foreseeable future. There is no push back about these types of companies going public because these areas are socially acceptable and endorsed by various politicians. We tend avoid these areas because we don’t see near term cash flow or a solid value proposition in most of the names. We could be missing out, but that’s our call.
The marijuana sector in Canada is unique in the sense that it literally catapulted onto the scene. The revised MMPR guidelines instituted in April of last year, essentially gave birth to an industry over night. This is an industry that will be cash flow positive next year. The magnitude of these cash flows is certainly in question, but one can deduce with reasonable certainty that there will be cash flow none-the-less. Given that there is currently only 1 publicly traded medical marijuana producer in Canada, we don’t see how this is anything but a great investment opportunity. If you have invested in a junior resource stock in the Congo, you should be more than comfortable allocating some capital to medical marijuana companies, which are highly regulated and should be cash flow positive in the near term.
There will come a time when the medical marijuana sector becomes frothy and some of the companies we have invested in become overvalued. At that time, we will probably look to sell. For the time being, we are more than comfortable positioning ourselves with some quality producers in the space. We will reevaluate our view when:
- We see signs that industry projections for the potential number of users in the system begins to overshoot.
- The aggregate industry supply response shows signs of outpacing our expectations on end demand.
- We witness any indication that the medicinal benefits of marijuana are not as powerful as currently anticipated.
- The regulatory landscape shifts in such a way that our overall thesis on the sector is negatively impacted.
- The aggregate market cap of listed companies begins to overshoot aggregate forward earnings.
- Company P/E multiples become out of whack (they are currently around 9X 2015 earnings by our estimates).
- Bay Street begins shifting analyst teams to the sector.
- Traditional mutual fund managers start allocating money to the space.
The variables listed above are factors that would suggest to us that our investment thesis is wrong and/or the sector is beginning to overheat. As of now, the risk/reward of investing in the complex is very favorable in our opinion.
Please call your Verdmont Representative if you have questions about the medical marijuana sector and some of Verdmont Capital’s preferred investments.
If you would like to follow what is going on at Verdmont Capital, please sign up to receive updates from our news site, www.verdmontlive.com.pa .
Friday, August 8, 2014
Our recommended mutual fund list for August 2014 is now out and can be viewed here.
Remember that we don’t have an affiliation with any one mutual fund family and the funds we recommend are only chosen because we believe they offer the best opportunity to produce above market returns with a reasonable amount of risk.
Please note that we are able to provide recommendations in various segments of the market. We would also welcome the opportunity to provide a free consultation regarding existing mutual fund portfolios that you may have, to determine if they are structured in line with your objectives.
If you have any questions about the extensive list of global mutual funds available through Verdmont Capital, please do not hesitate to contact your Verdmont representative.
Wednesday, July 30, 2014
Organigram Inc.: Fully Licensed Canadian Medical Marijuana Producer : Pre-IPO Financing : We are Taking Orders Now
Verdmont Capital has been quite active in the medical marijuana industry in Canada. Our clients made out well in the Tweed Marijuana Pre-IPO financing that took place earlier this year and we continue to comb the industry for attractive investment ideas.
We believe we have a pretty good handle on the industry as we have been fortunate enough to align ourselves with various company executives who are at the vanguard of the rapidly growing sector. We are currently working behind the scenes with certain companies to help them raise capital, and in some situations, assist them with their corporate strategy as they look to advance their business plans.
One of the standout stories we have come across is Organigram Inc. We recently visited with company management at their facility in Moncton, New Brunswick and were impressed with what we saw. We are confident that Organigram will develop into one of the top-tier medical marijuana producers in Canada given its attractive business model and first mover advantage in the Eastern Canadian market.
Organigram Inc. (OGI) is a private company that is looking to go public in late August and Verdmont has capacity on the pre-IPO financing. We have included details on the transaction below, along with some highlights about the medical marijuana sector and Organigram’s competitive advantages within it.
Organigram is looking to raise up to C$5.5Mil in a private placement priced at C$0.85 per share. Shares issued in association with the financing will be subject to a 4 month hold period.
The net proceeds from the sale will be used by the Company to purchase the building it is currently operating in, the expansion of their facilities to meet future demand, along with general working capital purposes.
Verdmont Capital clients have until the close of business Wednesday July 30th to express interest in the placement.
