Green Thumb Industries Inc. (GTBIF – $11.00)

Green Thumb Industries Inc. (GTBIF ? $11.00)

Buy - Price Target: $18.00

Growing Platform in Both Retail Distribution and Branded Products

June 10, 2019

Summary

Rommel Dionisio 646.448.3028

rdionisio@

Stock Data

Rating: Price: Price Target: Total Return to Price Target: 52-Week High: 52-Week Low: Dividend Per Share: Dividend Yield: Market Cap. (M): Avg. Daily Vol: Shares Out (M):

Compass Point Estimates

EPS (GAAP)

2018A

2019E

Q1

($0.01) ($0.06)A

Q2

$0.00

($0.02)

Q3

($0.02)

$0.02

Q4

($0.02)

$0.04

FY

($0.05)

($0.02)

P/E

(220.0)x

(550.0)x

Buy $11.00 $18.00 63.6% $25.03

$6.44 $0.00 0.0% $2,024.0 277,161 184.0

2020E

$0.06 $0.07 $0.09 $0.11 $0.34 32.4x

Revenue (GAAP)

Q1

$11

Q2

$14

Q3

$17

Q4

$21

FY

$63

$28A $34 $58 $71

$190

$84 $92 $103 $112 $390

Adjusted EBITDA (M) (GAAP)

FY

$(25.2)

$(1.6)

$93.7

Other Metrics ($M)

Debt-to-capital:

2%

Sources: Bloomberg, Compass Point estimates

We are initiating coverage on Green Thumb Industries with a Buy rating and price target of $18. Green Thumb Industries (GTI) has, through a combination of organic growth plus acquisitions, successfully built itself into one of the leading multi-state operators (MSOs) in the US cannabis industry. The company boasts one of the largest chains of retail dispensaries in the country with its RISE stores, and plans to more than triple its retail footprint in the next few quarters with additional store openings. In addition, with well known brands across the spectrum of price points and product categories, GTI has also become an industry leader in producing and marketing branded products for sale in either its own dispensaries or in other retailers.

As the US cannabis industry, which still remains in an early stage of growth, rapidly matures and consolidates, we believe investors will increasingly award higher valuation multiples to companies who successfully establish prominence in either the retail dispensary or branded product segments of the business. Over the long term, we believe these two categories will represent higher valueadded business segments compared to cultivation and processing, similar to what we see in other major consumer staple categories (i.e. food, beverage, etc.). With GTI poised as one of the early front-runners to become an industry champion in both retailing and branded goods, we believe shares of GTBIF should trade at an Enterprise Value/2020 Revenue multiple of 8.5x, a premium to the peer group average. This multiple generates our price target of $18.

Highlights

Emerging as an early leader in retail. With 20 dispensaries now open, most of which are branded with the RISE name, GTI has emerged as one of the early industry leaders in establishing a multistate retail footprint. The company plans to more than triple this number of RISE dispensary locations over the next few quarters with an aggressive rollout plan. In addition, the acquisition of Integral Associates will add the Essence line of dispensaries to the company.

Growing portfolio of branded products. Through both internal product and brand development as well as through acquisition, GTI has built a portfolio of brands than span the spectrum of price points from value to luxury, as well as product categories from flower and pre-rolls to vapes, tinctures, edibles, topical lotions & creams, and essential oils. Key brands include rythm in vapes, the Feel Collection in essential and topical oils, Pax in premium vaporizers, and Beboe (which has an exclusive distribution arrangement with Barneys New York) in luxury products.

Solid track record of acquisitions. Among the various publicly traded MSOs, GTI has built, in our opinion, one of the most impressive track records of acquisitions in recent quarters. These transactions have enabled the company to expand its portfolio of brands, enter new states such as Florida and Connecticut, and reinforce its presence in major states such as California and Nevada.

