LDS: Overview & Where to From Here? In my earlier post, a few hours ago, I stated that what we need to have LDS address is when will see the build out of the grow side of the business in order to reduce reliance on third party biomass sources.
We need to get a sense for when we will start building out the grow operations and dispensary on the 24.75 acres of land zoned for cannabis grow/manufacturing operations.
For those not familiar, LDS’ vertically integrated business model can be roughly diagrammed as follows:
As you can see, LDS looks set to control the entire chain from seed-to-sale. This is important in California where seed-to-sale tracking is being adopted in the cannabis industry. Most cannabis operations in California do not/will not come close to full vertical integration where they control the entire supply chain. The best they can hope to achieve is to implement seed-to-sale tracking.
However, if you really zoom in to the above, you find out that LDS is currently ramping up only the areas in the blue hexagon, including:
- Extraction;
- CannaStrip Manufacture; and,
- Vape Cartridge Manufacture.
To achieve full vertical integration, LDS needs to build out the areas on the two red hexagons in the diagram below, namely:
- Nursery/Cultivation;
- Transportation/Distribution; and,
- Dispensary.
LDS can’t tackle everything simultaneously. They need to address the lowest hanging fruit, which is also currently causing them the biggest challenge - finding a reliable source of contaminant-free biomass feed for their extraction process.
LDS needs to develop its input feeder/grow system for their extraction process. They need to build out the 24.75 acres of land they have previously purchased which is zoned for cannabis grow/manufacturing operations. I touched on the acquired land (here) when it was first disclosed in their Q2/2017 MD&A release.
I am hopeful and believe it is incumbent on LDS to provide shareholders with a roadmap of how they will operationally move from the status quo (relying on third party biomass suppliers) to supplying their own biomass input.
Beyond the above, if you are looking for bullish reasons/catalysts for LDS, here is a list that was included in one of my prior posts (link) and slightly modified for new updates.
- We are trading ~12% of the valuation of November 2016 when Proposition 64 was approved, but have starting production/sales this month and are less than 40 days from start of recreational sales in California
- LDS has given quarterly guidance on sales (link) which are:
- Q4/17 → $1M revenue;
- Q1/18 → $2M revenue;
- Q2/18 → $4M revenue;
- Q3/18 → $8M revenue; and,
- Q4/18 → $16M revenue.
- Using yesterday's closing price of C$0.70/sh and ~92M shares outstanding, LDS is trading at a valuation of 1.7x Revenue
- LDS has a Conditional Use Permit for cultivation of medical cannabis in a 22,000 sq. ft. facility in Adelanto
- LDS has a Conditional Use Permit for medical extraction and manufacturing
- LDS has a Certificate of Occupancy to operate
- LDS has gone through a full cycle of sourcing biomass and running it through the extraction / manufacturing process thereby working out the kinks. LDS is currently sourcing additional clean biomass
- Growers of clean product in California are looking to partner with other legal players, like LDS, so that their entire supply chain can remain up to snuff under new regulations and they don't risk being shut down
- LDS has acquired 24.75 acres of land in Adelanto for cannabis grow/dispensary operations (per Q2/2017 MD&A)
- LDS has been issued a dispensary license/permit (per City of Adelanto Council Meeting)
- LDS possesses a transportation license (public records).
- 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).
- Medical marijuana sales brought in about $2 billion in California last year. Researchers estimated that the illegal pot market in California accounted for another $5.7 billion, or about three-quarters of all marijuana sales in the state. Tourists are likely to make up a significant portion of the new marijuana industry. Tourists spent $7.2 billion on the California wine industry in 2015, according to an industry trade group.
- LDS is still one of few ways to invest in the California cannabis market via a public vehicle whose operations include cultivation, extraction, CannaStrips and vape cartridges. Despite all the delays over the past year, LDS is still early to the party.
~S