CPH is targeting US growth through M&A - Seeking a CEO

  Email Sent On: 25-10-2021 11:55 a.m.

10 minute read


Share price when sent: $0.115  

We have been invested in and following Creso Pharma’s (ASX:CPH) re-birth since October last year.

CPH is a cannabis and psychedelics stock that has now signalled an intent to grow quickly via M&A in North America, which it says will coincide with a NASDAQ listing (it wants to be listed on both the ASX and NASDAQ).

For us, the final piece of the strategy puzzle is for CPH to hire an experienced North American CEO to bring it all together and extract shareholder value from its growing and diverse asset base, and create a ‘simple to follow’ narrative for investors.

...and of course for sentiment for cannabis stocks to turn positive.

Creso Pharma
ASX:CPH, FWB:1X8

After CPH announced and then canned a proposed merger, the share price has been happily grinding away at around the 11c mark for a couple of months now and doesn’t appear to want to go anywhere just yet - but as we have all seen this can turn pretty quickly if sentiment towards cannabis stocks in general turns - we continue to wait.

Today CPH’s recently hired exec VP has delivered his first deal, with the company announcing the acquisition of a range of CBD brand and product assets that deliver anti-inflammatory relief to professional and amateur athletes suffering from chronic muscle and joint pain, and to aid joint and limb recovery.

All products contain less than 0.3% THC on a dry weight basis - which significantly reduces global regulatory hurdles.

The products have been approved on the “RangeMe” online platform - which is an online product discovery and sourcing platform for some of the world’s largest retailers to source products for their stores.

Retailers like CVS, Walgreens, Wholefoods, Petco and Amazon use RangeMe to source products for their stores.

On the back of this, tenders have been lodged to have the products stocked in CVS and Walgreens - these are the two biggest pharmacy chains in North America.

Creso Pharma
ASX:CPH, FWB:1X8

The most interesting thing to us with this new acquisition is how much it is structured to reward big revenue numbers.

It looks like CPH has picked up the assets for very little outlay ($200k in CPH stock), and has structured the deal in a way that the management team acquired with the assets will have to work hard to deliver a total of $40M revenue to CPH within 60 months in order to unlock performance milestone payment for themselves.

  • Performance milestone #1 is 3 million CPH shares if they deliver $20M revenue to CPH within 36 months
  • Performance milestones #2 is 3 million CPH shares if they deliver $40M revenue to CPH within 60 months.

Yes - it's a lot of “potential” and “maybes”, but we do like the low upfront cost to CPH shareholders - to us this is a bit like a free hit on some solid potential revenue targets.

If successful in getting the products into CVS and Walgreens across the US - those revenue targets have a good chance of being met - the vendors certainly must think so given the majority of the asset sale is on hitting those revenue numbers.

CPH is targeting US growth through M&A - Seeking a CEO

As we mentioned earlier, CPH’s new strategy is focused on the North American markets, and the company is currently trying to hire a North American based CEO and list on the NASDAQ.

We think the North American CEO is a key hire and crucial to CPH’s long term success, and to making sense of how CPH’s diverse asset base can start to be monetised.

CPH has acquired quite a few different business lines over recent years, and a leader that can bring it all together into a cohesive strategy, along with navigating the NASDAQ listing is going to be crucial - Especially creating a simple group narrative that investors can follow.

So this CEO hire is a major milestone for us in our CPH investment - CPH announced in September that the CEO recruitment process is underway and we look forward to seeing what kind of CEO CPH can hire.

While CPH searches for a CEO, it continues to progress the rapid growth strategy via bolt-on acquisitions.

CPH recently brought on William Lay Exec VP in Strategy, Origination & Operations, who has led over C$5BN of cannabis M&A transactions in the past - including the largest acquisition in the history of the cannabis sector.

He is already getting busy with CPH, as it looks like he has landed his first acquisition for CPH - and whilst the performance milestones look great - the true success of this deal will be measured on actual revenue impact.

More details on the CPH / ImpACTIVE deal:

CPH is acquiring the assets of ImpACTIVE Holdings Ltd, which are CBD based products designed to reduce muscle and joint inflammation. CPH is aiming to sell them through the biggest retail pharmacies in North America.