ORGANIGRAM AND HIGHLIGHTS OF THE TRANSACTION
For a detailed overview of the transaction, please see the company’s corporate presentation and the associated term sheet. Here is a brief overview of Organigrams business model and why we believe Organigram is a compelling investment at this time:
Organigram Inc. is a licensed medical marijuana producer and is located in Moncton, NB. OGI is focused on becoming a leading producer of condition specific medical marijuana and is uniquely suited to cover the Canadian market east of Ontario. The company is in the process of becoming Canada’s only publicly traded producer that is fully devoted to the production of organically grown marijuana. The company expects to begin trading at the end of August and its first shipment is expected to take place at roughly the same time.
The Medical Marijuana Industry is Poised for Exponential Growth
Health Canada recently overhauled the regulatory framework for medical marijuana use in Canada. As at April 1 of this year, they instituted the “Marihuana for Medical Purposes Regulations” or “MMPR.” MMPR represents a sea change for the medical marijuana market in Canada and essentially opens up an entirely new industry. MMPR streamlines patient access to medical marijuana and transfers responsibility of the supply and distribution chain to licensed producers. A detailed history of Canadian medical marijuana regulation and the recent changes under MMPR can be found here.
MMPR should significantly increase the number of registered medical marijuana users in the years to come. As at the end of 2013, there were roughly 40,000 registered medical marijuana users in Canada. Health Canada estimates that this number is due to grow by a compound annual growth rate of 25% over the next 10 years, leading to over 450,000 patients by 2024. We have seen various industry growth estimates from analysts and company executives, whose numbers fall pretty much in line with Health Canada’s projections. Accordingly, we believe it is within reason to assume an annual compound growth rate north of 20% for the sector, especially during the early years as MMPR gains traction.
The Sector has an Attractive Investment Profile
We believe that the marijuana complex will continue to attract a significant degree of investment interest for the following reasons:
- The potential growth profile of the sector far exceeds that of other industries in a weak global economy.
- The emerging industry will continue to get a large amount of press by both proponents and opponents alike.
- The idea of growing a plant that will cost $X/gram and sells for $Y/gram is pretty straightforward and easily grasped by the market.
- The business is very similar to other natural resource sectors and the method to value marijuana producers is not unlike that of a gold or an oil and gas company.
- The market in Canada is predisposed to natural resource stories and that knowledge is easily transported into the medical marijuana space.
- The licensed producers offer visible near term cash flow. This is highly attractive to speculative investors, especially those who have lost money in natural resource companies, that have habitually over-promised and under-delivered.
- American investors will find Canadian listed marijuana companies compelling given Canada’s federally mandated and far more coherent medical marijuana regulations.
- Investing in the medical marijuana market has a "feel good" element to it because it legitimately alleviates suffering for those individuals with serious illnesses.
- The industry continues to be misunderstood and the general public was yet to be fully appreciate the importance of medical marijuana in easing the agony of chronic physical and mental illness.
- People will begin extrapolating authorized medical marijuana use into full scale legalization of marijuana for recreational use.
- M&A activity should pick up over the next two years as producers look to exploit economies of scale and diversify their growing operations.
Lots of Market Cap up for Grabs in this Segment of the Market
We believe that that there is up to $1.2Bil in publicly traded market cap available for early entrants into the market. One of our key assumptions is that the market will give the producers a pass on early numbers as these enterprises iron out the kinks in their business plans. A the end of 2014 to mid-2015, we believe the aggregate industry multiple will be 9X aggregate EBITDA based on 2016 forecasts. Our various 2016 industry estimates, along with a brief background on our assumptions, can be found in the below table.
In an effort to err on the side of caution, a multitude of our numbers fall on the conservative side relative to other estimates that have been floating around. Of special note are our number of patients and revenue per gram assumptions, which will arguable be higher in the first few years as the industry enjoys rapid growth and premium pricing. Additionally, we use an elevated cost per gram, which is in tune with our belief that costs will be higher in the beginning due to production inefficiencies. Lastly, our 9X multiple may prove modest in light of that fact that there will be few publicly traded licensed producers in the first few years. We have discussed appropriate multiples with other analysts and we have been hearing the argument that a 15X number might prove more realistic given the juicy margins for early entrants. Time will tell.
However you slice it, we believe that there is a lot of market cap up for grabs for companies going public. Tweed Marijuana Inc. is the only publicly traded licensed producer in Canada at the present time and employs a market cap of roughly $100M. The above analysis is anything but bulletproof, however, we think it more than passes the smell test. At the very minimum, it should help dispel misguided concerns that the marijuana complex is in a “bubble” phase.
