Bluma Wellness: Big Potential Upside From A Small Operation (OTCMKTS:BMWLF) (2022)

It’s clear that cannabis is going to be a growth industry for some time to come. Equally clearly, it’s not an industry that is easy to navigate. The investment landscape is littered with cannabis startups that never made money or a decent product. There are a few large MSOs which have navigated this landscape successfully, and are now valued at something approaching fair value. However, it’s also nice to find a scrappy up-and-comer that still might be a homerun. Bluma Wellness (OTCPK:BMWLF) may be that stock.

BMWLF is a tiny cannabis stock that puts out a premium product, is growing strongly, is cash flow positive, and is currently fair- to undervalued. Things are early-stage enough that I would not bet the farm on this company. But I did bet something.

Bluma Wellness

Bluma Wellness is the parent company of wholly-owned One Plant, formerly known as 3 Boys Farms. One Plant runs seven medical marijuana dispensaries around Florida. The company was formed in a combination with CannCure, a Canadian cannabis investment company, in June 2020. Back in 2018, CannCure was going to be acquired by Scythian Biosciences, now SOL Global (OTCPK:SOLCF). Today SOL owns a significant chunk (40%?) of Bluma in various ways. (See this comment by In the Ruff Research for a breakdown.)

The CEO is Brady Cobb, who has a colorful backstory and a history in small cannabis-focused companies. “My father, Bill Cobb, orchestrated what is still considered the largest marijuana smuggling operation in U.S. history, according to the Department of Justice.” (source) So you could say the business runs in the family. From 2012-2018 he was Chief Legal Officer of Liberty Health Sciences, another tiny cash-flowing marijuana company. He then moved to CEO of Scythian Biosciences, an investment company with a heavy cannabis footprint. In June 2020 he became CEO of Bluma Wellness.

Cobb approached cannabis differently from some other companies. His first priority was a quality product and state-of-the-art growing facilities. All flower is trimmed by hand. The goal is to have the highest-quality cannabis in the state. The stores came more slowly, though the pace is picking up: five more are slated for the next few months. Expansion outside the state has not been a priority.

The focus on a quality product has paid off. In a short period of time, One Plant has established itself as one of the premium retailers for cannabis in Florida. They sell more flower out of their dispensaries than any company in Florida except Trulieve (OTCQX:TCNNF). Reviews on Reddit are generally positive. (See here, here, here.)

Growth Plans

3 Boys Farm began on 8 acres with a 24,000sf greenhouse in Ruskin, FL. This farm is now for sale. Bluma acquired 33 acres in Indiantown, FL where they have constructed a 54,000sf greenhouse and a 2500sf processing facility. They are in the process of building out a much larger (60,000sf) processing facility in the Indiantown location.

As of 3Q20, estimates for the Indiantown facility capacity were 9000 lbs/mo for 2020 and 14,400 lbs/mo in 2021. As the processing facility gets built out, other forms of cannabis (edibles, etc.) will hit the retail shelves.

Unlike say Trulieve, Bluma is not aiming for an unlimited number of dispensaries in Florida. Each dispensary is consciously chosen to be a hub for home delivery.

“By the time we are finished building stores, we will have 21. That number is not picked out of thin air. Twenty-one is the number of hubs that FedEx has in the state of Florida…. Our ultimate goal is to have same-day delivery statewide, and the geographic location of each store was chosen to facilitate that goal.” (source)

At the current pace of growth, 21 stores are foreseeable by the middle of 2022. Production at the Indiantown facility is ramping up, but same-store sales are not. However, One Plant is ranked second in amount of flower sold per dispensary. This indicates that the revenue bottleneck is on the retail end, and sales should continue to grow strongly with number of dispensaries. They just opened their seventh at the end of December. Five more are in planning stages.

Cash Flow Positive

In the press release announcing 3Q20 results, which came out in November 30, one bullet point says, “Beginning in the month of October 2020, Bluma Wellness had positive cash flow from operations (excluding one-time charges).” The CEO makes a remark later in the press release that indicates the positive CFO is ongoing in November.

I believe the company has a strong incentive here. Their lender is Advance Flower Capital, funding through a privately-held REIT, AFC Gamma. AFC does not do sale-leasebacks like IIPR. Rather, they lend against cash flow. An interview article on AFC includes this passage:

"The interest rate is also dependent on the level of risk. The Advanced Flower Capital team considers whether a prospective borrower is single-state or multi-state, cash flow positive or not. Ultimately, the REIT wants to work with successful borrowers and facilitate their cash flow-positive growth." (source)

Various filings mention covenants attached to loans, but I was unable to discover exactly what they were. However, AFC’s emphasis on cash flow, plus Bluma Wellness’s financial results, strongly suggests that one of these covenants involves maintaining positive cash flow from operations. Loan covenants have been waived until September 2021, but Bluma won’t want a negative evaluation at that point. Given the history of cash bleed in the rest of the cannabis industry, this kind of financial discipline seems completely healthy.

Valuation

BMWLF has only filed financial results up through September 2020, but they file monthly updates on some aspects of their progress with SEDAR. The December report just came out, and from these monthly updates, we can form a rough picture of the company.

First, enterprise value. I estimate 160M shares trading at $0.86 yielding a market cap of $137M. I estimate debt at $13M and to be conservative we’ll say no cash. Enterprise value estimate is $150M.

Next, revenue. The monthly reports give us the amount of flower sold and the gross price per pound. This yields an estimate of quarterly revenue. (Historically, this estimate is a few percentage points low.)

