The Wildfire Collective – A 9 Bagger Ready for PotStocks 2.0

The Wildfire Collective is a group of sustainable farms growing exceptional outdoor organic and craft cannabis. They are led by cannabis advocate Mark Spear and are in the middle of a crowdfunding campaign to grow their business.

In early August we visited Spear and his personal grow to learn more about the collective. We walked away with an appreciation for their authentic approach and intrigued by the economics of the collective.

Since that time, we have done some serious due diligence on Wildfire, and have since bought in with our own capital. We have also been working with them to tell their story through visualizations and videos.

We believe Wildfire presents a solid investment opportunity that warrants investors’ consideration. We breakdown the full thesis below.

3 Pillars of Value

To put it simply, we like this investment opportunity for three reasons:

  1. Substantial Short and Long-term Upside – Wildfire is a 9X+ opportunity on a comps and valuation basis in 2020 alone.
  2. Sound Business Fundamentals – Wildfire is positioned in high growth verticals with low operational expenses.
  3. An Authentic Approach Paired with Industry Experience – Wildfire is led by cannabis advocates with proven cultivation and licensing chops.

As we turn the corner and enter PotStocks 2.0, a paradigm marked by the importance of operational prowess and producing quality cannabis, we believe these factors will combine to yield a highly successful company.

The Collective Approach

Before quantifying the upside, we want to start with an explanation of the collective itself. The image below illustrates how Wildfire’s partnerships and capacity will grow over the next three years.

In their first grow season, Wildfire expected to produce 11,000 kg of capacity between three farms. For the cannabis produced by the two partner farms, Wildfire will keep 30% of revenues. This is equivalent to a total production of 4,400 kg for Wildfire.

The multi-farm structure of the collective means they are never putting all their eggs in one basket.

Over the subsequent two years, they expect to grow to 7 farms and 29,700 kg capacity in 2021 and 13 farms and 60,300 kg capacity in 2022. The corresponding equivalent production would be 12,100 kg and 25,200 kg respectively.

While this approach may seem complicated at first, it provides two inherent benefits.

The multi-farm structure of the collective means they are never putting all their eggs in one basket. Wildfire’s risk of total crop loss is only a fraction of that faced by single-farm producers.

As well, the collective has a right but not the obligation to purchase the cannabis from their partner farms. So, if the product is low quality, they do not have to incur any of the production costs for product that won’t sell.

The result is a scalable business model that mitigates risk in an effective manner. At a time where producers will need to be capital efficient, this is an excellent approach.

And with strong business fundamentals, the story gets better.

Exceptional Outdoor = Exceptional Margins

There is no denying that the Canadian cannabis market is going to face an oversupply. This will compress margins for generic conveyor belt cannabis producers and expose those who cannot produce efficiently.

Luckily for Wildfire, they have positioned themselves within two of the highest growth verticals in the cannabis space: organic and craft. While not belabouring the point, these are two market segments that are seeing rapid growth in consumer demand across all industries.

From craft beer producers to organic fruits and vegetables, there is a growing consumer trend to choose products perceived as higher quality and generally healthier and more sustainable. The charts below illustrate the growth projected for these verticals.

We expect craft and organic cannabis to see similar trends. In fact, steep acquisition prices of small-batch craft and organic cannabis producers already demonstrate the demand.

Supply of organic and craft product will be on the lower end compared to the generic conveyor-belt cannabis. This will create favourable supply-demand dynamics that will yield higher price premiums for those producers. Again, we are already seeing this from producers such as Whistler, Broken Coast, and 7Acres.

To add fuel to the fire, the collective’s operations already have favourable margins.

Rock Bottom Production and Expansion Costs

Production costs for Wildfire are substantially lower than those of indoor and hybrid greenhouse producers.

While the final revenue per gram will be lower for an outdoor product, as discussed below, there is still a net benefit to Wildfire’s bottom line.

And for those who believe there simply won’t be demand for an outdoor product, Wildfire already has purchase commitments for a third of their 2020 capacity. This speaks well to the demand for their product as well as their ability to generate sales.

Further, with the “collective” structure, expansion costs are over 50% lower for Wildfire than other LPs. The ultimate result is a greater amount of production capacity (and corresponding revenue) per dollar invested.

