Doubling Down on Grown Rogue and Hemp Beverages

The Mindset Value Wellness Fund Q2 2024 Investor Letter

Disclaimer: The below post is my Q2 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.

Mindset Value Wellness Fund Q2 2024 Letter

The Mindset Value Wellness Fund finished the second quarter up 19.5% on a net basis and is up 62.9% for the year.

The Odds of Rescheduling Before the Election Have Soared

I estimate the odds of rescheduling happening before the election have soared since Biden announced he would not run for reelection. Why do I think this?

Because while Presidential elections are about talking about hot button issues and firing up your base to come out to vote, the real election is about convincing the center or marginal voter to vote for you and your party. And this is where cannabis comes in.

What other topic or opportunity do the Democrats have to show common sense leadership on an issue that is very popular with Americans? There is only one that I can think of: cannabis. For more, I wrote a post about my thinking on how rescheduling should be soon:

https://mindsetvalue.substack.com/p/the-silver-platter

Grown Rogue Is About to Turn on New Jersey

However fun it is to speculate on Federal Reform, our focus remains on fundamental research and on our portfolio investments. Our largest position continues to be Grown Rogue (OTC: GRUSF). The company’s focus is on craft cannabis cultivation with an emphasis on quality and hyper-efficiency. Grown Rogue is profitable in Oregon at $800 to $900 a pound and even more profitable in Michigan at $900-$1000 a pound.

Very shortly, Grown Rogue will turn on its new New Jersey facility that will produce Oregon quality cannabis, but New Jersey wholesale prices are $3500 a pound. And with limited competition, the quality in New Jersey is far lower than exists in Oregon or Michigan. Grown Rogue’s cash flow should explode. To be conservative, let’s assume instead of costs at $600 a pound to cultivate flower, Grown Rogue’s costs soar to $1000 a pound in NJ. With 9,600 pounds of annualized production and assuming a lower wholesale price of $3000 a pound, Grown Rogue should produce over $19 million in EBITDA from New Jersey alone.

Then after New Jersey, they are turning on Illinois in 2025, where wholesale prices are $2500 a pound.

With no sell-side coverage, and only one independent analyst following it, few are running any kind of forward estimates or analysis.

I think the company could hit a run rate of approximately $40 million annualized EBITDA with operating margins above 50%, while growing at triple digits. As of the writing of this letter, the company has a fully diluted market cap unlevered of approximately $160 million. I’m not sure what the right valuation is, but the fastest growing company with the highest margins and one of the cleanest balance sheets should not be trading at one of the lowest valuations or anywhere near four times EBITDA.

Our Early Conversion of Grown Rogue

And this is exactly why we have continued to grow our position in Grown Rogue. We converted our remaining convertible debt into shares in June. You can see the filing of our updated ownership in this SEC filing. Please note that on a fully diluted basis, we own 14.4% of the company. The SEC uses basic share count, which doesn’t include all options and warrants.

New Private Investment Coming

I’m very excited that after almost two years of work, we have come to terms to invest in one of the premier private cannabis companies in the country with one of the best management teams. This company has taken very little outside capital but has built one of the few real brands in cannabis. We will be only the second outside investor in the company, and this opportunity is available only to Mindset, there are no other investors participating.

The plan is for the Mindset Venture Fund to lead the investment round and both the Mindset Value Fund and Mindset Value Wellness Fund to make smaller investments. I’m in the process of creating a new side partnership to fund the rest of the capital raise. If you are interested in participating, please let me know.

Increasing Our Cannabis Beverage Investments

We continue to think cannabis beverages are going to be a massive category and in addition to the five small private investments made from this fund, we also launched and closed a $10 million dedicated cannabis beverage fund called the Mindset Venture Fund. We wrote about our thesis saying the following:

Since October, I have been thunderstruck. And it all started with learning that 10% of liquor store sales in Minnesota were hemp-based THC drinks. I thought to myself, that can’t be right, annual alcohol sales are $260 billion a year. There is no way that data point is accurate.

Well, after months of research and due diligence, not only is it correct, but it is rapidly spreading to other states as well.

I think there is an opportunity to invest in hemp-based beverages and that the category could eventually generate more than $50 billion a year in annual revenue and could create more than $250 billion of market value.

Mindset is already re-investing in one of our breakout companies at a significantly higher valuation than we invested in January because this brand is far surpassing our expectations, and they are continuingly battling inventory shortages because demand is so high. We plan to write more about this company in the future, but our thesis is starting to play out.

Mindset also just participated in a private offering of a publicly traded company that is expanding into hemp beverages which we believe is the only pure play way to publicly invest in hemp beverages. There is a lot going on in the cannabis beverage and hemp beverage space and it continues to be ignored by most investors. It shouldn’t stay that way for long. Stay tuned. We should have much more to share in the future.

New Research Consultant to TOKE

This quarter we became the research consultants to the cannabis ETF TOKE, which is run by Cambria Associates. There are many interested investors who do not qualify for our fund, and we believe there is an opportunity for a fundamentally researched, well diversified cannabis ETF. We wrote about TOKE and how we are helping them.

Also, the CEO of Cambria, Meb Faber, had me on his podcast for a discussion on the opportunity in cannabis.

Summary

The next five months should have numerous catalysts from company specific to federal reform. I’m expecting there should be lots of fireworks and lots of opportunity for us to continue our strong performance.

Remember though that our investments can be illiquid and that can make for some random movements over the short-term. With patience and a long-term fundamental focus, we believe we should continue to generate outsized positive returns.

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

Sincerely,

Aaron M. Edelheit