Jun 27, 2022
Although the United States (US) cannabis industry is the most attractive market in the world, the sector has been under considerable pressure since late 2021.
While the sector has been under pressure, several additional states have started to allow for the sale of recreational cannabis and we are bullish on the growth trend in the US. Over the next year, we expect to see several recreational cannabis markets in the US record strong growth and have been working to identify companies that would benefit from this.
During the last year, we have highlighted Body and Mind Inc. (CSE: BAMM) (OTCQB: BMMJ) as a US multi-state operator (MSO) that is flying under the radar and is trading at a discount. We are of the opinion that the business is reaching an inflection point and want our readers to be aware of how the story has advanced so far this year.
Reports Third Quarter Earnings
Earlier this week, Body and Mind released third quarter financial results and recorded strong growth on several key metrics when compared to the same period last year. In future quarters, we expect the US multi-state-operator to capture additional market share in the markets it is levered to and believe the market is discounting this aspect of the story.
During the third quarter, Body and Mind generated almost $7.9 million of revenue which represents a 10% increase on a year-over-year basis. We believe the business has benefited from being levered to several high-growth markets in the US and consider this to be an attractive aspect of the story.
From Arkansas to Ohio, Body and Mind’s revenue mix is less reliant on its performance in in states like California and Nevada. We consider this to be a core pillar of our bullish thesis on Body and Mind and will monitor how the business benefits from being levered to several burgeoning recreational cannabis markets.
Another important pillar of our thesis on Body and Mind is related to the balance sheet. We believe the business has enough capital and resources to continue to execute on a multi-faceted growth cycle and consider this to be an underappreciated aspect of the opportunity. As of April 30th, the MSO had $3.71 million in cash, a working capital surplus of $2.42 million, and more than $4 million of inventory.
During the last year, the management team has been able to execute on a low-cost expansion strategy and we are favorable on how the team continues to advance the business. We are bullish on the markets the business is levered to and have provided an update on its performance in these states.
A US Growth Story
California: Prior to releasing earnings, Body and Mind reported to have amended the definitive agreement to reduce the cash purchase price by $1.25 million to acquire the Seaside dispensary by issuing common stock which has the same value as the cash reduction. We believe the amendment strengthens the company’s balance sheet and leaves the business better positioned to advance operations in other high-growth markets in the US.
Ohio: Although the state does not receive as much attention as Illinois or Michigan, Ohio is emerging as a must participate state with a population of 11.5 million people and less than 70 operating dispensaries. We are bullish on the long-term opportunity for Body and Mind. The company has benefited from having a first mover advantage on Ohio and we expect revenue numbers to ramp up on a going forward basis regardless of any move from medical to adult use.
Body and Mind recently was approved to increase production capacity and to use the kitchen at the Ohio production facility. Currently, the company is wholesaling branded extract products to licensed dispensaries in the state and is executing on a strategy to expand the types of products that are available for sale. By securing premium biomass for extract products, we believe the business is well positioned to launch new products and are bullish on this aspect of the story.
Arkansas: When we think about the most attractive cannabis markets in the US, Arkansas is not one of the first states that comes to mind. We are of the opinion that Body and Mind benefits from having leverage to Arkansas and believe the market has not assigned much value to this aspect of the story. Over the next year, we expect the company to continue to capture market share in Arkansas and expect sales in the state to steadily ramp up.
So far this year, Body and Mind has been nothing short of an execution story in Arkansas and we are bullish on the growth prospects that are associated with the market. During the quarter, the company received its first concentrate extracts from a third party which used its biomass and achieved a steady state of operations with flower and extracted product sales by wholesaling to other dispensaries and by selling product from its dispensary.
Michigan: We consider Michigan to be one of the most attractive recreational cannabis markets in the US and are favorable on Body and Mind’s leverage to it.
During the quarter, Body and Mind paused the Manistee cultivation and production facility construction for further evaluation. We are favorable on the patient growth strategy the management team has put in place in Michigan and believe the market does not assign much value to this asset. We believe the undervalued nature of the business is attractive and expect any positive development in Michigan to serve as a catalyst for Body and Mind.
Illinois: Like Michigan, we consider Illinois to be one of the most attractive recreational cannabis markets in the US. The company has management agreements and options to acquire two entities that have been identified in the Illinois Department of Financial and Professional Regulation (IDFPR) results of the Social Equity Justice Lottery as recipients of recreational cannabis dispensary licenses (conditional licenses) in the greater Chicago-area BLS region.
During the last year, the management team has been quiet about the developments in Illinois and we consider the market to be one of the most attractive growth pillars of the business. Next month, the IDFPR will issue the final license awards in the state and we expect any positive development to be a major milestone for Body and Mind. So far, the company has identified and advanced real estate opportunities for dispensary locations and we will continue to closely monitor this aspect of the story.
An Undervalued Execution Story with Catalysts for Growth
During the quarter, Body and Mind’s earnings were impacted by construction expenses in Michigan and profit margins dipped due to systemic economic impacts. We believe the decline in profitability is transitory and are favorable on how the management team identified and acted on the situation before it had negative ramifications on the business.
When compared to US cannabis operators which own assets in states where Body and Mind is capitalizing on, we believe Body and Mind is trading for a considerable discount. Over the next year, we expect this trend to change and believe Body and Mind is an underappreciated growth story. Following the earnings report, the stock has come under further pressure and we are of the opinion that the risk-reward profile is even more attractive after the decline.
If you look at an operator like Red White and Bloom (CSE: RWB) (OTC: RWBYF) which is levered to fewer markets that Body and Mind, you will notice that Red White and Bloom is worth more than twice of Body and Mind (based on market capitalization). We find the disparity to be significant because of the states that Body and Mind is levered to, the balance sheet, and the growth of the business.
Since inception, we have considered Body and Mind’s management team to be one of the most important aspects of the story. The leadership team has proven its ability to execute on a low-cost multi-state expansion and we believe the team has its pulse on the state of the US market. By being able to adapt to the market environment in a proactive manner, the management team has been able to continue to focus on the states that are generating the most value for the business and we consider this to be an attractive aspect of the story.
In the near-term, we believe the greatest potential catalyst for Body and Mind is the granting of dispensary licenses in Illinois. We are of the opinion that the market undervalues this aspect of the story and are bullish on the growth prospects that are associated with the business.
At current levels, we find the risk-reward profile to be favorable and consider the business to be undervalued. During the last year, the cannabis sector has been under significant pressure and Body and Mind has been impacted by this. We believe the recent selloff is overdone and will continue to monitor how the management team works to create value for shareholders.
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