Organigram has an Attractive and Unique Business Model
Organigram has set itself apart from the competition by focusing solely on organically grown marijuana. The company is only 1 of 2 licensed producers in Canada employing an organic approach and the only one due to go public in short order. Organigram utilizes true living organics (or “TLO”) in its grow process. TLO is the science of managed micro life enriched soil which negates the need to use any synthetic nutrients, pesticides or additives in the grow cycle.
In addition to the marketing benefits associated with having a differentiated product, we feel that there is legitimacy to the story that organic marijuana will be very attractive to both the referring doctors and the end patient. Our belief is predicated on the fact that many patients are looking to use marijuana as an alternative treatment to the pharma based programs they have been using. Many narcotic based therapies have very negative side effects (think OxyContin and the various SSRIs) and patients are looking for an alternative to chemical based treatments. It is not a stretch to assume that a large portion of these individuals will gravitate towards organically grown marijuana given the widely held belief that it is better for the body.
First Mover Advantage
Organigram is currently 1 of 13 licensed producers in Canada and the only one located east of Ontario. The gives the company first mover advantage, which is key for brand awareness in an industry where direct marketing is prohibited. By being there early, the company has a jump on the competition and puts itself in a good position to capture a disproportionate number of the new patients expected to enter the system under MMPR.
Additionally, given that the company is due to go public in late August, OGI’s stock should get a lot of attention when it begins trading. Tweed Marijuana Inc. is the only publicly traded licensed producer at the present time. Tweed is due to be joined by licensed producers Mettrum and Bedrocan in the next couple of months. Including OGI, there will be 4 licensed producers trading in short order. We envision significant investor interest in these names as there is a dearth of options for investors looking to get exposure to an industry with such solid prospects.
Eastern Canada Represents a Large and Underserviced Market
Solid Management Team
Organigram has an excellent team in place to move the company forward. We were impressed with Denis Arsenault, Organigram’s CEO, during our visit to the company’s facilities in June. He has a long track record of putting together successful businesses in the greater Moncton area, which has a small town feel. We believe his dealings in local real estate and business development, along with his association with various political entities in the area, represent a unique skillset that lends itself perfectly to the business. He knows how to get things done on time and on budget, while still balancing the sensitivities of doing business in a small town like Moncton. What has been most impressive, is the relative fluidity of the company’s strategy and their willingness to listen to the medical marijuana community to help best address its needs. In the short time we have been working with the company, they have come up with a slew of interesting ideas for various segments of the business. This entrepreneurial spirit is an essential ingredient for a startup company in an emerging industry.
There are many standout team members within the organization, whose bios are contained in the attached business presentation. Another standout in the roster is Stephanie Steeves, who is the Director of Quality Assurance. This is a crucial position for a producer given Health Canada’s strict quality parameters. Additionally, for businesses in their infancy stages, short term hiccups in the production chain can be extremely damaging given the intense competition for capital and the need to attract the first wave of patients under MMPR. Stephanie has an impressive background, which included employment as a Quality Assurance Manager with Maple Leaf Consumer Foods.
Cost Efficient Growing Facility
Organigram is maximizing the floor space within their facility by employing an multi-tiered approach. The company is growing on 3 levels of shelving, as opposed to the competition, who from what we have seen, are only adopting a 1 level approach. This should contribute to a very competitive cost profile for the company given the benefits associated with economies of scale.
Organigram has the ability the ramp up production to meet future demand. The company currently has onsite capacity to produce 2Mil grams which can be expanded to 11Mil given unutilized space within their existing building. This is a compelling story given the fact that competing companies without significant onsite capacity will have to apply for a completely new license for any new facilities they look to construct. Given that there are north of 800 companies currently in the application process with Health Canada, this is a huge issue. Organigram only needs to file for an amendment to their existing license in order to expand its growing capacity.
Sound Marketing Campaign
The medical marijuana industry is unique in that licensed producers are not permitted to directly market to the public as set forth under MMPR. Under this constraint, Organigram has developed an aggressive marketing campaign which has focused on educating the medical community and utilizing social media to its advantage. The most impressive element of their campaign is the quality of sales representatives the company has employed to help with its efforts. Organigram currently has 4 sales representatives targeting the major markets, all of whom have experience at various well-known big pharma companies in Canada. The skillsets learned in this area are easily transportable to the medical marijuana industry and will help to foster solid relationships with the medical community.
The company has also been proactive by tailoring its business model to focus on its target market. Eastern Canada and Quebec have a large francophone population. For both practical and cultural reasons, this population chooses to do business with those companies that have their business platform in French. In addition to many francophones working at Organigram, the company’s website, customer service platform and social media outlets are fully bilingual. This will greatly enhance the company’s ability to attract and retain this segment of the population.
