A Mammoth Investment

The Mindset Value Wellness Fund Q3 2024 Letter

Disclaimer: The below post is my Q3 2024 Investor Letter that I sent last week to investors in the Mindset Value Wellness Fund. This post is NOT a solicitation. I talk about stocks that I own and my view of the future. It is imperative that you do your own due diligence and not rely on anything written below. I’m posting this in order to show how my writing translates to actual performance. With that, I hope you enjoy and gain insights.

The Mindset Value Wellness Fund finished the third quarter up 6.9% on a net basis and is up 74.1% for the year.

Grown Rogue Is a Coiled Spring

Grown Rogue (OTC: GRUSF) took it easy in Q3 finishing relatively flat after soaring in Q1. This despite the company announcing that it has officially started planting in New Jersey, where prices are at least three times the prices the company receives in Oregon and Michigan and the company putting up an excellent earnings report.

We continue to believe the company is exceptionally undervalued at 4 times our estimate of EBITDA next year and cannot wait for sales to start in New Jersey in early December. We think the stock can easily double if not triple from its current stock price in the next twelve months. This contrasts with a myriad of problems many other cannabis companies are experiencing and that should be showing at best flat growth to at worst negative growth in 2025.

Florida Cannabis Amendment Failure Leads to Cannabis Selloff

The Florida constitutional amendment (Amendment #3) to legalize adult use in Florida failed to pass the needed 60% threshold last week. The reaction from investors has been swift and brutal, especially to Florida focused cannabis companies. Some stocks fell as much over 70% since the election.

Why did some stocks fall so much? Because without Florida adult use as a catalyst, there is no growth and potentially little equity value in some highly levered companies. Also, a few of the larger companies in the state were ramping up capacity in anticipation of adult use sales and this may cause too much capacity to come online with little upside expected in the medical market. Investors are now expecting very little or negative growth.

But a bigger issue is that many of these companies are built to exploit “limited license” markets. These are markets that limit the number of licenses and limit competition. There is no business model that can be replicated. What I mean by business model is that if you build a cannabis facility, it costs X much to build and it will pump out weed at Y price per pound and you can sell it for Z price per pound, even if Z falls to competitively challenging levels.

The problem for most large incumbent cannabis companies is that they acquire a license in a limited license state and then hope that the competition doesn’t increase too much and hope that a state goes from medical to adult use, where sales double or triple.

These limited licenses have given rise to some companies that aren’t really that great at growing cannabis, or making great, affordable consumer products or retailing these products in a way that resonates with consumers. But these companies have been able to generate cash flow and gain investor attention because the level of competition is low. But what has happened is that over time, competition slowly increases, prices fall, and these “excess profits” dissipate, leaving investors holding on to companies with no growth, falling cash flows and stranded assets that may not have any real long-term value.

I continue to believe that what is in short supply is not limited licenses, but instead operational excellence. And what is great long-term for consumers is great products at low prices. This is why I have been so vocal about Grown Rogue (OTC: GRUSF) and Glass House (OTC: GLASF).

They are two companies that have been duking it out in the most competitive markets (Oregon and California) with some of the lowest prices in the country. They have been forced to figure out a business model that is based on tough competition and low prices and not on artificially low competition. Consider that since Grown Rogue entered Michigan, pricing collapsed nearly 70%, and yet annual cash flow is around $6 million a year on a $6 million capital investment. Now that is the kind of business model investors should get excited about.

I believe the problem for most large publicly traded cannabis companies is that they don’t have a Grown Rogue model for growth, they just have the old playbook of limited licenses. Until that changes there may be little or even negative growth. In a stock market that prizes growth and penalizes value this could lead to continued painful stock prices.

Back to the election results, what is remarkable about the defeat is just how popular cannabis is in Florida when you consider the facts: 55.9% of Florida voted in favor of Amendment #3, a double-digit win and almost the same percentage that voted for Trump. The Amendment received 55.9% of the vote despite a vigorous effort by the popular Governor Ron DeSantis, who fought the initiative tooth and nail.

The most surprising angle of the Governor’s and his supporters’ attack was that this amendment only helped one company, Trulieve (OTC: TCNNF), who bankrolled over $100 million into trying to get the Amendment passed. Ironically, the more money that Trulieve poured into the campaign for Amendment 3, the more it highlighted the Governor’s main critique.

And this gets to one of the big points of what isn’t popular in cannabis: limited licenses. Cannabis continues to be quite popular, but limited licenses are not, especially ones that limit supply and create artificially high prices for consumers. Not only are they not popular on the right, but they also really aren’t popular on the left either. And politicians, regulators and social equity activists have been fighting them for some time with various levels of success for years.

So, not only do limited license markets not have a reproduceable model, but almost every stakeholder doesn’t like them either. When you are at odds with every stakeholder, you might have a problem.