Gross price/lb

Flower sold (1000 oz)

Gross revenue (000)

Oct

$8980

4633

$2711

Nov

$6322

5947

$2415

Dec

$7000 (EST)

5127

(Video) Cresco Labs CRLBF stock to go up 200% to $33.60 on guidance and growth

$2243

Total

$7369

The fourth quarter is going to show about $7.4M revenue, something like 135% improvement QoQ. I believe this will be a significant catalyst for re-rating the company. Annualized, this level of production alone would put the company at an EV/Sales of 5.1.

However, consider forward revenue. The company estimates it will harvest 14,400 lbs of marijuana from its Indiantown facility in 2021. Estimate gross price per pound at $6K on the low end and $9K on the high end. That yields a maximum gross revenue estimate between $86M-$130M for the year. If they realize half of this, EV/2021 sales are between 2.3 and 3.5.

Low price estimate

$6K/lb

High price estimate

$9K/lb

Low yield estimate

7200 lbs

Revenue $43.2M

EV/S 3.5

Revenue $64.5M

EV/S 2.3

High yield estimate

14,400 lbs

Revenue $86.4M

EV/S 1.7

Revenue $130M

EV/S 1.2

For comparison, here are the similarly-sized public companies doing business in Florida, along with their ratings (all data from Seeking Alpha):

EV ($M)

EV/S

Quant

SA Authors

Wall St.

Bluma Wellness

BMWLF

150

5.08

n/a

n/a

n/a

(Video) Benzinga Cannabis Hour | Latest News & Business Trends In Cannabis Industry | Benzinga Stock Market

Fluent (Cansortium)

CNTMF

177

3.75

n/a

n/a

n/a

Liberty Health Sciences

LHSIF

343

6.34

n/a

4.66

n/a

GrowHealthy (Ianthus)

ITHUF

245

1.85

3.61

n/a

2.00

MedMen

MMNFF

225

1.47

2.57

3.00

2.50

Harvest

HRVSF

937

4.70

4.43

4.40

4.57

For comparison, here are the similarly-sized public companies doing business in Florida, along with their ratings (all data from Seeking Alpha):

(Video) Best Growth Stocks to BUY in 2021 | Huge Stock Earnings | BUY This Stock Now | Cresco Labs | Cresco

EV ($M)

EV/S

Quant

SA Authors

Wall St.

Bluma Wellness

BMWLF

150

5.08

n/a

n/a

n/a

Fluent (Cansortium)

CNTMF

177

3.75

n/a

n/a

n/a

Liberty Health Sciences

LHSIF

343

6.34

n/a

4.66

n/a

GrowHealthy (Ianthus)

ITHUF

245

1.85

3.61

n/a

2.00

MedMen

MMNFF

(Video) IS CRESCO CANNABIS the BEST SO FAR? - Cresco Labs Stock, CRLBF Stock, CL.CN Stock

225

1.47

2.57

3.00

2.50

Harvest

HRVSF

937

4.70

4.43

4.40

4.57

You can see that Bluma is currently priced alongside the highly-rated Harvest (OTCQX:HRVSF), above the more low-ranked companies, and below the takeover price of Liberty Health Sciences (OTCQX:LHSIF). I would call this fair value on current numbers and a lot of potential for upside next year, from 50-100%.

Takeover Target

You can never count on it, but it seems very likely to me that Bluma Wellness will get bought out. The industry is in a bit of a consolidation phase, and Bluma is an attractive target for a suitor: small enough to buy, producing an excellent product, well-managed, and flowing cash. Also it operates in the most profitable and heavily-contested state, Florida. The obvious comp is Liberty Health Sciences, another small but profitable Florida operation, which is currently sitting at its take-out price and an EV/S of 6.3, although that is probably not the metric they used to value the company. One could argue that LHSIF is being sold too low. However, this comp indicates that if BMWLF were taken out today, there would be ~30% upside.

Risks

This is an early-stage company. They are positive as far as cash from operations go, but they are spending a lot on growth capex, to build out the Indiantown facility. They have already had to waive covenants on their mortgage and take on a punishing 19% bridge loan. Selling the Ruskin farm will provide a much-needed cash injection. If this does not work out, they are in trouble. It’s your basic early-stage company risk.

I have not tried to value the company against anything but revenue. Since the positive CFO only began in the fourth quarter, I don’t know what it is, but it’s likely very small. Net income for 3Q20 was $300K but this is basically meaningless, in my opinion, because it is calculated off huge non-cash adjustments for biologicals. Both problems apply to EBITDA. The upshot is that the company can grow and sell all the premium cannabis it wants, but if it can’t make money doing so, it’s a bad investment. And we just don’t know about that yet.

Also, waves of shares come out of lockup in January (9M, 180 days after business combination) and then again in March (11M, 270 days out) and then again in June (19M, 365 days out) and then a big drop in September (~50M).

Conclusion

I believe the 4Q20 results will provide a catalyst for the stock, which seems to already be a little front-run. Longer term, the outlook looks good, with up to 100% upside. However, Bluma Wellness is a penny stock in an extremely early stage of development, so size your bets accordingly.

Disclosure: I am/we are long BMWLF, TCNNF, SOLCF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Top Articles

Latest Posts

Article information

Author: Madonna Wisozk

Last Updated: 12/16/2022

Views: 5401

Rating: 4.8 / 5 (48 voted)

Reviews: 87% of readers found this page helpful

Author information

Name: Madonna Wisozk

Birthday: 2001-02-23

Address: 656 Gerhold Summit, Sidneyberg, FL 78179-2512

Phone: +6742282696652

Job: Customer Banking Liaison

Hobby: Flower arranging, Yo-yoing, Tai chi, Rowing, Macrame, Urban exploration, Knife making

Introduction: My name is Madonna Wisozk, I am a attractive, healthy, thoughtful, faithful, open, vivacious, zany person who loves writing and wants to share my knowledge and understanding with you.