Strong Value Component Behind the Raise
Organigram’s forecasts at this time are pro forma, which is a key issue with much of the sector given that it is only in its infancy stages. Additionally, it is quite difficult to get numbers from the competition as the bulk of the producers remain private. These issues make comps difficult and it also leads to a heavy reliance on various assumptions. A risk for sure, but the nature of the beast when investing in a very new industry and an issue you face with all companies in the complex.
Organigram is being valued at $35Mil in conjunction with the current raise. As per company estimates below, the raise represents a valuation of 8.3X 2016 EBITDA. We believe this represents good value when stacked against the market and on a standalone basis.
We believe a very conservative aggregate multiple for the industry will be 9X 2016 numbers. We use 2016 numbers because we feel that the market will give the industry a pass in 2015 as it works its kinks out. A multiple of 9X is amongst the most conservative we have heard, so, there is a good chance Organigram represents far more value here than we are indicating.
On a standalone basis, it is reasonable to assume that the company, and the industry, will enjoy a premium multiple in the beginning. Profit margins are expected to be very fat for the first couple of years under the assumption that early entrants will enjoy premium pricing and solid demand. By some estimates, profit margins will be north of 80%. When you factor in these margins, the barriers to entry in the form of a difficult to obtain license and the industries potential growth profile, a 9X multiple may prove to be overly pessimistic.
Given Organigrams solid business model relative to the pack, and the potential for significant profit growth within the industry, we believe an 8.3X 2016 EBITDA multiple represents great value.
Excellent Share Structure
The typical risks associated with small cap investing in a newly emerging industry apply. By definition, only those investors with risk capital to deploy should consider organigram as an investment. Investment in the medical marijuana industry and Organigram carry a heightened degree of regulatory risk, political risk and operational risk. We have stressed on numerous occasions that there is limited data to go off of and information from companies remains scant. Forecasts for industry demand, along with company guidance, are largely assumption based at this time. There is no guarantee the medical marijuana market will experience the exponential demand currently being discounted by the market. Furthermore, many companies, including Organigram, are at the beginning of their production cycles. There is no guarantee that company projections on production, product quality and cost per gram will be met.
We believe that there is a lot of money to be made in the medical marijuana industry in Canada. Recent regulatory changes by Health Canada have essentially opened up an entirely new industry. As with all new industries, companies positioned early should enjoy premium pricing and solid profitability. The sector has a compelling investment profile given the prospects of near term cash flow and relatively inelastic demand. We believe that Organigram is well positioned to take advantage of this emerging industry given its unique business model, strategic positioning in Atlantic Canada and its entrepreneurial management team. This Organigram financing has a great risk/reward profile for those investors comfortable taking on the risk.
Please call your Verdmont Representative for a more detailed view of Organigram and the medical marijuana industry.
As mentioned above, Organigram is closing their financing in short order. Please voice your interest immediately to secure an allocation. As with all opportunities we show our clients, Verdmont insiders may be participating in the raise alongside interested clients.
Monday, July 28, 2014
Below is an article from the Globe on the weekend. It was an interview with Tilray executives and outlines some of the risks of investing in the medical marijuana sector.
We would agree with certain points in the article, specifically, the need to be diligent when looking at companies claiming to be in the marijuana business. As with all emerging sectors attracting capital, there will be scammers looking to capitalize on some of the misinformation floating around.
We also agree with the statement that there are many companies pitching their stories with certain “facts”, that really can’t be backed up by any hard data. For example, no one knows how many strains will be needed in the marketplace and the efficacy of these strains in treating different ailments. We have also heard companies discussing various projections with a high degree of confidence. With limited visibility on end demand, and a yet to be determined industry cost curve, most projections need to be taken with a grain of salt.
Where we disagree however, is that investors should avoid investing in the space until the “dust settles.” If you are a mutual fund investor looking to clip coupons, then certainly this applies to you. By and large however, for educated investors with some risk capital to deploy, now is a great time to get involved. The risks are higher for sure, but then the potential returns are there if you can identify the right teams and companies to get behind.
We also take issue with the fact that the industry is not yet suitable for the public markets. On the contrary, we think this industry is ripe for going public. The market can help the marijuana industry attract risk capital and also greatly steepen its learning curve. By definition, that is what the markets do.
