LDS ValuationAfter the ~25% decline in LDS’s share price last week, it may be worth examining the look-through valuation of the company. The capital structure of LDS after updating for the July 28th option grants is presented below. Note that warrants exercised during the month of July are not reflected in the capital structure below as the information has not been released by the company. This info should be released prior to start of trading on Tuesday August 8 along with a July monthly activity update.
https://investorshub.advfn.com/uimage/uploads/2017/8/8/gyoqk2017-08-07_LDS_Cap_Structure.jpg
To calculate the Enterprise Value (EV) we need to know LDS’ current cash on hand. The June 30, 2017 figure won’t be published until the end of August, so let’s estimate the cash on hand by totalling the net proceeds from the last two Private Placements in May and June of 2017 (ignoring cash that was on the Balance Sheet before). Let’s also assume for argument’s sake that the company has spent US$1M since it closed the private placements on facility upgrades. With these assumptions, we have an estimate of US$6.3M cash on hand currently.
https://investorshub.advfn.com/uimage/uploads/2017/8/8/etkjn2017-08-07_LDS_Valuation_1.jpg
Using the above tables, we can look at the Market Cap and EV at a number of different LDS share prices. The table below, for example, indicates that the August 4 closing price of C$0.37/sh implies a market cap of US$28M and an EV of US$22M. If the share price were to fall to say C$0.25/sh, it would imply an EV of US$13M.
https://investorshub.advfn.com/uimage/uploads/2017/8/8/mvyje2017-08-07_LDS_Valuation_2.jpg
I get that there are ~3.8M of C$0.18 warrants that expire between now and Sep 9 and there will be pressure on the price until this overhang is cleared. Those looking to sell shares in the 30s (or below) should be aware that they are selling shares with a look through EV in the low-US$20M range which makes little sense given the following: - We are less than 3 weeks to the August 25 enactment of Ordinance 572 allowing LDS to obtain its COO and commence calibration and production in early-September
- We are trading below 50% of the valuation of November 2016 when Proposition 64 was approved, but are only one month from start of production (assuming no other delays) and 4.5 months from start of recreational sales
- LDS has a Conditional Use Permit for cultivation of medical cannabis in a 22,000 sq. ft. facility
- LDS has a Conditional Use Permit for medical extraction and manufacturing
- LDS has acquired 10 acres of land in Adelanto that is suitable for up to ten individual 20,000 square foot cultivation facilities (see June 21 PR) giving LDS the potential to produce ~25% of the total bio-mass necessary to produce oil and distillate for CannaStrips
- I believe that LDS has acquired or is in the midst of acquiring 30 more acres of land in Adelanto that is capable of providing LDS the potential to produce the remaining ~75% of the total bio-mass necessary to produce oil and distillate for CannaStrips
- I believe that LDS possesses or will soon possess a transportation license as evidenced by the following statement in its Q1/2017 financial statements:
- Subsequent to the three months ended March 31, 2017, the Company paid a $67,850 (US$50,000) refundable deposit to set up an escrow account for an offer to acquire additional land parcel in Adelanto. The estimated cost of the property is $780,000 and the Company has until August 25, 2017, to conduct due diligence on the property. The Company intends to use the land parcel as the operational location for a marijuana transportation permit.
- I believe that LDS possesses or will soon posses a dispensary license (one of only four available) in the city of Adelanto. A map showing the available zoning for dispensary locations is shown here. I believe LDS is attempting to secure one of the properties immediately adjacent to highway 395 (within purple outline on the map) that runs directly to Los Angeles.
- According to management’s own estimates, “It is anticipated that by the second half of 2017 the company should have the capability to produce enough oils to exceed its $50 million annual revenue target.” (see May 25 promo piece here). Consider how this compares to the current EV that is in the low-US$20M range and the implied EV/Revenue valuation of 0.4x.
- Management options granted on July 27, 2017 have a strike price of C$0.50/sh implying these options are worthless unless the price goes materially above C$0.50/sh.
- LDS is still one of few if not the only way to invest in the California cannabis market via a public vehicle whose operations include cultivation, extraction, CannaStrips and vape cartridges
So if you take the view that the delay to first production experienced up to this point will not encounter any further hiccups beyond the one-to-two weeks it will take to calibrate equipment after August 25 / COO receipt, I believe the shares will experience a re-rating over the coming month or so.
I personally don’t give too much weight to the risk of Canadian companies with US cannabis assets being kicked off the CSE. The TMX Group which operates the TSX and TSX-V exchanges also owns CDS which provides clearing services for TSX, TSX-V and the competing CSE index (owned by CNSX Markets Inc). I see this as a sabre-rattling turf war between TMX Group and CNSX Markets Inc. I don’t believe it is within CDS’ mandate to apply a standard like this and choose not to settle certain trades. In some ways this seems like anti-competitive behaviour under the Canadian Competition Act. I believe that CDS will back down on this. In the event they don’t, likely solutions are:
- Another party is found to settle CSE trades
- Canadian listed companies with US cannabis assets could be rolled over into US shells using an RTO process and listed on the OTC where they are permitted to trade
- If a significant disconnect in valuation results between the market cap of such companies and their operating results, they will be taken private through a buyout because of the huge windfalls that a private party can capture versus the overhang on valuation as a public company
~S