Financial Press: A Tale of Two Analogies


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OTC:BB:VRCI
06/05/2014 [ACCESSWIRE]

or Why You Want to Own the Revenue Stream from many  Marijuana Dispensaries rather than the Dispensaries

VANCOUVER, BC / June 5, 2014 / This is a tale of a tremendous opportunity, which is just now coming together in the Los Angeles County medical marijuana market, the largest market in the world for medical marijuana. The opportunity is Verde Sciences, Inc. (VRCI: OTCQB) which is a company recently refocused on medical marijuana. It will be explained using some analogies from the mining sector which many investors in this space understand well.

Analogy Number One - Artisanal Gold Mining - Artisanal gold mining occurs in poor countries, which have little or no infrastructure and no capital to invest in infrastructure or new technology. In a typical artisanal gold mining district, there is near surface gold over a wide area with ore that the locals can access readily using hand tools. Initially, ore is processed on site by mixing it with mercury and agglomerating manually. 

In time an outsider discovers the situation and realizes that for a nominal investment, he can install a small mill and capture great profits with little risk. The mill is installed and offers to buy ore from the miners for around the same price that they would get processing it themselves. At best the miners typically recover half or less of the contained ounces of gold.

Once the mill is processing the gold, the miners are free to mine 100% of the time, increasing their profit. Meanwhile the toll milling operation is making a tremendous profit selling gold that previously was unrecoverable. The miners gladly deliver their ore to the mill and get paid for it on the spot.

News of the operation quickly spreads and soon all the miners are selling their ore to the mill.   The mill owner now effectively "owns" the entire district.  

How does this relate to medical marijuana? In Los Angeles County, Verde Science is signing agreements with multiple dispensaries. They do not own nor are they buying the dispensaries, but rather they will invest in the businesses. 

Verde will provide capital to install state-of-the-art growing systems, provide assistance running the operation, and growing and marketing the product. In exchange they will own a royalty stream on all product grown by the dispensaries.

Once the first grow facility is on line, Verde Science will be like the mill owner.   Verde will "own" the market, because they can cultivate high-potency marijuana that is disease, pesticide, and mold free at a far lower cost to the dispensary. They can sell it very profitably at a price significantly below what the other dispensaries are paying for their product. 

Whereas the artisanal miners brought their ore to be processed at the mill, LA County’s Mom and Pop medical marijuana dispensaries will affiliate with Verde. Verde will provide assistance: technical, operational and financial.

Everyone will be happy. Everyone will be making more money. Everyone’s life is easier and Verde Science simply repeats the process over and over.   They will continue to expand the brand, building more grow facilities as needed both in LA county and eventually through all legal jurisdictions in the United States.

The title of the article promised two analogies so here is the second one. It is an artificial analogy, but it will demonstrate why the medical marijuana market needs Verde Science to progress from its current Mom and Pop phase to the big time.

Analogy Number Two – Rollerblading. Let us imagine that rollerblading for safety reasons had been outlawed for many years. Once it was legalized, the most committed skaters would be the prime movers behind the sport’s revival. Dedicated skaters would begin to manufacture equipment and promote the sport.  

These new roller-blading entrepreneurs would try to meet the demands of the re-born sport by manufacturing skating equipment. Difficulties in manufacturing would likely occur because of their lack of experience and capital.   They would be constrained to expanding their business slowly out of a small stream of profits.

Eventually well-financed, savvy entrepreneurs would step into the market and purchase a foothold. Using their substantial access to capital and the ability to attract talent, they would build massive facilities to manufacture state-of-the-art skates. 

The skaters who had been the dominant force in the roller-blading revolution would simply be hanging out on the street corner with their friends enjoying life, and the well-financed manufacturing companies would be producing top quality affordable skates, all the while making substantial profits.

The Mom and Pop operators are the committed roller-bladers in the analogy. They were the first to open dispensaries and they are trying to navigate their way through a complex legal, financial and operational path to build their business.   The new operator, Verde Science has better technology, a competent technical team and most importantly access to capital.

Verde is positioned to be a force in the medical marijuana market in the U.S and Canada.

The analogies help illustrate the Verde opportunity. Verde has a contract with a dispensary in LA County, and more contracts will be announced as they are signed. 

Over Memorial Day weekend, I met with the CEO of the company, Harp Sangha and toured the facilities with whom Verde is in discussions.   I gained a tremendous insight into the company and I met the entire Verde management team. I soaked up the corporate story.

