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“Healthy Balance Sheet & Ops, a Distinct Cannabis Company”

Jon Brown Jon Brown, Stockhouse
0 Comments| May 6, 2019

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Theo Zunich knows his cannabis competition is coming on strong. But he doesn’t seem particularly bothered about it.

The President, Chief Executive Officer and Director of Solo Growth Corp. (TSX:V. SOLO, FSE:2LK, Forum) told Stockhouse Editorial in an interview right off the top that Solo, which is soon-to-be-doing business as YSSTM, is well-funded and sustainable. As the industry struggles during a supply shortage, the Solo Growth retail platform is solid and not over-extended. It is already an attractive investment target, one that is looking to build considerable momentum backed by a combination of industry experience with M&A and capital markets background.

What sets Solo Growth apart

The Company boasts cash in the bank - a working capital surplus of $15.9 million. It also has a low overhead with a tight annual run-rate general, administrative and lease expenses of around $3.0 million. Through its licensed-operational store in Red Deer, Alberta, it is generating annualized revenue of around $4.8 million and cash flow of around $1.2 million. This is a sustainable operation with a near-term line of sight to becoming a cash-flow positive Company - a key objective for 2019 as Solo Growth looks to acquire more stores. Its operational Red Deer store is serving as an example of what the Company is capable of, focusing on immediate cash flow with a tight team exercising capital control, not spending beyond its means on capital investments or leases.

The other key distinction about Solo Growth is that it is very attractively valued compared to its peers. Its market cap sits at $40.2 million versus other cannabis retail companies at $100 million plus. Solo Growth is using its cash strategically to secure deals, complimented by an organic build strategy, all part of a business model focused on profitability and sustainability through this current cannabis supply shortage.

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A little background: According to Statistics Canada’s StatsCannabis report from January 2019, supply is on the rise with more cannabis plants being grown and new facilities being licensed. Everything points in the right direction, but there is still a massive bottle neck in the supply chain. From packaging at the LP level to distribution from provincial regulators. Digging a little deeper, CEO Zunich noted that part of this is also due to the fact that not all cannabis is created equal:

“We can get an abundance of certain products, but we don’t have enough high-quality, high-demand cannabis with higher THC content. Customers are starting to understand what they’re getting in certain brands; certain products are definitely more popular. High THC flower sells out within days, there is plenty of lower quality product and edible oils, and it does sell well, but not like the high-quality flower.”

CEO Zunich also pointed out that not all locations are equal and to ensure long-term profitability, focus must be on quality over quantity. He noted that Solo Growth’s successful Red Deer business is doing roughly $4.5 - $5 million in revenue, driving $1.2 million to $1.3 million cash flow at the store-level. The Company has line-of-sight to $15 - $30 million EBITDA in the next few years.

Fighting for shelf space versus fighting for land space

Therein lies the long-term value of what Solo Growth is building – shelf-space. The only place a company can market to the consumer effectively is in the stores themselves. Competitors in the cannabis space have been aligning with licensed producers (LPs), but Solo Growth wants to sell what the consumer wants to buy and even take this one step further. The strategy here is to leverage the retail space and customer contact to create a longer-term shareholder value, which in theory, would likely make partnering with an LP redundant when it can partner in a brand or edible or extract or accessory product. From there, the Company can create a revenue stream every time that brand is sold, it also promotes establishment of that brand. This is flipping LP model on its head.

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As the cannabis industry evolves under this new legal framework in Canada, Solo Growth’s leadership believes there won’t be another cannabis retail location “land grab”. The new landscape is shelf space, which is where the Company is targeting the consumer directly. This transition of ideology happened concurrently with the Company’s transition of leadership and market focus.

When the retail cannabis market started, the focus revolved around leases, the scope and scale of retail and real estate. That dried up when the regulatory bodies shut down licensing in November and December 2018 post-legalization due to the supply shortage. In its wake, licenses from here on out have been granted slowly by regulators, ending the “free for all” for locations. Because of the supply dynamic, companies must be more strategic in how they think about the business.

