BMMJ - Bengal Capital - Body And Mind:   A Systemically Undervalued 'Busted Story'

2023-03-05 04:00:00 ET

Summary

• Body and Mind looks like a collection of random cannabis assets, but we have come to believe the logic is an underlying capital efficiency.
• Unlike most of the other busted stories, BAM has a core of quality that we believe will create long term value.
• In 2023, we will be looking for BAM to continue to tighten its focus.

The following segment was excerpted from this fund letter .

Body and Mind, Inc. ( BMMJ )

From the outside, Body and Mind, Inc. (" BAM ") looks like a collection of random cannabis assets - some California retail, an Arkansas vertical operation, a grow in Nevada, retail in Ohio, etc. - without an overarching logic. But we have come to believe the logic is an underlying capital efficiency - BAM got into the best markets it could for as cheaply as possible. As we looked deeper, we realized that BAM is a bit in the Grown Rogue mold of lean, scrappy cultivation operations mixed with an intriguing retail asset portfolio - so much so that we recently put together an SPV investment of $3mm of convertible debt into BAM, with just over $1mm coming from a side pocket of the Fund.

Why pick BAM, a company that generally strikes many as one with too much "hair" on it?

• BAM Is A Systemically Undervalued "Busted Story": "Busted stories" are companies which went public at the height of cannabis boom, did a significant amount of marketing to garner interest, and then either fell out of favor as they hit performance headwinds, engaged in misguided mergers, or the vagaries of fast-money investors shifted sending the stock into the doldrums. As a company like this desperately needs its stock to "work" in order to access capital, when the wind goes out of the stock's sales, so does much of the business progress. The higher quality companies that qualify as busted stories tend to suffer structurally weak stock prices, and BAM had the additional problem of a large legacy holder of the stock which was continually selling shares and functionally pushing down its stock price even further. To be clear: BAM is certainly not the only busted story that followed the general pattern above - many other companies did similarly things and ended up in the busted story bucket as well. The difference is that, unlike most of the other busted stories, BAM has a core of quality that we believe will create long term value.
• But BAM Continued To Execute: We were especially surprised when BAM announced that it had won two licenses in Illinois' recent retail cannabis expansion and the stock did not respond whatsoever. In our view, Illinois (even after the retail expansion) was on the low side of stores per capita and retail licenses there had the potential to be quite valuable - especially if the location was right. We came to find out BAM's Illinois locations were excellent. Furthermore, when we looked at the then-price of the business, we were relatively comfortable that the downside was protected by what a sale of the assets would bring in a controlled liquidation. The downside being relatively capped, combined with what we felt was a good operating team with two strong cash flowing assets on the horizon in Illinois prompted us to establish an equity position. Beyond Illinois, BAM is also now entering into the rapidly growing New Jersey retail cannabis market by purchasing an entity that has two critical gating items in establishing a retail cannabis store already done: (1) local approval for the cannabis use, which is usually a critical gating item before one can attain a final state cannabis license and (2) a lease on a location with all of the makings of an excellent retail location (plenty of square footage, ample parking, on a main throughway, etc.). Also, to minimize downside risk to BAM, the vast majority of consideration for its purchase is contingent on attainment of final licensing milestones. As some additional optionality, BAM has been previously successful in winning licenses through applications - generally the most capital- efficient way of entering a market and one of the best return on investment activities in cannabis - and there is a chance that will continue. Even one additional license win makes a meaningful difference for a company of BAM's size.
• Bengal Rolls Up Its Sleeves: In many ways, BAM has the hardest year ahead of it in terms of execution of all the holdings discussed here. This is why we have been personally involved with BAM more than our other holdings save Goodness Growth and anticipate this to continue - Josh Rosen, managing partner of Bengal Capital, has joined BAM's board.

In 2023, we will be looking for BAM to continue to tighten its focus by shedding some vestigial assets, inflect more of its individual operations into producing cashflow, successfully opening its Illinois and New Jersey stores (likely the most consequential thing on this list), and deleveraging by paying down its senior debt unless there is a truly exceptional opportunity to invest capital (we realistically see such potential high-return opportunities only in acquisitions of strategic craft cultivation assets that can be paired with its new Illinois and New Jersey stores).

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

For further details see: