Three-part questionnaire for the investment rationale:

Part 1 - The business

• What does the company do? BOD sells Medicinal cannabis, CBD and hemp products to consumers and doctors (anxiety, sleep disorder)
• Do they have a simple mission? No, they have 2 missions -> Grow Medicinal cannabis and grow CBD wellness.
• If you were to work for this company why would you do it? Would people enjoy working for the company? Not sure where I would work considering sales are handled by H&H Group. Can't find a glassdoor review to check if people enjoy working at the company.
• Who runs the business? Should be Jo Patterson as she is the founder but H&H Group owns most of the outstanding shares and have been adding non-executive directors to the board.
• How long have they been in the business? 7 years now, founded in 2014 really impressive growing from $0 to $7M in revenues for past 7 years in the difficult cannabis market.
• Do they talk the talk or walk the walk? They have a product so they do walk but they also have clinical trials and have been talking about new areas. Overall, they do walk the walk as they are laser-focused on new products and growing sales.
• Are they honest with their shareholding (align shareholder interest)? This is a tough one, while yes insiders own shares the issue is the remuneration. Jo has a high and healthy annual salary of $333K. This means during market downturns her net wealth is not impacted.
• Do they have past experience running a business? Yes, she had success running private businesses in the past most notable is selling Onemail to e-mitch before the financial crisis in 2007. Very tiny startup gobbled up by a large advertising firm at the time. History to repeat itself with H&H Group?
• Do they have a compelling product? The Swisse label makes it a compelling product as they are granted rights to receive royalty fees on CBD wellness products. Although, I have not tried it so I am talking BS. I need to try it to see if there are benefits or if it is a fad.
• Would customers pay a premium for the product (i.e. if I raise the price by 100% will more than 50% stop using the product)? No. It is not an essential product unless you are suffering from anxiety and is recommended by doctors. Thus CBD Wellness is less sticky than Medicinal Cannabis. Hence price rises do not equal higher sales.
• What technologies do they have? Patented R&D on their oil? They are going through clinical trials to validate it.
• Are they outsourced or developed internally? Internal R&D
• Does the product sell itself or do they have to spend marketing to win customers? They actually spend money on influencers to sell the B2C products lol. Although, they do have word of mouth from doctors when it comes to the Medicallibis
• Would you buy the product? Yeah, why not? I want to see if it helps me with stress. Curious to know.
• Who are their competitors? Many competitors in both wellness and Medicinal cannabis. The competitors range from startups to incumbents. However, the entire industry is held by regulation into medicinal cannabis.
• Do competitors offer better products? Most likely -> Although, I don't know is the honest answer
• Do competitors have better technology that reduces cost or make their products more desirable? The technology I imagine competitors would have is vertical integration in the supply chain. Bod is outsourcing that to H&H Group since they have done it in the past.
• Do customers also use competitor products? I doubt it for medicinal cannabis but for Wellness there would be other alternatives especially from Canopy Growth or Cronos.

Part 2 - Red flag city scenarios

• Any hidden issues that could kill the company? H&H Group divesting from the business and kicking Jo out of the business she created. Sales growth not growing faster than the cost to run the business.
• Any decisions that do not further the mission of the company? In-fighting between management and H&H group. Jo selling shares to buy property.
• What would kill the company? (including Meteor/asteroid would they survive the aftermath) A meteor strike would kill the business. Also, sharp increases in raw material costs could also kill margins and the business.
• Did the founder/CEO misrepresent financials? Nope. They are honest with what they can achieve, although I feel they have not experienced transitioning from a small business to a large business.

Part 3 - Financials

• How do they report revenues? Under AASB 15 when recognising revenue in relation to the sale of goods to customers, the key performance obligation of the consolidated entity is considered to be the point of delivery of the goods to the customer, as this is deemed to be the time that the customer obtains control of the promised goods and therefore the benefits of unimpeded access.
• What are their revenues? $7.5M in FY21 -> $2.4M in Medicinal Cannabis, $4.4M in CBD Wellness and $0.7M in OTC herbals. It grew ~ 25% yoy.
• Are they profitable? (EBIT to me is the most important as it is very clean compared to NPAT and the accounting tricks companies can use to fudge the numbers). Nope and not even close. They would need around $20M revenues to break even.
• Do they have debt? Not really. Their liabilities is mainly trade payables, and they did not procure debt to finance the business. They raised capital to keep the business going.
• Do they have enough cash? They have $8M in the bank but they are blowing $5M p.a. cash outflow. Hence have around a year worth of burn before they are forced to tap into financial markets.
• Do they have high inventory? Surprisingly no, which means the products are selling. There was not much inventory growth yoy. The inventory as a proportion of cash is quite small although most of the cash comes from investors.
• Positive operating cash flow? Nope. They have to find a way to get there.
• Do they do capital raises and does it have a negative effect on shareholders? Yes, large-cap raises hurt existing shareholders but keep the company alive.
• Does the cash flow statement match with the Income statement? Closely match but may have differences due to capitalisation of assets.
• What financial metrics are the most important? Revenue growth and operating margins for me are the most important metrics. The big question is can they stay alive without relying on capital markets?

Thoughts

Like I said it is very risky but the valuation is tempting and the product does sell well which is good. The financials do not show major red flags although cash outflow & I feel there is not enough cash. It all depends if they can win back revenue from the UK. We saw a sharp decline from $2M to $0.8M due to the lockdown.

Not a lot of research done for this microcap company. I remember there was a time with persistent cannabis booms and bust. However, now I feel we are approaching an inflextion point in the adoption curve where the winners start making money. I would not classify Bod to be a winner with only $7M in revenue for FY21. However, the capability for the canabis market to grow is only restricted by regulation. We are seeing a lot of companies going past the phase 1 trials.    

So why am I maintaining a bull thesis? To me, Bod is an investible canabis company. It's actually not that hard to value on a traditional sense. You split the business in 2 segments (Medicinal Cannabis & CBD Wellness). Slightly more than half the revenue is coming from CBD Wellness division (thanks to the involvement with H&H Group).

Normal canabis companies try to commercialise cures and have to go through the clinical trials. Bod reached commercialisation of the medicinal canabis division 2 years ago through Medicalibis. You can see the seismic growth during FY20 - FY21 where they grew from 4,000 sales to 12,000 sales. The 12,000 sales correspond to $2.3M so from a unit economics it is roughly $200 per product. Next task is to look at the gross margins. Unfortunately COGS is blended at $3.9M so we don't know the mix. The good news is that COGS remained stable YoY.    

Just to show how complex finding good companies in the  canabis/hemp sector read this. According to Business News Australia, these were the 20 best cannabis companies. If you look at the list, 4 of them commercialised the rest are still in clinical trials. 

Why I went with Bod over the others?

• For starters they have a product you can buy from the shelf. Count how many of these ASX listed companies actually have a product?
• They have a large distributor -> Health & Happiness Group selling Bod's product in Europe and now USA. I need to learn Chinese. This was H&H Group's Annual report last year :)
  • H&H Group last year generated ~ $11B revenue, 64% gross margins, $1B in profit so 11% net profit margin. Hence, Bod got a behemoth to sell the product. 
  • The most important metric to look at H&H Group is the cash generation: $1.8B cash in the bank with assets > liability. On average they spend about $60M in marketable securities attributed to H&H Group's investment into Bod. They generate positive operating cashflow to fund capital expenditure and other investments. I highly recommend using TIKR <- Props for Alpha showing this site :)    
  • In summary, H&H Group could buy Bod for $100M+ without making a dent in their cashflow statement. Instead, they are dedicating resources to grow Bod and I believe spin off the company for a higher valuation. They could sell to a buuyer like Cronos from USA. Everyone would make money off that transaction including retail shareholders. 
  • The only thing to watchout is that half of Bod's success is entirely dependant reliant on H&H Group. H&H is only for CBD Wellness not for medicinal cannabis. There is quite a lot of uncertainty attached to the business. "New H2" which is the innovation arm of H&H Group invested $5M into bod for 16% ownership. Jo Patterson the CEO under (Health And Beauty Enterprise) & Craig Weller COO under (Noir Ted) owns ~11% together. The ownership is similar and we have seen New H2 group put more appointees into Bod. In saying that, both companies are incentivised to grow the business. 