Verde is working hard to sign agreements with multiple dispensaries. I am excited. I have drunk the Kool-aid. Perhaps not the best analogy for marijuana, but close enough!  

I had purchased a position in Verde prior to my trip to Los Angeles. After spending the weekend with Harp, I am again accumulating VRCI stock. Verde is taking a decidedly different approach from many of the other medical marijuana companies - one that I believe will bear fruit for investors and bring technological advances and operational expertise to the business.

Press releases to date make references to Verde Science’s new direction, but the market is only now coming to understand the opportunity. This is mostly because it is an unfolding story. However, when the vision which management conveyed to me is realized, Verde will be a blockbuster success. 

Patient investors who take the time to understand the progress Verde is making in advancing their vision will see that Verde is a bargain relative to its peers in the medical marijuana business.

I have been trading medical marijuana stocks in the US since the beginning of 2014. It is important to note that the medical marijuana business is in its infancy and there are only three companies I found with one year or more of operations. These deal’s market caps have traded between lows of $65M to $180M to highs of $150M to $285M with spikes up to $600M. 

While the statistics are limited, these three somewhat mature U.S. deals still provides a point of comparison with which to value new entrants to the sector. 

 In Canada, many of the emerging marijuana stocks have pre-market valuations of $30M to $55M.    While the valuations will go higher as the companies progress, I feel that too little upside is being left for the first money coming into the deals.

Additionally there is a pending case before the Supreme Court of Canada on MMAR licenses and if this goes the wrong way for the large producers, their lofty sales projections will go up in smoke.   The companies discussed earlier are focused on the U.S., a market that is 10 times larger than Canada’s, and they have earnings that justify their valuations. 

Many Canadian "weed" stocks may ultimately become profitable but with such a high starting valuations, how much profit will investors realize? Wouldn’t you rather buy an undervalued and under-appreciated company like Verde Science at current bargain prices? 

Verde has a current market cap of roughly $8M and will be operating alongside the U.S. companies whose valuations were listed in the previous paragraph.   In addition, Verde’s innovative business plan could vault them past the current best U.S. performers. If they simply become an average U.S. "weed" stock they will trade at $200M to $225M. 

There will likely be some dilution along the way, but if the dilution is as high as 50%, the share price would still be about twenty times (20x) the current $.08 share price for a 12 month price target of $1.60.

Another company recently joining the medical marijuana space, Affinor Resources, announced on May 28th that they had acquired 49% of a Washington State medical marijuana dispensary. Their stock soared to $0.85 by June 2nd from an early March price of less then $0.05 prior to the company announcing that they were entering the medical marijuana market. This is a move to a $50M market cap from under $2M, for ownership of slightly less than half of a single dispensary in Washington State. 

Compared to Verde Science operating in Los Angeles County, Affinor’s valuation is whimsical. The LA County market is an order of magnitude larger than the entire Washington State market. 

Bottom line - Verde Science is extremely cheap! Once stock investors understand Verde’s story, they will race to buy it at a market cap of just $8M to $9M. I believe that Verde is still a bargain at a $25M market cap or roughly $0.25 per share.

In summary, Verde Science offers investors the opportunity to participate in bringing state-of-the-art aeroponics growing technology to the world’s largest medical marijuana market. They will also offer investors the opportunity to be a part of a pharmaceutical research arm of the company, the particulars of which will be announced once finalized.  

It is my belief that the confluence of the factors described herein make for a tremendous opportunity, but please understand that I have simply listed the reasons why I have bought and continue to buy shares of Verde Science. 

This is not a recommendation for others to invest in Verde Science, but rather a suggestion for investors to investigate the company and do their own research and due diligence. 

One place to start is on the OTC markets website at www.otcmarkets.com and type in the stock symbol VRCI in the "Get Quote" box. There is a wealth of information available including all of the company’s press releases under "News". Also check out www.verdescience.com which is being frequently updated as the company progresses. 

Should investors decide they like the opportunity and if Verde meets their investment risk profile, then and only then should they take a position in the company. It is my belief that Verde has tremendous long term potential, but as in any endeavor there are many risks which can cause a venture to fail or go sideways for long periods of time. Happy investing.

Authored by Benson Caine

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CONTACT: Harp Sangha, Chairman / CEO
         Tel: 1-858-210-0236
         Email: harpsangha@shaw.ca 
SOURCE: Financial Press 
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