ImpACTIVE Holdings was formed by current and former athletes that were seeking alternative treatment routes for the athletic community.

The group has developed a range of CBD based products designed to reduce muscle and joint inflammation, without the use of heavy narcotics or prescription pharmaceuticals.

They’ve assembled a team of brand ambassadors from ice hockey and Canadian football, and you can check out their promo video here.

ImpACTIVE’s assets - that CPH is acquiring - include 8 products for sale, with all products containing less than 0.3% THC on a dry weight basis - which streamlines global regulatory hurdles.

CPH is acquiring the brand and product portfolio assets. ImpACTIVE has also made a provisional patent application relating to topical compositions of cannabinoids and its delivery of pain relief assets.

The products have been approved for the RangeMe system (a product procurement platform) used by the world’s largest retailers.

As a result, tender applications have been lodged to have the ImpACTIVE products stocked in CVS pharmacies and Walgreens in North America.

CVS is massive in the US - it's America’s largest retail chain by number of locations, with almost 10,000 stores across 49 states.

Walgreens is America’s second largest pharmacy store chain, operating 9,000 retail stores across the US.

We are always cautious in getting excited about the “size of market” calculations - it’s the go-to-market strategy and ability to execute it by capturing market share that is more important to us as investors - we will be watching closely to see early traction in sales of these products, through the Walgreens and CVS Pharmacy channels.

We think the ImpACTIVE guys must be pretty confident these tender applications will be successful, as the deal terms with CPH are heavily weighted toward future revenue growth.

Deal Terms - Low Upfront Cost to CPH

We think the deal terms look pretty good with a low upfront cost to CPH - the deal for ImpACTIVE shareholders is:

  • Upfront: CPH to issue C$200,000 of CPH shares to ImpACTIVE
  • If C$20M in sales revenue from the products is recorded within 36 months - CPH to issue 3 million shares to ImpACTIVE
  • If C$40M in sales revenue from the products is recorded within 60 months - CPH to issue another 3 million shares to ImpACTIVE.
  • The Impactive co-founders will enter into employment agreements with CPH, where they will also be rewarded with CPH options - 500,000 each with exercise price of $0.1375 within 3 years from date of issue. The options will be subject to retention conditions so they vest in equal parts over 3 years.

What we think of the deal

We like that the transaction is heavily skewed toward sales performance by ImpACTIVE.

Obviously if the revenue goes up, we would expect CPH’s share price to go up as well - increasing the value to the vendors - that's the kind of alignment we like to see on a deal.

CPH needs to turbo charge its revenue - and this is one way to do it.

Low upfront cost means this is essentially a free hit for CPH on the ambitious revenue targets set on the deal.

Posting solid revenue figures ahead of a NASDAQ listing is also a good strategy that should attract US investor interest.

Aside from ImpACTIVE - CPH sales update

The market for cannabis stocks looks to be a bit flat at the moment, but CPH’s cannabis business appears to be starting to head in the right direction - CPH has been posting semi-regular news on all important purchase orders being signed.

News earlier the month was that CPH had secured over A$800,000 in purchase orders for its cannabis products, some of which were repeat orders - a very good sign for us that CPH customers are happy with their purchases.

We are looking forward to seeing what kind of revenue all the recent purchase orders translate to in the September quarterly report and beyond.

CPH is an early stage speculative growth stock, and like a lot of ambitious small cap companies, it continues to burn more cash than it brings in. So CPH is a long way from being cash flow positive and still relies on tapping the market for capital raises fairly regularly - but at least it is now bringing on some revenue to help cover its costs.

Perhaps in recognition of this, CPH has placed some very ambitious revenue targets on the ImpACTIVE acquisition. If the ImpACTIVE team can bring in the kind of revenues that see them beat their targets, this is going to be a good result for CPH’s financials.

