Gaia Grow Corp. is growing places in 2020!

Gaia Grow Corp. (TSX-V: GAIA) is a tiny Canadian hemp company that successfully harvested a maiden crop of 1,494 acres, resulting in ~4 million pounds of low CBD-content biomass. Management is actively selling the biomass. On January 24th the company announced some really significant news….

Gaia Grow is using a third-party technology known as “milling,” for which it has obtained exclusive access, to increase the CBD content of a portion of its 100%-owned & harvested biomass to ~6% CBD. This is the biggest news for Gaia Grow in quite some time!

CEO Fredrick Pels commented in the press release,

“Gaia now has exclusive access to technology that will increase the value of its own crop, as well as the ability to buy lower CBD biomass & increase its potency, viability and value. Not only does this technology multiply the CBD percentage, it creates a product that extraction equipment can operate at higher efficiency, eliminating the need for bale busters & manpower. Most importantly, it saves time on each run….”

Does the market understand the implications?

According to the January 24th press release, using the technology, a single machine can process 0.5 to 1.0 tonne of biomass/hr., increasing CBD content via concentration by > 300%. These blockbuster results have been independently verified by a third-party lab.

Importantly, not all of the biomass feedstock gets upgraded, most of it does not. Even still, the upgraded ~6% CBD content material can be sold at a significant premium to conventional 6% CBD-content biomass. The reason why is critical to fully appreciating this news.

Management believes that its processed biomass, the portion that’s upgraded to ~6% (in this particular case, Gaia could also purchase third-party biomass to upgrade) will be highly sought after.

CBD extractors will want Gaia Grow’s biomass because it’s reduced to a powder, making it substantially more amenable to extraction processes. If customers can run upgraded biomass from Gaia through their equipment faster and more efficiently, that means less cost, less waste & greater profit. A win for end users.

CEO Pels further stated,

…. This technology will create a second revenue stream outside of our own cultivation and allow Gaia to provide its off-take partners with near endless supply of high-potency CBD inputs and an overall better product. The 300% increase in quality was verified by both our own tests and third-party testing. Gaia has brought a serious solution to the Canadian hemp industry…. “

Gaia’s notable news appears to be under-appreciated by the market. In addition to hemp cultivation + biomass upgrading through exclusive access to a ground-breaking technology, the Company could also move into a toll biomass upgrading role, generating a second revenue stream that would meaningfully enhance profits and diversify the company.

Two revenue streams, diversification, a war chest of cash….

Gaia believes it will be able to sell, through wholesale channels, all the upgraded product it can produce. With that in mind, management is carefully considering gaining access to a second machine to double throughput. As it stands, with access to one machine, processing four million pounds of Gaia’s low CBD-content biomass with this game-changing technology would take about six months.

Further company diversification could come from Gaia expanding into the U.S., and possibly adding cannabis to its mix. Partnering with the technology owner (with whom CEO Pels has a long-standing business relationship) to toll process third-party biomass could end up being more profitable and less logistically complex & risky then growing the hemp crops themselves!

All that’s needed to pursue and execute cultivation, upgrading and partnering to toll mill hemp biomass across north America, is working capital to advance these exciting initiatives. Gaia has that more than covered. In coming months, millions of dollars will be flowing into the treasury.

How much revenue? A lot more than the C$4-$5M I expected before the news of being able to upgrade a portion of their low CBD-content biomass. Depending on the revenue split between Gaia and the technology owner, I estimate C$8-$10M, (net to Gaia), realized over the next 6-9 months. NOTE: {revenue estimates are entirely my own and are meant to be broadly indicative, they are NOT the opinions or forecasts of management.}

If management can get access to a second machine, then CY 2020 hemp-only revenues in Canada alone could approach C$20M. Compare that figure to the company’s Enterprise Value (“EV“) [market cap + debt – cash] of close to zero (pro forma for revenue over the next several months).

Meaningful cash to obtain the best products, brands, assets, people…

Twenty million dollars of sustainable, high-margin revenue would be worth quite a lot to an acquirer. I’m tracking > 300 hemp, cannabis, extraction, LP, MSO companies. The top 100 trade at an average EV/trailing 12-month revenue multiple of ~15x.

That prospective C$20M in CY 2020 revenue would be solely from Canadian hemp operations. Yet, readers are reminded that CEO Pels made multiple trips to the U.S. last year. Gaia’s board is carefully evaluating acquisitions and joint ventures south of the Canadian border and could have material announcements on that front in coming months.

Having a cash war chest is extremely helpful at a time when a large number of hemp & cannabis “juniors” are hitting the wall. Dozens & dozens have some combination of a bloated capital structure, onerous debt, minimal cash, and negative cash flow.

It’s a tremendous buyer’s market for north American assets. Make no mistake, not all companies are worth saving, in fact most are probably not. But, Gaia need not acquire entire companies. Management is in the enviable position of being able to buy valuable assets at steep discounts.

Or, buying otherwise promising consumer brands that are starved of growth capital. Attracting strong industry talent to join the Gaia team. Partnering with the very best small companies (ideas, brands, products, concepts), that have run out of cash.

Conclusion

2020 is poised to be a very busy and exciting year for Gaia Grow. I look forward to near-term news on sales contracts, the expanded use of this new technology and perhaps acquisitions and/or joint ventures.

It would be hard to overestimate the importance of cash liquidity at this stage of the hemp / cannabis industry cycle. Gaia’s existing cash of ~C$2.5 million, with millions more coming in, shield it from the very scary times faced by a number of players, both small & large. Gaia Grow Corp. (TSX-V: GAIA) successfully navigated a very difficult 2019. If all goes reasonably as planned, there could be very nice upside in the share price.

Disclosures: Peter Epstein of Epstein Research [ER] owns shares of Gaia Grow purchased in the open market. Mr. Epstein & [ER] have no prior or existing relationship with Gaia Grow or any member of its management team / board.