Despite the negative outlook for limited license business models, cannabis is still quite popular in the US, and cannabis usage continues to climb. I believe we are riding a wave of cannabis adoption that should go on for another 20 years. My favorite data point of the election was from Kentucky. The state gave every local municipality a chance to approve or deny medical cannabis local sales. EVERY SINGLE COUNTY, all 106 counties approved medical cannabis. EVERY SINGLE ONE.

Cannabis adoption continues to grow, and cannabis remains popular. At the same time, some companies like Grown Rogue are breaking out and few are doing much in the way of due diligence or research, so there is very little competition and thus lots of opportunities both in public and private companies.

Mindset Makes a Mammoth Investment

With just $4.5 million in external funding, Mammoth Distribution has grown its premium house of brands to over $65 million in sales and 200 employees, while competing in California, the most competitive and difficult cannabis market in the world. Mammoth’s Heavy Hitters is the #1 Premium Brand in California, with 2.5X the loyalty of the industry norm and is the only brand that has stayed in the top five in its category (vape) for the past 8 years since legalization.

While most California cannabis companies are experiencing serious price declines, Mammoth has kept its premium pricing unchanged for the last five years. Heavy Hitters vapes cost 70% more than the competition and dominate the high-end vape market with 75% market share in California.

The reason Heavy Hitters can keep its premium price is easily explained with a single word: quality. The company’s quality standards and controls are best-in-class. I witnessed and watched in amazement as a quality control employee examined every single vape cartridge individually to see if there were any impurities in the cartridge, and if there were, it got tossed in the garbage. Another person with gloves polished every cartridge to rid it of smudges or fingerprints before packing as well.

This commitment to quality also extends to where their products are sold. Not only does Mammoth do its own distribution, but it also refuses to sell to anyone who sells to the illicit market. The company believes that to build a long-term brand, you must control where, how and how much a product should be sold for. This is very atypical for a California company, as most California brands end up showing up in illegal stores in New York and other places. Mammoth’s sales could easily double if they were “looser” in who they sold to. I think Mammoth’s level of sales is even more impressive when considering that they are probably giving up a substantial number of short-term sales to seed long-term brand value and loyalty.

This commitment to quality and long-term thinking stems from one of the best management teams I have come across. Skylar, Nik, Wes, Jeremy, Matt, Rob, Kirstie, and Sandip act more like a high functioning sports team than any other cannabis company. And I’m not the only one impressed with them, other Mindset portfolio companies such as Grown Rogue, Garden Society and Uncle Arnie’s could not speak more highly of the team as well. The company is well-known and well-regarded in California as one that is focused on building long-term, mutually beneficial partnerships.

The culture at Mammoth is simply exceptional. I believe that top management are a group of “A players” that are: happy, committed, ambitious and finding joy in developing significantly safer and better products than competitors in the most competitive market in the world. And most importantly they have demonstrated something that is in short supply in the cannabis industry: operational excellence.

Mammoth is now ready to take its show on the road by expanding into additional states, starting with New York. The company believes that if your brand can dominate California and New York, you will dominate cannabis culture, and every market will follow suit.

Along with geographic expansion, there is an amazing opportunity for Mammoth to onboard distressed California brands. Mammoth has enormous operating leverage in its distribution and manufacturing infrastructure. The company can simply plug in brands, strip away what’s not needed and turn them profitable.

The company recently demonstrated this by being the perfect acquirer for the high-profile, powerful brand called Papa & Barkley. Investors had poured $75 million into Papa & Barkley, but the company had fallen on hard times, and Mammoth was one of the few companies that were able to successfully acquire and onboard the company. This is because Mammoth has not only the operational expertise, but the company does its own sales and distribution. After a smooth transition, Mammoth is now generating positive cash flow from the acquisition and has some interesting ideas on how to grow the brand from here.

Papa & Barkley is just the latest example of brands and businesses Mammoth has brought on board including Almora, Lift Tickets, and Space Station. In a highly immature industry full of bad actors and people who don’t know what they are doing, Mammoth’s combination of operational excellence, ethics, culture and powerful infrastructure make it one of the few companies that can successfully acquire other brands.

There are only a handful of companies in cannabis that can be the home for distressed cannabis brands that have the resources, distribution and management talent and expertise in California. Mammoth’s phones are now ringing off the hook with potential opportunities from companies that need help.

Mindset Capital believes the long-term winners in cannabis will come from the highly competitive West Coast. If you can not only survive markets like California, but thrive, then when you head to more limited license markets, you should crush the competition. Mammoth fits that mold.

When institutional investors, private equity and Fortune 500 companies decide to enter the space, they may be shocked at the lack of operational excellence and talent there is in cannabis. Further, there are few investable brands in the cannabis industry. Not only do we believe Mammoth already owns real brands, but it can become the first true house of brands in cannabis, and it can do this while most of the industry is reeling.

