Gaia Grow Corp. (CSE: GAIA) / (Frankfurt: GG0) is out with blockbuster news. It has entered into not one, but two LOIs to acquire 100% Interests in privately-owned TRU Extracts (“TRU”) & Canna Stream Solutions (“CSS”).
Both companies are being acquired in all stock deals with shares to be issued at a deemed price of C$0.10 (a 66.67% premium to today’s post-news, morning price of C$0.06, and zero warrants involved). Shareholders of TRU are entitled to receive an additional bonus payment based on future revenue generated by the TRU business segment.
With all the change & turmoil of the past several years…. imagine being able to step into the cannabis / hemp extraction & waste management sectors today, armed with everything that’s been learned from prior industry mistakes. WELCOME TO GAIA GROW 2.0! The following commentary is focused only on today’s news, not the Company’s retail cannabis/hemp store segment.
TRU is billed one of Western Canada’s largest cannabis & hemp processors. They have a HC-licensed, fully-operational 12,500 sq. ft. facility in Calgary (expandable by 6-12,000 sq. ft.) featuring supercritical carbon dioxide (CO2), ethanol, butane / pentane, & solvent-less extraction capabilities.
Services that TRU provides include toll processing THC, CBD extractions & isolates & white label service for cannabis THC & CBD products.
CSS is an entirely different, complimentary enterprise developing critical technologies for storing, transport & processing physical & chemical cannabis / hemp waste. They have filed a U.S. provisional patent application in “chemical extraction & fractionation of cannabinoids & monoterpenes from cannabis flower & biomass.”
CSS utilizes a proprietary solvent system that’s significantly more efficient than ethanol-based systems. It has the ability to significantly lower & control the costs of high throughput processing & extraction operations involving cannabis & hemp biomass.
Both acquisitions are game-changers. Taken together, Gaia Grow 2.0 will have industry-leading, high-quality, low-cost hemp & cannabis processing operations capable of generating substantial revenues at fairly high margins.
In this video clip, one can see the truly visionary idea of the combined company working to reduce carbon emissions. Three PhD scientists are featured, this new Company will have enviable ESG credentials!
Everything the Company does will harness green technologies and be accretive to margins — a win-win for all stakeholders. Gaia Grow 2.0 is more than just an extraction company, it will recycle, reuse, recover solvents with a very low carbon, perhaps carbon-free, integrated process.
According to leading experts at CSS, for each 1 kg of product, there’s 8 kg of waste created. However, in that waste stream are valuable chemicals & biomass. CSS is already working on converting that waste to nano-materials for use in biotechnology applications and/or the manufacturing of non-petroleum-based polyurethanes.
If Gaia Grow 2.0 can consistently deliver the greenest end products, with the lowest impurities, at a competitive price, the world will beat a path to its door.
The extraction business used to be a really great one, but fierce competition & lower end product prices decimated margins. Companies like The Valens Company (market cap C$590M), MediPharm Labs Corp (market cap C$118M) and Neptune Wellness Solutions (market cap C$275M) are leaders, with an average market cap of C$328M and an average market cap to trailing 12-month revenue ratio of ~5.5x.
These leaders have something in common, all three had negative EBITDA on a trailing 12-month basis! To be fair each is expected to turn things around next year. Industry challenges have been severe; companies have had to deal with regulatory & legal changes and falling prices, while trying to enter international markets. COVID-19 made these factors even more daunting.
Gaia Grow 2.0’s pro forma market cap (assuming both transactions are consummated) would be about ~C$16.5M (at the current share price of C$0.06). That’s just 5% of the average market cap of the three companies mentioned above.
Remember, Gaia has not been battling extraction industry challenges in the public market, and both TRU & CSS are private entities. Therefore, they don’t have the bloated overhead & legacy baggage of publicly-traded companies.
While there remains substantial execution risk in building the newly combined Gaia / TRU / CSS, if management can pull it off reasonably as planned — the results could be spectacular. Recall that peer extraction companies had an average market cap / Rev ratio of ~5.5x. For Gaia to achieve that valuation, it would need annual revenue of just C$3M.
However, I believe the potential for Gaia Grow 2.0 in 2022 is for revenue in the tens of millions of dollars. More importantly, I believe that EBITDA margins should be (if things go reasonably as planned) fairly robust. Based on profit multiples inside and outside of the cannabis / extraction / hemp sectors, the new Company could trade at 10x-30x 2022e EBITDA.
Although it’s certainly no sure thing, if management can generate tens of millions of dollars in revenue, with a 25% EBITDA margin, the Company could be worth in the hundreds of millions. In my opinion, the EBITDA margin could be even higher than 25%, if operations are as low-cost as management believes they will be.
Here we are, years into the cannabis / hemp revolution, yet most players still have negative margins. Or, if positive — margins under 10%.
A green extraction company using the best technologies & operational flow sheets in the world, with high margins & strong growth, could attract dozens of suitors.
To be clear, there’s a lot of moving parts here, this transformation will take time, but it will be worth the wait. Eventually, Gaia Grow 2.0 (CSE: GAIA; Frankfurt: GG0) might have to raise capital to fund R&D and market growth, but I’m very excited about what the combined management team brings to the table! I look forward to progress on closing the transactions & building a ground-breaking new business.
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