The primary expansion costs for the collective are related to assisting partnering farms with licensing costs and building out their in-house processing capabilities. All other costs are left to the partnering farms.

When production and expansion costs are this low compared to the industry averages, you know the upside will be similarly impressive.

A 9-Bagger Opportunity in 2020

The following infographic illustrates how we are thinking about the Wildfire opportunity for the 2020 growing season.

In the above diagram, you can see all the assumptions we used in the valuation, however, we wanted to note a few important aspects.

While we believe their organic and craft product will command a solid price point, management has chosen a conservative $2.82 per gram sale price. Even for wholesale, largely concentrate-feedstock, this demonstrates they have reasonable expectations and aren’t being sensational about what they will achieve.

This price point also doesn’t include any consideration of premiums that an organic and craft product would command.

And with production costs 60-80% less compared to indoor and greenhouse facilities while the sale price is only 50-60% cheaper, we should still expect a net benefit to Wildfire’s bottom line.

Looking at the margins, Wildfire is projecting EBITDA margins close to 60%. We believe this is achievable given the low cost of operations, minimal sales requirements, and reasonable growth plans.

However, to factor in potential additional unforeseen expenses, we’ve chosen a 45% EBITDA margin to be on the safe side.

And this still yields a 9X opportunity.

Upside Verified By Comps

Looking beyond a valuation basis, you see confirmation of the demand for organic and craft producers through two separate comps.

Even when you discount the price per gram basis by 50% for an outdoor product, you’re still seeing 13X to 11X upside.

This isn’t even for the 2021 or 2022 production capacity. In future years, with equivalent capacity increasing to 12,100 kg and 25,200 kg, the upside balloons to 20X and 30X.

Hopefully, now you see why we like this opportunity.

Authenticity + Experience Lead to Exceptional Cannabis

We don’t want to waste your time detailing the experience of each team member – you can see the full bio on their website here. Instead, we want to focus on four specific points.

Wildfire has significant experience obtaining cannabis cultivation and processing licenses.

A key aspect of Wildfire’s strategy is obtaining licenses for the farms in their collective. While this may seem like a daunting task to many, they have a professional license consultant on their board and the process itself recently changed in favour of outdoor grows.

Georges Routhier, CEO of cannabis consultancy Pipe Dreemz, has amassed substantial experience with 32+ licenses obtained since working in the cannabis licensing space in 2013. He brings with him a familiarity with the process and an understanding of typical friction-points with Health Canada (along with networks to ensure the process goes as smoothly as possible).

While not experience-related, Health Canada also recently changed its licensing rules to require a facility be fully-built out before submitting a license application. This has significantly de-cluttered the cue of non-serious applicants and sped up the process to a service guarantee of 60 days for applicants.

With Wildfire’s build-out plans having already passed Health Canada’s high-level review and using Routhier’s expertise with evidence packages, the collective shouldn’t have any issues obtaining licenses in time for the 2020 growing season.

The team has 60+ years of combined experience with commercial growing in the regulated cannabis industry.

Three of the four members of their operations team have substantial cannabis cultivation experience (5 to 15 years), with the CFO being the only odd man out. A smaller, more experienced team will ultimately yield better results and eliminate concerns over sourcing high calibre professionals for their growing operations.

Wildfire has an extensive library of outdoor cannabis genetics.

CEO Mark Spear has been breeding outdoor cannabis plants for 5+ years in his (certified) personal medical grow. Upon licensing, Wildfire will be able to grandfather in a genetic library with over 200+ cultivars bred for outdoor cultivation and 12+ cultivars as live plants.

This unprecedented outdoor-focused genetic library will allow Wildfire to hit the ground running next spring. Not only are these plants proven in this climate, but the team will have a familiarity with the exact cultivars, making it easier to achieve a high yield and a better-quality product from the plants.

The Wildfire team is comprised of cannabis advocates determined to take an authentic approach to the cannabis industry. 

If you know Mark Spear at all, you understand he is an authentic cannabis enthusiast who has been advocating for the cannabis industry for the past 10+ years. Other members of their operations team are similarly passionate about the industry.

While this certainly doesn’t guarantee profits, if you look at other companies started by authentic cannabis advocates, it suggests Wildfire’s future will be bright.

