Integrated Cannabis Solutions (OTCMKTS: IGPK) announced via an 8-K today that they completed the acquisition of GCTR Management. This is a transformative acquisition, but the market seems perplexed and skeptical of the structure. The market seems to be missing that there are definitive terms spelled out in the filing. The total cost is 1,200,000 million preferred B shares. The first payment of 598,800 shares which represents 49.9% of GCTR Management has already been made.
The purpose of this tranche payment may be a move to mitigate the auditing risk. If IGPK purchased a majority of this subsidiary then the company would need to have audits completed within the next 90 days. This phased closing approach avoids the audit risk and allows the IGPK management to take over running the asset and executing its expansion plans without the risk of being out of compliance in it’s upcoming audit requirement. Simply put, this structure avoids the 90 day auditing clock required by OTC markets and allows the company to move forward with its expansion plans.
The acquisition cost was spelled out in the Acquisition Agreement at $10/ preferred share. The current market cap is $3.5 million despite the $12 million of assets just acquired. The deal is not immediately dilutive since the authorized share count is 1.65 billion shares and the issued and outstanding is 1.63 billion. The company has 6 months in which to purchase the debt without penalty and shareholders could be left with a windfall if their sales ramp and hit the high end of estimates. This would allow the cash flow of the business to repay the debt and prevent any further issuance. The deal structure is very friendly to shareholders and aligned with high incentives for the current management to produce. It’s likely that management has some very lucrative contracts in abeyance so that they can hit their milestones.
Should management not secure sales it’s unclear if $300,000 in sales is enough to support the debt. The terms of debt are unknown and this represents another potential risk. The terms of the preferred B have not been revealed and could represent further upside or downside once released. For example, if there is a conversion clause a low conversion price to common of 100 to 1 or even a 200 to 1 feature would be an extreme positive placing values at $.10 or $.05 share. A ratio of 500 to 1 would place fair value at $.02. There might be no conversion and that would be a boon to investors experiencing no dilution. Investors need to understand this unknown risk is currently weighing on the price and could resolve itself in dramatic fashion upon release of a filing.
Cannabis Operation Primed For Growth
This cannabis operation was started in 2018 and is located in Sacramento CA and currently makes $300,000 monthly with plenty of room for expansion. The operation is located in an industrial park building with 9,986SF. The building has 4000 Amps of power to it and has 24ft ceilings, and reinforced concrete construction with grade level doors. Licenses in California are for a specific location and that allows investors to confirm that GCTR does in fact have a license and that the operator behind the operation is Tom Roland. He was also the co-founder of Indulge Oils and clearly has a wealth of experience in the cannabis sector. The facility has at least $5.0 million in hard tangible assets but also has a number of leasehold improvements. One look at the blast room (pictured below) which is used in volatile organic extraction, and investors can see massive venting to prevent VOC from escaping.
One of the very interesting things about this deal is how they reconciled the current valuation with future valuation. Instead of a claw back provision, it looks like they put in a claw forward provision that highly incentivizes GCTR management to ramp sales quickly. They have monthly goals between $1.25 million to $2.0 million which translated to an annual run rate of $15 – $30 million.
Expansion Plans – Caribbean / Consolidated
In the past decade the United States has cultivated quite a few cannabis brands. Names like Leafs by Snoops, Chong’s Choice, Marley Natural, Willies Reserve, and Kushie are manufactured and sold in the United States but they have no distribution outside the United States because that would mean having operations in those jurisdictions. There is however a loophole that IGPK plans on exploiting. In the Carribean the laws allow cannabis products to be exported to Europe. IGPK has identified key assets that include the real estate and manufacturing facility in order to scale a grow and manufacturing operation that can distribute in the local and international markets. They are using their contacts, expertise, and manpower from their California operations in order to contract grow and manufacture for a number of American brands looking to expand into Europe.
Another acquisition slated for closing is called Consolidated and its a company that offers embroidery and promotional products that will likely tie into cannabis products. This appears to be a rollup play that could contribute $1.5 million or more.
The acquisition of this key cannabis asset positions IGPK for exponential growth. It also serves as the first revenue the company has seen in its history. Shareholders have been waiting for a very long time for a number of acquisitions to be folded into the company. Whether it was the audit or the license or the access to financing that delayed the finalization of this acquisition, it is now complete. IGPK is now an operational business with recurring monthly revenue. The company has a very motivated management team that seems ready to exponentially ramp sales. Brand expansion plans in the Caribbean are also in the works. These assets also serve a dual purpose and will enable IGPK to obtain an uplisting to QB and eventually act as a stepping stone to a major exchange. The market cap is $3.5 million despite the fact that close to $12 million was infused into the business. If it becomes clear that debt to fund the acquisition was indeed not toxic, the stock could have quite a run to at least its asset value which could represent a 3x return in the short run. The company seems very undervalued with respect to its asset value and has not been given any credit for its new revenue stream.
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