Rapid industry growth in the US. Despite the current restrictions on cannabis at the federal level, 33 US states now allow medical use of cannabis, and 10 of those states allow use on the recreational level. The accelerating pace at which state legislatures have changed such laws in recent years has enabled the US cannabis product industry to experience 20-25% annual growth, to approximately $13-14 billion in estimated sales for 2019. Such growth will likely establish the legal cannabis products market in the US as one of the most important growth sectors in consumer staples for years to come. For a more detailed discussion of the accelerating pace of regulatory changes driving such strong industry growth, we have published an accompanying industry piece: Accelerating Pace of Regulatory Changes Driving Strong Industry Growth in Cannabis.

See Important Disclosures on page 19 of this report.

Compass Point Research & Trading, LLC

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Company Description

Based in Chicago, IL, Green Thumb Industries is one of the leading vertically integrated multistate operators (MSOs) in the US cannabis industry. The company's businesses include cultivation, processing, distributing, and retailing cannabis products for both the medical use and recreational/adult use markets.

On the production side, Green Thumb Industries currently has 11 manufacturing facilities where cannabis is cultivated, stored, and processed. In addition to flower and pre-rolls, the company also produces derivative products which require the extraction of cannabinoids into oils intended for use in vaporizers, tinctures, topical lotions and creams, extracts, and edible products.

On the product retailing side, GTI now operates 20 retail dispensaries, most of which are branded with the RISE name. The RISE chain of retail dispensaries is already one of the best known and fastest expanding in the country, and management already has licenses and near-term plans to open as many as 77 retail dispensary locations. Such rapid expansion could certainly entrench the RISE network of dispensaries as one of the nation's leading chains of cannabis retailers.

rythm rythm Hits ? premium glass chamber vape cartridges, use CCELL ceramic technology to ensure uniform heating

Source: Company website

Finally, on the branded product side, GTI has developed or acquired a broad portfolio of wellknown brands of cannabis, including rythm in flower and vape products, Beboe in luxury vaporizing pens and edibles, the Feel Collection in tinctures and essential oils, Pax in premium priced vaporizers, and Dogwalkers in pre-rolls.

Management Team

Ben Kovler ? Founder, Chairman, and Chief Executive Officer Ben Kovler founded GTI in 2014, and has grown the company into a national cannabis packaged goods producer and retailer. Mr. Kovler frequently appears as an industry expert and leader in major global media outlets. Mr. Kovler also serves as Chief Investment Officer for Kovpak II, LLC, a diversified investment fund. He received his MBA from The University of Chicago and his BA from Pomona College.

Rommel Dionisio | 646.448.3028 | rdionisio@

Compass Point Research & Trading, LLC

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Anthony Georgiadis ? Chief Financial Officer and Director

Anthony Georgiadis joined GTI in 2015 as Chief Financial Officer, and has served as a Board Member since 2016. Mr. Georgiadis previously served as Chief Operating Officer of Wendover Art Group, a private manufacturer of wall d?cor. Prior to this, he worked as a principal investing associate for CIVC Partners, a private equity firm, and as a mergers and acquisitions analyst at Bowles Hollowell Conner & Co. Mr. Georgiadis graduated from Bucknell University.

Andy Grossman ? Head of Capital Markets

Andy Grossman joined GTI in 2016 as Head of Capital Markets. Mr. Grossman previously served as Managing Partner and Head of Trading, Risk Management, and Operations for LG Capital Management, and investment fund he also co-founded in 2011. Previously, he was a senior trader for Chesapeake Partners, a Baltimore-based multi-billion dollar investment fund. Mr. Grossman received his BA in Finance from Syracuse University.

Jennifer Dooley ? Chief Strategy Officer

Jennifer Dooley joined GTI in 2016 as VP of Marketing & Brand Development. She became Chief Marketing Officer in 2017, and head of corporate development and investor relations in 2018. Ms. Dooley previously led brand development and innovation at Storck USA, a top 10 global confectioner, where she worked from 2008-2016. She received her MBA from Northwestern University's Kellogg School of Management and her BS from the College of Charleston.