Companies like Supreme Cannabis or Tantalus Labs have been built around cannabis culture and the results have been exceptional cannabis and strong companies. We believe Wildfire’s team will generate similar results with their experience and above all, their authentic approach to the cannabis industry.

Multiple Exit Pathways

While an exit is realistically over a year away, it’s obviously an important consideration.

Through speaking with Spear, they believe an acquisition or IPO are the most likely scenarios. Both instances would provide liquidity for early investors, and while there are no guarantees, we believe it will be at a much higher valuation than the current level.

Given they are an experienced team of cannabis cultivators, Wildfire is far more likely to grow in value as they execute their plan compared to other start-up cannabis companies with little experience in the space.

We have already seen the appetite for craft and organic flower from some of the bigger LPs. As the supply of conveyor belt cannabis increases, we believe the demand for Wildfire’s capacity will also grow.

Add on top solid business fundamentals and an acquisition seems like a very real opportunity.

While most investors may not be used to holding a position for over a year, we believe this is an opportunity that warrants a different approach.

With that said, no high-reward investment is without risk.

High-Risk Equals High-Reward

Although we’ve laid out what we think is a very compelling investment opportunity, we aren’t trying to downplay the risk.

With any new venture, there are risks that the opportunity does not materialize as expected. Obviously, with our investment and in writing this piece, we believe the upside outweighs the risk, but let us elaborate.

As we see it, there are two primary risks with this opportunity; challenges obtaining licenses and challenges growing cannabis profitably.

License Process Understood, Underway, and Expedited

As we detailed above, the team has substantial experience obtaining cultivation licenses. With an expert on their team, they should have no issues moving through the process efficiently.

More importantly, however, is the fact that these processes are already underway. Wildfire submitted their plans for high-level review in 2018 and as of May 2019, they received the green light from Health Canada with no critical concerns holding them up.

With construction almost complete at Glencoe, that farm is weeks away from submitting it’s evidence package. Similarly, the Lambton farm is following closely behind and expects to have its evidence package submitted before the end of Fall.

Finally, Renfrew construction is at an earlier stage, but still well on track for submitting an evidence package by the end of the year.

With Health Canada’s recent rules change speeding up processing time (verified by recent applicants), their new stated service guarantee of 60 days would mean all three farms should be licensed before the end of Winter.

Add to the fact that Health Canada has now approved multiple outdoor grows, and the risks of whether the collective will be licensed in time are greatly reduced.

Wildfire’s “Collective” Structure Mitigates Risk

In terms of growing cannabis profitably, as we detailed above, Wildfire’s “collective” structure significantly reduces its operational risk. Specifically, they have a lower total spend (capital and COGS) per gram of capacity compared to other growers.

Outdoor growing is more robust with higher margins, making it cheaper than indoor or greenhouse facilities on a per gram basis.

Expansion costs are also largely pushed down to the individual farms, which lowers the required investments from Wildfire and increases their bottom line.

Lastly, Wildfire isn’t required to purchase any sub-par cannabis produced by partner farms, drastically reducing any investments into an unsellable product.

The net effect of these factors is a lower cost per gram of capacity purchased with your investment into the Wildfire collective. This ultimately translates into a lower total risk per dollar spent.

For example, assume a gram of outdoor production is 75% as likely to materialize as a gram of indoor/greenhouse production (i.e. it’s riskier). Also, assume the investment (cost) required to produce a single gram from an outdoor grow is one quarter that of an indoor/greenhouse. Then the final cost per gram produced still ends up being one third that compared to an indoor/greenhouse grow even after accounting for a 25% crop loss.

These are the advantages that the Wildfire Collective’s rock bottom production and expansion costs provide.

Poised for PotStocks 2.0 Success

In the end, we see this as a high risk, high reward investment. As we enter PotStocks 2.0, there aren’t many opportunities to get in on the ground floor of anything. Not only is this one of those opportunities, but it’s a novel approach positioned for success.

We’re excited to be putting our capital behind the Wildfire Collective and look forward to seeing an authentic approach to the cannabis industry unfold.

If you’re interested in investing, you can find out more on their campaign page.

 

The Wildfire Collective is a consulting client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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