Who is running the show?

• I actually don't know?? The easy answer is Jo Patterson as she is the founder and CEO but H&H Group could easily invest more and own more of the company overtime. In saying that, she is the CEO and she understand the business she has created. Unlike other CEO's of canabis companies who are actively promoting the stock, Jo is laser focused on growing sales. Especially targeting repeat orders from existing customers.  

Why I remain bullish 

• CEO Jo Patterson is the founder who is motivated to grow the business. 
• Investment from H&H Group aligns interest 
• Good Business model for a small cap
• Low valuation ($30M company) 3 times sales for the valuation experts :)  

Major risks

• New H2 Group could kick CEO - Jo Patterson off the board or management team
• Sales growth slows down 
• COGS grows with sales growth which hurt operating margins 
• Small company and there could be a massive red flag I am not seeing. Especially with H&H who could put a strangle hold in the company although they have invested and I don't see why they would do it.  

Invest at your perill is the best summary :)

Having done the work I am ok to take a position into the company. For those who struggle to read warning labels, Bod is still a high risk investment. I maybe wrong let's see in a few years.

Q2 FY21 update:

• Bod achieved total attributable sales of $3.33M a 52% increase on previous quarter (Q1 FY2021: $2.2M). The sales represent the sum of invoice sales and binding purchase orders received during the reporting period. 
• The sales growth is by new MediCabilis purchase orders in the UK and Europe for CBD and hemp consumers products. 
  • 2,360 MediCabilis units sold during the quarter, marking a 49% increase in the last quarter (Q1 FY2021: 1,581).
• The company is in a safe position with $10.6M cash in the bank to capitalise on growth prospects. 
• The chart below shows the rapid growth in MediCabilis sales every month. The amazing takeaway is that repeat prescription accounted for 62% of total sales volumes. Physicians and patients are satisfied with the product. 
• They are also expanding their presence in the European market:
  • Italy through two binding purchase orders valued at $1M and $871K respectively from H&H for four Swisse Wellness (“Swisse”) hemp seed oil products. 
  • Bod and H&H will launch the products in over 4,000 pharmacies across Italy, as well as through Swisse’s e-commerce channels.
  • More importantly for investors "Bod will receive a royalty from H&H on net product sales, as well as a cost-plus margin for the supply of its extracts and formulas". That is the exclusive license agreement. It sounds like H&H is slowly taking control of distribution which is good as sales are growing. 
  • They are also entering France and Netherlands through pharmacies and e-commerce. 
• Recent regulatory shifts across the cannabis sector is an important tailwind to the business:
  • "Therapeutic Goods Administration (“TGA”) announced a decision to reschedule cannabinoid products to Schedule 3 (Pharmacist Only) medicines. This ruling means that a pharmacist can now supply TGA-approved CBD products that contain up to a maximum of 150mg/day to consumers over-the-counter without a prescription." From Bod's perspective, it opens up a large market opportunity in Australia and they are "assessing product registration steps for a schedule 3 CBD product". 
  • Globally the United Nations Commission on Narcotic Drugs accepted WHO's recommendation recommendation "to remove cannabis and its derivatives from Schedule IV of the 1961 Single Convention on Narcotic Drugs". 
  • Finally in the US, the "House of Representatives also passed the Marijuana Opportunity Reinvestment and Expungement (“MORE”) Act to decriminalise cannabis. The bill aims to remove cannabis from the US Controlled Substances Act and importantly, recognises the medicinal properties and therapeutic benefits of cannabis." The US market is extremely important for Bod as it is the next region in their growth. The More Act will get voted by the Senate, if it goes to a tie Kamala Harris has the final call. She has been very inconsistent in the past although last year she advocated the House to pass the act. 
• Overall the company is looking very good and have room to grow further internationally through H&H. They are capitalising on the regulatory changes by establishing a medical advisory board comprised of internationally recognised physicians and researchers. Bod has a clear path for growth and I am happy to go on the ride.