Publicly listed companies are forced to become more transparent as part of the listing process and then update the market on their results once they begin trading. The more information that is out there, the better, for the industry and investors alike. For example, we have been trying to reach various private companies to get information - to no avail. Publicly traded companies on the other hand, are required to divulge information, which assists the industry by steeping the learning curve. The market can then decide who the winners and losers are. The strong survive, leading to a higher quality product at a better price for consumers. Industry executives are also able to tweak their business strategies by listening to the market and seeing what has worked for their competitors.
So, there will be winners and losers. The sooner we find out who they are, the better. The market will only serve to assist in this process.
Tuesday, July 22, 2014
Verdmont has limited capacity on an equity raise currently being done by Martello Technologies.
Martello is a private company that offers cloud based telecommunication solutions. The company currently has revenues of C$800k per annum, which are expected to grow to C$1.6Mil by their fiscal year end April 2015.
The company is raising upwards of C$7Mil to expand its business operations.
The company is being priced at a pre-money valuation of C$2Mil.
MARTELLO TECHNOLOGIES AND HIGHLIGHTS OF THE TRANSACTION
For a detailed overview of Martello and the cloud based telecommunications industry, please see the company’s corporate presentation. Here is a brief overview of Martello’s business model and some of the highlights of the transaction:
Martello Technologies delivers performance cloud services through their main software MarWatch. In the simplest terms, cloud computing means storing and accessing data and programs over the Internet instead of your computer's hard drive. The cloud is just a metaphor for the Internet. Instead of having to set up, pay, and maintain for your own telephone communication, fax, and email, you just pay $35 per month.
Strong Value Proposition for Martello’s End Clients
Under the cloud model, companies pay a monthly fee per handset and essentially outsource this segment of their business. Martello, with its partner Mitel, benefit from economies of scale by hosting numerous clients on an internet based platform. They are also able to provide an improved level of service, functionality and support, which the market is beginning to appreciate and embrace.
Growing Business Segment
Various industry groups expect this segment of the telecommunications market to grow by annual compound growth rate of 25%-30% over the next 4 years.
Bruce Linton, Chairman & Co-Founder of Tweed Marijuana Inc. is Martello’s CEO. The founder and main shareholder of Martello is Terry Matthews who is a very well-known and successful tech entrepreneur http://en.wikipedia.org/wiki/Terry_Matthews.
Solid and Growing Client Base
Mitel (MITL:$10.58), a $1 billion dollar market company, is their main partner. Mitel uses Martello’s software technology as part of their overall service offering to improve the quality of the cloud experience. Martello receives an ongoing fee from Mitel for all of their clients that utilize Martello’s service. Clients currently using Martello’s platform are the Government of Canada and the Chicago School Board.
Now is a Compelling Time to Invest in Martello
We believe that the cloud based model is beginning to gain significant traction. The recent share performance of Mitel serves to underscore our view. Mitel, a US$1.1Bil company, has seen its share price rise substantially as of late, as its unified communications segment (cloud technology) experience substantial growth.
Mitel (MITL:$10.58) – 3 Year Performance
Furthermore, companies with a reoccurring fee based model have to reach a critical mass before they can be deemed a success. This differs from a company that sells software for example, as a company in that industry gets large substantial cash flow upfront. Martello now has enough customers signed up that the reoccurring revenues are beginning to “move the needle” and the company can advance to the next stage. The company currently has C$800K in annual revenues, which are expected to grow to C$1.6Mil by fiscal year end April 2015. During the next 2-3 years, revenues are expected to grow substantially, which we believe makes Martello a logical takeout target for someone like Mitel.
Strong Value Component to the Raise
The company is trying to raise a total of $7 million. The pre-money valuation of the company is C$2Mil, which is 2.5X trailing annual revenues. This is quite cheap, given that companies with reoccurring revenue streams can be valued north of 6X revenues. If one assumes the company’s sales target of C$1.6Mil is met in April of 2015, the raise is closer to 1.25X revenue. Good value in our opinion.
Strong Shareholder Base
The main investor is Terry Matthews, mentioned above, who has successfully launched more than 80 companies. Terry will own 49% of the company post raise. We believe his involvement lends a huge degree of credibility to the story. Additionally, one has to think an investor of this pedigree would not bother with a small company like Martello unless there was some real meat the story.
In summary, we believe that Martello technologies is an exciting and unique investment opportunity for Verdmont Clients to participate in. Martello is positioned well to capitalize on this rapidly growing segment of the telecommunications market.
Please contact your Verdmont Representative to request an allocation. We have very limited capacity on this raise, so please indicate your interest immediately. Allocations will be done on a first come first serve basis. As with all transactions we recommend to our clients, Verdmont insiders may participate in the raise.