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Liberty Health Sciences LHSIF (OTC)

Should you invest in Liberty Health Sciences LHSIF (OTC)? Recommendation: See Below

Liberty Health Sciences Cannabis StockFundamentals

Profile:
HQ: Toronto, ON, Canada
Founded: 2011
Facilities: Toronto, Florida
Symbol: LHSIF (OTC), LHS (CSE)

Focus: Strong
Liberty Health Sciences buys and operates U.S.–based companies in the medical cannabis market. Currently, it produces medical cannabis in Florida in two facilities and sells through 23 dispensaries there. It plans to open 30 total dispensaries in Florida.

It adds value 3 ways: 1) through expertise in commercial-scale greenhouse growing at a low cost, 2) its proprietary Seed-to-Sale Certified process, and 3) its automation and processing methods.

It has a partnership with the Veterans Cannabis Project to support research on the treatment of service-related trauma with cannabis, and a partnership with AdaViv to enhance the production of cannabis.

Size:
Market Cap: US $139.5 mil
Enterprise Value: US $132.9 mil
# of employees: 75

Markets: Strong
Primary: Florida medical cannabis market
Secondary: Ohio
Florida’s medical marijuana market was estimated at between $200 million-$300 million in 2018, a big jump from $20-$40 million in 2017.  Active patients more than tripled over the last two years to 307,000.

Operations: Strong
Cultivation:
Current production: roughly 14,2000 kgs/yr, on 300,000 sf of cultivation
Future production: roughly 30,000 kgs/year on 350,000 sf

Distribution:
Direct sales: yes, online and through dispensaries
Store networks: They operate 23 dispensaries in Florida, with free shipping anywhere in FL.

Hemp CBD sales in the US are sold roughly equally through natural food stores, online sales, and smoke shops. By 2022, chained retailers are predicted to grow their share a lot, with shares for natural foods stores and online platforms declining.

Management Agreements/Joint Ventures:
Liberty has an exclusive Management Agreement with Chestnut Hill Tree Farm, a Florida nursery, as a dispensing organization of medical cannabis in Florida. Chestnut holds one of eight licenses in Florida, which is 14% of the U.S. medical cannabis market, with a total estimated market at maturity of $1.1 bil.

Liberty entered a joint venture to open a medical cannabis dispensary in Dayton, Ohio, in March 2019. The JV will also operate a 10,000 sf processing facility for extraction, refining, formulation, and packaging.

Integration/Diversification
Vertically integrated: Yes, Florida
Horizontally diversified: No

FinancialsStrong
Third Quarter 2019 Revenue: $16.1 mil
Previous Quarter 2018 Revenue: $3.2 mil
Outstanding shares (diluted): 332 mil
Cash: $28.5 mil
Revenue growth QoQ: 500%!

Should you invest in Liberty Health Sciences TCNNF (OTC), TRUL (CSE)? Recommendation: See Below

Management: Neutral
CEO: Victor Mancebo
CFO: Rene Gulliver
VP Marketing: Stephanie Kubacki
Medical Director: Dr. Jennifer Timothee Oliveras

Branding: Strong
Liberty has a strong focus on branding. They recently launched a branded line of products called Zentient Labs with a unique branding story that they will get you “in the zone.”

Currently, in the US, tinctures hold 39% market share, topicals (growing) hold 19%, capsules 17%, vape oil cartridges 12%, gummies 6% and edibles 5%.

Valuation: Strong
Current share price: US $0.395
Price to Sales: 4.88 (Tobacco industry = 5)
52 week low/high: US $0.256- $0.782
EV/Revenue: 3.72
Price/book: 1.24

Financings: Neutral
Raised $22 million in November, selling 12,000 notes at $1000 each, convertible at $2.

Risks: High
The risks of investing in any cannabis or hemp company are currently high given the newness of the market. Given the rapid changes affecting the global, national and regional economies generally, and the CBD industry, in particular, no company can guarantee to maintain a competitive advantage in the market. Competitors include Trulieve, Surterra, Curaleaf, Knox Medical, and Vidacann. Combined, these companies have about 70 dispensaries in Florida. Each license holder in Florida can have up to 25 dispensaries.

Recommendation: Strong
Liberty is building a solid, low-cost, high-margin, vertically-integrated, medical cannabis business in Florida, which they plan to expand to other states. They are now producing at several facilities and selling through 23 of their own stores, which should generate a strong margin.

Liberty claims to already have a 15% market share in FL, and they are aiming to raise that to 25% in a few years.

In their most recent quarter, they generated about $16 million in sales, a pace of about $70 million per year. At their current price of $0.39 per share, we estimate they are priced for revenue of about $60 million.

Liberty Health Sciences expects to produce 14,000 kgs of cannabis this year, which, depending on its price for its CBD products, could produce over $100,000 revenue. They plan to triple production to about 30,000 kgs in the coming years, which could yield $300,000 of revenue. If they pull this off, this should raise their stock price 4-5x.

Many things can change this rosy picture. Competition could intensify and reduce their market share. Price could very well drop, decreasing their revenue. Liberty may not increase production as much as they hope, reducing their supply. They could raise money with equity, diluting shares. All of these are possible.

However, with the anticipated strength of the market growth in Florida, even if several of these factors does slow their revenue growth, there is still a large chance for their revenue to exceed $300 million and cause their price to grow solidly to a higher level than it is today.

For this reason, we believe this company is likely a good investment now, and probably up to $1.50 at least.

Should you invest in Liberty Health Sciences TCNNF (OTC), TRUL (CSE)?


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