Mindset Capital will be investing in Mammoth and this investment opportunity is only available to Mindset Capital and our investors. Mammoth is only willing to accept investors that believe in its mission and see the long-term opportunity in cannabis. The Mindset Venture Fund, the Mindset Value Wellness Fund and the Mindset Value Fund will be investing in this round. If Mammoth was a publicly traded company, each of the Mindset Capital open funds would have at least 10% of the portfolio in this company, it is such a high-quality investment. Due to the need to manage liquidity in our open funds, we will be investing less but know that we consider this to be one of the best risk/reward investments we have come across in the industry.

Mindset is also creating a new partnership called the Mindset Mammoth Fund to invest. Please let us know if you would like to invest. The total investment from Mindset across all its funds should be somewhere between $5 to $10 million.

In our bull case in which Mammoth not only grows geographically and adds brands, but succeeds in hemp and beverages, the company could be worth billions of dollars. The opportunity is simply Mammoth.

Hanging Out More with Uncle Arnie

We are very bullish on the future of cannabis beverages and believe that hemp beverages could be the killer app or the iPhone moment for cannabis to truly explode higher in terms of consumption. We have made a series of investments and even launched and closed a hemp beverage venture fund, the Mindset Venture Fund, earlier this year to capitalize on this thesis. And some of our portfolio companies are starting to break out.

Today, I want to talk to you to our favorite uncle: Uncle Arnie’s.

Since we invested in January, we have been blown away with just how exceptional Theo, Alberto, Jimmy and Assaf are as founders and operators. They are simply knocking the cover off the ball. Uncle Arnie’s is a fun, happy, value brand that delivers a good experience at an unbeatable price that it is being embraced by consumers.

We believe Uncle Arnie’s is special because they are not only killing it in the hemp beverage space, but they are also crushing it in the regulated dispensary channel. Uncle Arnie’s is proving that a 5 or 10 mg THC hemp customer is a very different customer than a 100mg dispensary customer and the company can cater to both.

On the hemp side, despite being a relatively late entrant into competitive markets, they have rapidly gained market share and grown at breakneck speed. The keys to their success besides the clear talent of the executive team, is they know they are a fun value brand that is non-carbonated in a field of competitors trying to capture the high-end consumer with fancy seltzers.

The company has also come out with a small 10mg shot that we think is a potential blockbuster in the making. This shot is akin to a 5-hour energy shot that you see in liquor stores, convenience stores and gas stations near the cash register. And the retail price for their 10mg shot is $2.99, which is simply an amazing value proposition to consumers.

We are hearing that some stores in Minnesota cannot keep their supply in stock and that customers are coming to buy full cases of the shots.

In the regulated channel, the company is the leader in California and does a thriving business there. More recently, Uncle Arnie’s launched in Illinois in partnership with Green Thumb (OTC: GTBIF), one of the largest US cannabis companies. We understand that Uncle Arnie’s quickly became one of the best-selling products in Green Thumb’s dispensaries. Further, the ties between Uncle Arnie’s and Green Thumb are blossoming as Green Thumb just hosted the company for a party to show off Uncle Arnie’s to budtenders and to company staff.

In January, we made our first investment in the company. After hearing from the Arnie’s team that they were grappling with shortages of inventory due to soaring demand, we approached them about investing additional capital to put more fuel on the fire. We quickly came to terms and have now invested at a valuation more than double the valuation set in January. And a large strategic investor invested right alongside us (we have promised to keep confidential the identity of the strategic). The total raise was $4 million in fresh capital, setting Uncle Arnie’s to meet explosive demand in 2025.

With multiple growth opportunities from new regulated dispensary markets, to continued hemp beverage growth, to a big push in Direct-to Consumer (DTC), new products such as their new shot format and several new key hires, Uncle Arnie’s is poised to have a blockbuster 2025. This is why Uncle Arnie’s is Mindset Capital’s largest beverage investment.

Uncle Arnie’s is showing that hemp and regulated cannabis can both exist and thrive and that they serve different customers. They are also showing just what kind of demand there is from consumers for cannabis beverages.

So, look out cannabis world, your fun uncle is bursting on scene and breaking out by delivering delicious drinks at an unbeatable price. I love it, but most importantly, consumers love it. (Note: Due to the strategic investor investing alongside us, we will be marking up our Uncle Arnie’s investment as of the end of October.)

Summary

We are very excited for the upcoming year. Grown Rogue should grow its cash flow by triple-digit rates, we have exciting beverage investments that are breaking out and now represent over 10% of the fund and of course our brand-new Mammoth investment, which is in a prime position to acquire distressed cannabis companies and grow.

Thank you so much for your trust and support and as always if you have any questions or comments, please feel free to reach out.

Sincerely,

Aaron M. Edelheit