What we want to see next from CPH:

  • Hire a North American based CEO to simplify the company’s narrative
  • Finalise NASDAQ listing (co-listing)
  • Sales updates for ImpACTIVE products with a major US retailer
  • More consistent revenue growth overall
  • Clinical Trial Authorisation for its Psychedelics study in Canada

Creso Pharma Corporate Milestones

$9M Cap Raise @ 2.9c
Convertible Notes Extinguished
Key Appointment: Bruce Linton
Next Investors Watchlist
✅ Improved Global Regulatory Environment for Cannabis
🌏
TGA Reclassifies Cannabis as a Schedule 4 drug
🌏
MORE Act Passed in the US
$18M Cap Raise @19c per share
⚔️
MindMed NASDAQ Listing, (2)
✅ OTC Listing
[UPA1] Merger Announced with Red Light Holland
i️ Red Light Holland Merger Terminated
Management Appointment (William Lay, ex Canopy Growth M&A)
📅 Quarterly Revenues up 24% (Apr-Jun Quarter 2021)
🔄 NASDAQ Listing
🔄 New (US) CEO Appointed

✅ ImpactAlpha Acquisition
🔲 Revenue Growth 1
🔲 Revenue Growth 2
🔲 Unexpected Announcement 2
🔲 Unexpected Announcement 3

Cannabis Products

Purchase orders listed here are over $150k only

Mernova Cannabis

✅ Purchase Order 1 $242K+ (Mernova Cannabis)
Purchase Order(s) 2 $502K+ (Mernova Cannabis)
✅ Purchase Order 3 $177K+ (Mernova Cannabis)
Purchase Order 4 $240K+ (Mernova Cannabis)
✅ Purchase Order 5 $800K+ (Mernova Cannabis)
🔲 Purchase Order 6 (Mernova Cannabis)
🔲 Purchase Order 7 (Mernova Cannabis)
🔲 Purchase Order 8 (Mernova Cannabis)

ImpactAlpha

🔲 Distribution partnership with major US retailer
🔲 Purchase Order 1
🔲 Purchase Order 2
🔲 Purchase Order 3
🔲 Purchase Order 4
🔲 Total Accumulated Sales Revenue $20M [2024]
🔲 Total Accumulated Sales Revenue $40M [2028]

Nutraceuticals / Pharma Products

✅ Purchase Order 1 $295K (Nutraceutical / Pharma Products)
Purchase Order(s) 2 $415K + (Nutraceutical / Pharma Products)
✅ Purchase Order 3 $300K + (Nutraceutical / Pharma Products)
Purchase Order 4 $247K + (Nutraceutical / Pharma Products)
Purchase Order 5 $337K (Nutraceutical / Pharma Products)
🔲 Purchase Order 6 (Nutraceutical / Pharma Products)
🔲 Purchase Order 7 (Nutraceutical / Pharma Products)
🔲 Purchase Order 8 (Nutraceutical / Pharma Products)

Psychedelics

Plan to acquire Halucenex (psychedelics company) announced
Increase Psilocybin Supply for Clinical Trials
Halucenex receives Dealers License
Complete Halucenex Acquisition
🔲 Clinical Trial Authorisation (with Health Canada)
🔲 Phase II Clinical Trials Begin
🔲 Phase II Clinical Trials Recruitment
🔲 Phase II Clinical Trials - Interim Results
🔲 Phase II Clinical Trial Completed
🔲 Phase II Clinical Trial Results
🔲 Commercialisation Milestone
🔲 Improved Global Regulatory Environment for Psychedelics

CPH Investment Milestones

ASX:CPH is a medium term investment we hold and write about that is not currently in the portfolio. We took a position at 3c in October 2020 as a short term hold which upgraded to a medium hold after the company delivered. On March 26 2021 we increased our position at 19c. We are considering adding CPH to our long term portfolio if it can deliver a few more key milestones.

✅ Initial Investment @ 3c
✅ Increased Investment @ 19c
✅ Price Increase 500% from Initial Entry
✅ Price Increase 1,000% from Initial Entry
🔲 Price Increase 2,000% from Initial Entry
🔲 12 Month Capital Gains Discount
✅ Free Carry
✅ Take Profits
🔲 Hold Remaining Position for Two Years

Disclosure: The authors of this article and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 1,350,000 CPH shares and 2,152,325 CPH options




 

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