RISE dispensaries Interior of Rise retail dispensary ? York, PA

Source: Company website

Matt Miller ? General Counsel Matt Miller joined GTI in early 2019 as General Counsel. Mr. Miller was previously VP and Deputy General Counsel for publicly traded Groupon, a worldwide e-commerce marketplace connecting subscribers with local merchants. Prior to this, Mr. Miller was an attorney in private practice. He received his JD from Loyola University Chicago School of Law and his BA from University of Wisconsin ? Madison.

Rommel Dionisio | 646.448.3028 | rdionisio@

Compass Point Research & Trading, LLC

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Kate Denton ? Senior Vice President, Marketing

Kate Denton joined GTI in 2018 as SVP of Marketing. Ms. Denton previously served as Chief Marketing Officer of Loudpack, a California-based privately held cannabis company, before which she was SVP of Capitol Music Group. Before this, she was Sr. Director of Marketing at PepsiCo. Ms. Denton received her MBA from Northwestern University's Kellogg School of Management, and her BA from the University of Michigan.

Investment Highlights

Sharply increasing market for legal cannabis in the US

Driven by a rapidly changing regulatory environment on a state by state basis, the US is seeing sharply rising consumer demand for legal cannabis products, in both the recreational use and medical use markets. As many as 33 states plus the District of Columbia now allow regulated medical use of cannabis, with 10 of those states now also allowing recreational use as well. Illinois just passed legislation last week to become the 11th state to allow recreational use, and this legislation will take effect in January 2020. Most of these states have adopted such regulations in just the past two years, driving a considerable rise in demand in the US overall, even in spite of cannabis still being a controlled substance on the federal level.

US State-by-State Guide State map of cannabis programs

Source: National Conference of State Legislatures website

Within the 33 US states which now allow cannabis products for medical use, we are seeing rapid acceleration in demand from sharply increasing number of patients eligible to purchase such products.

For example, in the state of Florida, which voted to allow access to medical cannabis for patients with severe medical conditions in November 2016, today over 210,000 patients have been issued medical marijuana cards, up from just 95,000 a year ago.

In the state of Illinois, the recently signed Alternative to Opioids Act reduced what was formerly an approximate 90-day wait period for patients to receive a medical cannabis card, to a wait time of approximately 1-2 days to have access to cannabis products.

We also believe certain states that currently allow cannabis for medical use only may soon enact legislation allowing for the legalization of cannabis products for adult recreational use in the

Rommel Dionisio | 646.448.3028 | rdionisio@

Compass Point Research & Trading, LLC

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relatively near future, perhaps before year end. States such as New York and New Jersey have governors who have already recently outlined plans and proposed legislation that would enable the recreational use of cannabis.

Though such potential legislation remains pending, we continue to view the US regulatory environment on a state-by-state basis as continuing to fuel increased demand and accessibility for cannabis products for years to come.

We note that only 26% of the current US population reside in states where both recreational and medical use of cannabis is legal, with another 42% residing in states where only medical use is legal. Thus, there remains significant additional opportunity for the addressable market to increase substantially.

Addressable market in the US Broken down by state populations

Source: US Census data, Compass Point

We estimate the current market size for the US legal cannabis product market, including both recreational and medical use cannabis, to be approximately $13-14 billion for 2019, growing at about 20-25% annually. Naturally, further changes in the regulatory environment on a state-bystate basis could certainly accelerate this growth trajectory in future periods. Developing portfolio of consumer brands GTI has developed and acquired a growing portfolio of consumer brands to target different segments of the fast-growing US cannabis market. The company's rythm brand is a line of flower, vape, and concentrate products distributed through GTI's RISE dispensaries. The recently acquired Beboe brand of vaporizing pens and edible pastillers are premium-priced products targeted towards the luxury end of the market. The Feel Collection brand of ingestibles include tinctures infused with essential oils, capsules, and topical oils. The company also offers a line of premium priced vaporizers under the Pax brand, as well as a line of pre-rolled packs under the Dogwalker brand.

Rommel Dionisio | 646.448.3028 | rdionisio@

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