A company I’ve looked at cursorily in the past (previously Vodis Pharmaceutical), GnomeStar Craft ($GNOM) is run by Dr. Earl Oliver (Computer Science). He began as investor, and ultimately ended up as CEO. He’s an interesting guy.
I first met the gent back at a Lift in 2018: he was standing in the Vodis booth with a smile on his face, happy to engage anyone walking by. I’d just had a look at Vodis (the financials looked like hell), and I couldn’t resist the urge to walk in. We followed it up a year later with another look at Vodis on a Dive Bar Tuesday (spoiler, it still looked like hell). Earl smiled at me, I smiled back, and we chatted.
I spoke with Cyto once about the whole ‘PhD’ thing, as I’ve found introductions awkward sometimes. He told me there’s 2 types of ‘doctors’ in the world: those who introduce themselves as ‘Dr. Benson’ , while the other will simply say….’Hi, I’m Larry.
Earl falls into the latter category. Read his story if you haven’t, it’s an interesting one. I’ll wait.
Earl hustles on social media for exposure, and is generally known for putting out good product.
TheCannalysts (well, me more than GoBlue) are interested in the smaller scale ‘craft’ and small batch producers. We wonder if there is enough throughput to support an enterprise, let alone a public one. Our recent look at Norton Singhavon’s $GTEC reveals a company with capacity issues in the near term, share price run notwithstanding. Norton’s since lit up (a now upsized) $20MM bought deal with 3 year full warrants attached. The price of that money should give you a hint about perceived risk. I can’t find the prospectus yet, but I have some confidence that it’ll come with a 6% cash commission attached, as well as broker units that’ll include optionality. Existing shareholders had to eat a $4MM $0.20 raise a month earlier no less. While it’s hard to blame Norton for putting out his hand at this point with a higher share price (this money will be used for expansion), while he is operating at breakeven, overall, he’s losing money. Competitive pressure will increase, price compression is easing (but likely unfinished), and a single a crop failure would be a gut punch that could take out 2 growth cycles in correction/remediation. An event like that would be a $2-3MM hit, and kill a financial year. It’d demand a raise on its’ own.
So, let’s look at (by all accounts) an amiable fella’s efforts to build his own dream, and see where he’s at. I’m not going to go too deep (just this and prior Q).
To the financials!
- Cash at…..$0 (?) Yep. In account in overdraft by $841. They began the quarter with $320k. It got them up (and I’m guessing) fully operational.
- $200k in receivables, $643k in payables. There’s another $1.5MM in a separate line entry for payables, $700k originating from previous management. It’s in dispute as well, with the previous party claiming another $100k. Earl’s house-cleaining isn’t quite done.
- What isn’t for the former guys, Earl and his CFO have taken some $700k in IOU’s to keep this boat afloat. Compared to the bullshit that we see in $AYR.A ($35MM USD ‘incentive compensation) or in $WEED (Klein’s $45MM CAD parachute money), it’s something different to look at an outfit that has their folks putting their money into the company, rather than loot it.
- Yeah, ‘loot’ is a strong word. Want a fact? Both Klein and $AYR.A CEO Sandelman have lost a combined $4.1B CAD in their two companies over the past 3 years. I am not the activist shareholder type – if I don’t like a shop (or its’ management), I simply don’t own it. My point is that nobody making money outside of a private company is beyond a discussion of their salary. Far too many shareholders imho let this kind of thing go too easily.
- Revenue for the quarter….$200k. That’s the problem with State Monopolies, they pay you on their cheque run cycle, not normal course, nor COD. Previous quarter sales $58k.
- G&A a ridiculously low at $366k. Necessity is the mother of invention and all.
- Rent is $11,595/mo, currently on a one year lease. $2MM in leasehold improvements, $240k in lights and dirt. One of the things about that $2MM – it’s largely gone. While spend has been capitalized, it’s not your building.
- Look for this in companies who’ve spent a ton on building sexy storefronts, but don’t own them (or have done a sale/leaseback). They’ve essentially exchanged capital for rent, and it’s not rent to own.
- This is especially important in MSO’s – where as our piece on a possible regulatory meteor strike in the US – which would render many millions in bespoke builds and upgrades virtually worthless. Even the permitting of drive-through windows in Nevada recently will highlight those who had foresight in planning. It’s an emergent mode for transactions, and Americans seem to love the idea, especially for weed.
- 4.7MM options, 57MM warrants. Except for 2MM of the options, nothing’s near the money.
- We heard from the folks at Shelter that a craft producer could be expected to generate about $2MM/yr in ideal conditions, bit more likely 60-70% of that number. ‘Ideal’ is a big word, and rarely hit. Unless $GNOM has more throttle to go – I don’t know how long they’re going to be around.
Ok. The financials – as thin as they are – have good disclosure.
Earl’s reference to the Washington facility look factual, at least to the money side of it. Despite some $3MM going into the place – and carrying an option to purchase – cash flow never materialized. Cash issues in Canada (which wasn’t in production) – could not support the lease payments, which, let the option to purchase lapse and loss of use of the facility and upgrades. He’d probably love to have that $3MM right about now.
These financials…..eesh. Tough read. Despite a good marketing presence (at least in the Twitter bubble) and product (full disclosure – I bought some of his Meat Breath, it’s gassy and definitely BC quality), I think capacity issues are at the forefront of their travails. Netting ~=$2-4/gr simply isn’t enough on grows this small. Worse, because he needs a higher price (his 1/8ths are $50!) – he’ll show slower throughput. I think equivalent quality can be found $10 cheaper, and when one doesn’t have the cashe of a Broken Coast or a Simply Bare – it’s a tougher sell.
Earl mentioned in the article that if he’d had a preference, he’d have kept it private. If I was him, I’d be shopping half ownership of it out to a Norton ($GTEC) or a Shelter – try and keep something (anything) rather than watch it sold completely. If he does have the production capacity, he’s going to have to find some money quick to stay alive before long.
And with financials like these, he’s gonna need a miracle. An infusion by Tantalus would likely be a dream come true (just came up with that, and frankly, I think it’s a great idea).
Maybe Earl will find an angel, perhaps he has more resources available to him. One way or the other, that’s the only thing that’ll keep him growing weed commercially.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $GNOM