CEO Zunich added that the Company is also open to doing business in other parts of the supply chain. Opportunities range from white-label products to joint ventures and span all types of derivative or auxiliary products such as vape pens, edibles or extracts. The Company can plug in to anywhere in the supply chain from the mid-stream on down, as opposed to starting with cultivation.

In Zunich’s view, the Company doesn’t need to help LPs promote their brands and believes there is value in remaining LP independent; Solo Growth is focused on the customer first. Some competitors have taken capital from LPs, who want to influence how those companies sell cannabis and influence how consumers purchase those products. It doesn’t seem like a win for Solo Growth.

When the license suspensions came down, the Company hit the brakes on construction of new outlets. There were 30 leases lined up in Ontario alone, but the province changed the rules two business days before the application process was scheduled to open and the government moved toward the lottery system with 25 winners from around 17,000 applicants. The Company put termination provisions in all but one of its leases as a safety measure, which meant it was not on the hook for something potentially disastrous: stuck with multiple decade long leases with no assurance or line-of-sight to opening.

As the Company looks ahead, its plan is to open 30+ stores in Alberta in the next three years. The most “business-friendly” regulator in Canada, the province is Solo Growth’s main focus for now. There is a plan to expand into Ontario, as that province’s government recently announced in its budget statement to lift the cap on cannabis retail outlets and allow up to 75 licenses per retailer. This is expected to let demand and the supply dynamic justify the number of stores that are opened. Combined, Ontario and Alberta represent over 50 per-cent of Canada’s population, while Solo Growth has an eye on future considerations across secondary markets in Saskatchewan and Manitoba, at the moment, those licenses are few and far between.

Started at the beginning, now he’s here

An entrepreneur at heart, CEO Zunich was previously an investment banker for 10 years, seven of those years was focused on oil and gas. Following the downturn in that industry, he sought to diversify his interest and became actively involved in the emerging cannabis industry. As a consumer, he loves the cannabis product and the grassroots movement toward legalization. In his view, making cannabis legal will make the overall culture behind it healthier. Feeling that it is a misunderstood product, he wants to change the stigma behind it and sees it as a great business opportunity and the black market shouldn’t see all the reward. He wanted to capitalize on the opportunity of legal cannabis and was a founding partner of Eight Capital, a cannabis-focused investment banking firm. From there, he helped to launch Solo Growth in early-2018 before joining the Company full time in August. There has been a lot of change within the industry, something he thrives upon even since before venturing into this marketplace.

Solo Growth’s Red Deer store is an example of what the Company is capable of, as close to a “safe bet” any investor will likely find. Boasting an aggregate revenue from opening to February 28, 2019 of $1.3 million, with a store level adjusted cash flow of approximately $335,000 in the first 98 calendar days since opening, this is akin to the type of operations that the Company is looking for.

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Company leadership initially funded a shell at $0.05 per share, with 670 million shares outstanding. There was no RTO here, this is truly a “ground-up” operation from its genesis and now management is proposing a consolidation. With a legacy capital structure, now is an ideal time for investors to do their due diligence on Solo Growth. This opportunity offers a strong value compared to its competitors with a healthy balance sheet and a solid strategy looking for near-term cash flow retail opportunities, along with strategic opportunities that help create long-term value for shareholders.

As noted in their May 2nd press release, Solo Growth is not to be confused with Solo Liquor, a private company recently petitioned into bankruptcy by its creditors. Solo Growth has no corporate, financial or operational relationship or affiliation with Solo Liquor or any of its principals. The Company will ask shareholder to approve the Company’s name change to YSS Corp. and a 6 – 1 share consolidation at the May 29, 2019 AGM.

Solo Growth still has work to do to become cash flow positive this year, but with a committed focus on fundamental drivers like sales per square foot, low G&A, EBITDA margin, and capital payback, Solo Growth offers a very attractive option for a “ground floor” investment.

With one store already operational in Alberta and six others inspected and awaiting licence, bolstered by 22 applications submitted in the province and many acquisition opportunities across Canada and new Ontario regulations expected, the path to success is already laid.

FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.

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