ANALYSIS OF THE CITY OF LV DISPENSARY LICENSE
So what does one do with 60% ownership of a dispensary license sitting north of the strip in an industrial area?
The answer depends on a number of factors.
Had TRTC never been awarded any licenses in Clark County on the Las Vegas Strip, the decision would be easy.
Build the city of LV dispensary and the Reno dispensary and be thrilled you won 2 dispensary licenses.
However, with the additional 2 Clark County LV Strip dispensaries awarded in early September 2015, the game completely changed.
Now TRTC was sitting on a whopping 4 dispensary licenses, with 3 in Las Vegas and 1 in Reno.
One no-brainer decision is to keep the Reno dispensary, as it is one of only three dispensaries awarded for the entire city of Reno, where 5M tourists visit annually.
The other no-brainier decision is to keep both Clark County LV Strip dispensaries, as these have the best locations, situated directly east and west of the LV Strip, which is teeming with 40M tourists annually.
That leaves the city of LV dispensary as the odd man out, clearly the least favorable of the 4 dispensaries, and now potentially a valuable sellable asset situated inside of a cash-strapped company.
But to figure out whether selling the city of LV license is a sound business decision, one needs to figure out how that cash would be put to good use, and if this good use is better than hanging onto the license and building out the city of LV dispensary.
What are the potential uses of the cash received in a sale of the city of LV license?
There are 2 major uses:
1) Acquisitions
2) Funding buildout of Nevada dispensaries and cultivation/production facilities
Let's start with acquisitions:
There are several that make sense --
DP's 12% stake in Blum Oakland
A dispensary in Cali
A cultivation facility in Cali
An IVXX-related acquisition of another brand -- edibles, drinks, oils
In order to avoid a lengthy dissertation on this matter, and because I'm in the mood to cut right to the chase, this is how I see things going down.
Out of the 4 acquisition candidates, DP's 12% stake in Blum is the superior choice, and not just for purely financial reasons.
Here is my very brief analysis of the situation...
Blum Oakland brings in about $16M annually and is one of the largest dispensaries in the entire state of California.
Oakland will likely be the first city to be granted for-profit status for its medical marijuana-related entities.
DP has owned Blum for several years, knows the ins and outs of the entire operation, and obviously has a ton of influence on the business positioning and day to day operations of the dispensary.
In November 2016, though both California and Nevada are voting for recreational MJ, while the former is a virtual lock to go rec, the latter is far less certain.
Based on my analysis of the polls I have reviewed and the projected status of the bills that will be on the ballot, I would give California a 90% chance of going rec and Nevada a 55% chance of going rec.
This discrepancy between the likelihoods of California and Nevada going recreational makes a hedge, in the form of selling the city of LV license and using that money to buy ownership into Blum Oakland, an excellent strategic bet.
Hedging is a very important strategy when the future status of a game-changing event, like whether or not a state goes recreational, is uncertain.
If TRTC keeps all 4 dispensaries in Nevada, instead of selling the city of LV dispensary and using that money to buy a stake in Blum Oakland, and Nevada does not pass recreational MJ in Nov 2016, then TRTC would be committing a very grave error.
There is a large difference between the value of a brand new medical marijuana dispensary in the city of Las Vegas and an already existing $16M medical marijuana dispensary in Oakland, California.
But there is an absolutely enormous difference between the value of a strictly medical marijuana dispensary in the city of Las Vegas and an already existing $20M medical marijuana dispensary in California that can also sell recreational marijuana, which would be the case if Cali passes recreational and Nevada does not.
There are other factors that are discussion-worthy, such as the likelihood of stricter limits on the number of new recreational licenses that can be granted in Oakland in comparison to the number that can be granted in the city of Las Vegas should rec MJ pass in both states, a factor that also favors the sale of the city of LV dispensary license in exchange for buying a stake in Oakland Blum -- but such discussion of these additional factors is not appropriate for this forum.
Ok, so in any world where logical hedging takes place, it is clear that selling a stake in the city of LV dispensary license to buy a stake in Blum Oakland makes sense.
And if we forget about hedging for a moment, would you rather own 3 dispensaries in LV and none in Oakland, or 2 LV dispensaries and 1 in Oakland?
Yes, we call that superior business positioning, which also favors the sale of the city of LV license for a stake in Blum Oakland.
So now let's think about the major players in this sale and acquisition, since an analysis of those players is necessary to fully understand the psychological and financial factors involved in the decision to sell the city of LV dispensary and buy Blum Oakland.
TRTC -- We've already analyzed this player and it makes sense to trade city of LV ownership for Blum Oakland ownership
DP -- The player yet to be analyzed, owner of 12% of Blum Oakland
Derek Peterson --
Like any other player involved in a buy-sell transaction, he wants to maximize his return on investment.
It gets really interesting because he has a stake in both sides -- his own personal financial stake in Blum, and his publicly owned stake in TRTC.
This can get really, really complicated, and I've had a pretty long day at work so I am going to omit a lot of the psychological and characterological commentary, even though that is probably more fascinating, in favor of the cold, hard and boring financial analysis.
One cool irony is that by my calculations, his current stake in TRTC (25M shares at $.10) is roughly equal to his 12% stake in Blum -- about $2.5M for each entity.
The upside for Blum Oakland is obviously limited, whereas the upside in TRTC is virtually endless.
That being said, Blum Oakland is a lot safer investment than TRTC, but bigger rewards usually come with bigger risks, all other thing being roughly equal.
With TRTC shares trading near the bottom of the 6 month trading range of 10-15 cents, the timing is right to do the deal now because DP can maximize his stake in TRTC if the transaction occurred now.
A deal at .10 brings DP 33% more shares of TRTC than a deal at .15
So what is the deal?
TRTC sells its 60% stake in the city of LV dispensary and receives $2M-$4M in cash.
TRTC buys DP's 12% stake in Blum Oakland, valued at $2.5M by paying DP $500,000 in cash and $2M in TRTC shares at .10 per share (20M shares)
A 100% share deal with no cash would give DP 25M shares of TRTC at .10 per share, which would double his ownership in TRTC.
Both TRTC and DP comes out winners in this transaction, and whenever this occurs, a transaction is much more likely to happen.
I will end on a psychological note, since I omitted such factors in this analysis.
If this deal does go down and DP gives up his stake in Blum Oakland for a majority of TRTC shares and only a minority of cash, that is a huge signal to the market that DP is going all in on TRTC and he is playing for keeps.
No other event would give the market more confidence in TRTC than the CEO accepting mostly TRTC shares for his own stake in Blum Oakland.
In a radical stroke of genius, not only is DP making the deal of a lifetime, doubling his ownership in TRTC when the stock is selling at discount prices at the least risky point in the history of the stock (lowest risk/reward ratio), but he is also simultaneously dramatically increasing the probability that TRTC will succeed as both a stock and a public company by going all in on TRTC, thereby creating the beginning of a self-fulfilling prophesy by injecting a strong dose of investor confidence into TRTC.
$LEEK$CAPE
AI
