GLASF - Mindset Value Wellness Fund Q2 2023 Investor Letter

2023-07-22 11:00:00 ET

Summary

• Mindset Value Fund's Aaron Edelheit is passionate about introducing interesting money managers, executives and startups that no one has heard of. His background includes investing professionally for over 25 years and starting and running the American Home.
• The Mindset Value Wellness Fund finished the second quarter up 12.7% and is up 25.9% for the year.
• Grown Rogue is poised for explosive growth - we are essentially getting paid while we wait for a company that has the potential to go up by more than 10 times in value.
• I now believe that cannabis is the equivalent to a hundred-dollar bill laying on the ground for the Biden Administration.
• While I believe there are catalysts on the near-term horizon for the cannabis industry, even if these catalysts don’t come to pass, our companies should continue to not only grow but expand their competitive advantages.

The Mindset Value Wellness Fund finished the second quarter up 12.7% and is up 25.9% for the year.

Grown Rogue Is Poised for Explosive Growth

On the face of it, Grown Rogue ( GRUSF ) looks tiny and insignificant. The stock is a penny cannabis stock and a very illiquid one at that, trading around C$0.23 per share. Its volume has recently risen from almost nonexistent to 53,000 shares a day. But even that is only about C$10,000 a day in total trading volume!

Why in the world would you buy a stock that is that illiquid? In a nutshell, the company has a competitive cost advantage over much larger cannabis companies when it comes to producing high-quality indoor cannabis flower and their growth is poised to explode from 30% year-over-year growth to potentially over 100% growth at a time when most cannabis companies are retrenching and showing little if any growth at all.

I believe Grown Rogue is the most efficient indoor cannabis cultivator that is publicly traded in the world. My research shows that it is operational excellence that is in short supply in the cannabis industry, not limited licenses, and that is what Grown Rogue has mastered and gives it a competitive advantage.

Grown Rogue produces the #1 flower in Oregon, a market with sophisticated consumers and a legacy market where if you don’t produce the best flower, it won’t sell. But Grown Rogue’s secret sauce is producing this high-quality flower for less than $600 a pound inclusive of all expenses. They’ve taken that formula and entered Michigan, where they are now around a top 5 flower producer. One advantage is that all Grown Rogue does is cultivate. They do not do retail and they do not do edibles.

Their recent earnings tell the tale of the company’s performance in a time of struggling cannabis companies. Grown Rogue recently reported record revenue, growing almost 30%, record EBITDA and free cash flow in their latest quarter. And now the company is on the move beyond Oregon and Michigan.

The company signed a strategic partnership with Goodness Growth, a struggling MSO, that needed help with their cultivation. Grown Rogue will receive at least 20% of any improvement in operating income from Maryland and Minnesota for the help in cultivation. That’s right, Grown Rogue is now receiving royalty income from two limited license states, one which just went adult use and the other which goes adult use in the next year or so.

I wrote about the opportunity and interviewed Grown Rogue’s CEO, Obie Strickler.

I believe that the Goodness deal is just the beginning for Grown Rogue entering another 10-12 limited license states with their Oregon quality flower, but more importantly at Oregon cost as well. I believe the company is on a path towards $40 to $50 million in EBITDA and $15 to $20 million in free cash flow on a current market cap of approximately $30 million. At that valuation, I couldn't care less about the liquidity.

But it is even better for Mindset investors because we negotiated a convertible debt deal in December, where we get paid a 9% yield and can convert into the stock at C$0.20 CAD. The stock is currently trading above that at .22 per share. Please note that we value our convert at our cost position for now to be conservative.

And now we are investing in Grown Rogue in another convertible that again pays 9% and converts into the stock at C$0.24 per share and includes an additional warrant at C$0.28 per share.

We are essentially getting paid while we wait for a company that has the potential to go up by more than 10 times in value.

Announcing the Launch of the W&GP Fund 1

And this leads us to the launch of our newest partnership, the W&GP Fund 1. The initials stand for Wait and Get Paid. Right now, the Mindset Value Wellness Fund and the Mindset Value Fund reinvest any dividends and interest right back into stocks and other investments in the goal of compounding capital over time.

We think there is an opportunity to offer investors a fund that pays out any dividends or interest received. And this partnership gives us the opportunity to go deeper and own more of the companies we love. And so, I’m proud to announce the launch of the W&GP Fund 1, which will invest in Grown Rogue’s convertible and another company’s preferred equity deal.

The new fund should pay out quarterly distributions that represent an annual distribution of approximately 10% net of all expenses, but still offer substantial equity upside upon Federal Reform. This fund will open once and then close. Thanks to all investors who have expressed interest in the new fund, the plan is that this partnership will close on July 31. Let me know if you want to invest before the close.

Lots of Catalysts on the Horizon, but Rescheduling is the Most Important

There are several catalysts for the cannabis industry before year-end, but the most important is the Biden Administration’s review of rescheduling cannabis. I wrote about how there is a December 2 ^nd deadline to update Congress on the scientific portion of the review.

But more importantly, I now believe that cannabis is the equivalent of a hundred-dollar bill laying on the ground for the Biden Administration. You have an elderly President, who has publicly fallen more than once, and has a potential issue bringing out young voters to vote for him. What other issue is out there that the President can move on that is extremely popular with young people, would drive out progressives to vote, but wouldn’t alienate moderates? I believe for the first time we have a Federally elected official, where it is in his best interest to move and move aggressively on cannabis as we enter the election season for the 2024 election.

We also are waiting for the California Attorney General to issue his opinion on interstate commerce, which has enormous implications for Glass House ( GLASF ). We also have the political theater of SAFE Banking, who knows what will become of that.

But we also have continued movement from states. I expect in the next 12 to 24 months, we should see New Hampshire, Ohio, Florida, and Pennsylvania move on cannabis. That would be 27 states that would offer fully recreational cannabis and would mean that two-thirds of the US population would have access to fully state legal cannabis.

I’m just not sure how long the Federal illegality can stand. It’s just not tenable.

Summary

While I believe there are catalysts on the near-term horizon for the cannabis industry, even if these catalysts don’t come to pass, our companies should continue to not only grow but expand their competitive advantages. And while we wait for the inevitable Federal Reform, thanks to our diverse investments in convertibles, preferred equity, and common stocks, we are getting paid while we wait with a yield that is close to a 7% annual yield.

Thank you for your support and trust, and if you have any questions or comments, please feel free to reach out to me.

Sincerely,

Aaron M. Edelheit

Original Post

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

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