- Botanical Oils are one of the fastest growing segments in nutraceuticals
- Management Team with superb credentials.
- Favorable capital structure
- Strategic Investor backstops acquisition
The market reaction to the acquisition of Eqova Life Sciences was very favorable trading up 132% on Friday. The size of the Cannabinoid (CBD) products market is expected to reach $2.1 Billion by 2020 according to the Hemp Business Journal. This means there is still a lot of opportunity for innovative startups like Eqova. When companies enter a market that is growing so large and so fast, entrepreneurs can lose sight of their focus. The pending acquisition of Eqova Life Sciences by Grey Cloak Technology (GRCK) due to close on October 10th seems like an ideal union that will provide capital markets liquidity to a startup company focused on the medical practitioner market. The question on investor’s minds is how well can they execute on their business model and is it viable? After conducting a little due diligence the answer appears to be in the team they assembled. This team seem to be laser focused in targeting the niche market of medical practitioners that buy everything from nutraceuticals to cannabis.
Patrick Stiles, the head of Eqova Life Sciences, is an industry veteran in the supplement industry. His background is primarily in psychotropic therapies which makes him ideally suited for the hemp oil market. For those that don’t have a dictionary handy, psychotropic means he is an expert in designing supplements that deal with a person’s mental state. He was co-founder and CEO of Zen Life Supplements for over 6 years and was responsible for all facets of the operation including marketing and at its height had upwards of $1 mill in ad budget spent in just digital media. The marketing background he offers the new company is a unique skillset that encompasses a consultative approach to direct marketing in a highly competitive supplement industry. This is exactly what he was doing for years at Zen Life but he had to face the headwinds of distinguishing the products from all the other supplements out there. The laser focus on Hemp Oil allows him to leverage all the positive press surrounding its uses and fold this into an aggressive growth plan that targets medical practitioners. He was also involved in Thrive Science another small startup supplement company. This background and entrepreneurial spirit that he brings to the new company just serves to underscore the old adage that you bet on the jockey not the horse.
Exponential Sales Growth Potential
Doing some napkin math it’s conceivable that with 10 sales reps they might be able to do about $1 million per sales representative annually. This metric comes from what an average outside sales pharmaceutical rep could produce to a pharmacy in a given year. This sales team could drive total sales close to $10 mil in the first year. With at least 50% Gross Margins on hemp oil it’s not unreasonable to see $5 mil in gross profit the first year.
Favorable Market Structure
The company is on OTC markets listed under Pink Current Information and fully reporting with the SEC. From the latest 10-Q they had 25,319,572 shares issued and outstanding. Their fraud analytics subsidiary is continuing to produce revenue but it’s uncertain if they are profitable. The salient point about the revenue is that GRCK is not a shell company. The company is active and has been making progress on the balance sheet and has cleaned up some of its convertible debt and went from $405,097 to $349,062 in the past 6 months according to the last quarterly filing. They have been fully reporting since 2015 so a natural progression to look for might be an uplisting, now that money and revenue seem to be in place.
Large Strategic Investor
There was a 13-G filing by Oakmore Opportunity Fund LLP on Sept 26, 2017 where they filed that they owned 4,657,247 shares of common stock or 9.9% of the stock which puts the new share count at 46,619,089. The timing of this filing suggests a couple of things. It appears that they likely bought out the remaining debt from the noteholder and might have put additional capital in the company to scale up operation. Oakmore doesn’t seem to be a very large fund with its only other holding in Wisdom Homes of America, Inc. (WOFA) but it seems they are very selective and that should bode well for GRCK shareholders. It’s not hard to connect that the activity in the past couple of days has been driven by fund interest in a great growth story.
Earnings Growth Acceleration
The details of the deal remain unknown but it’s not hard to conservatively speculate that management might hold has much as 25% percent of the company which could potentially drive the share count as high at 58 million. Assuming share count goes to 58 million, and it might not even be that dilutive because they might structure in some options based on performance investors could be looking at roughly $.16 in eps per share assuming this capital structure and sales momentum. Investor’s should keep in mind that this is a hypothetical scenario and should wait until early October to see what the terms of the deal are and react accordingly.
GRCK with its acquisition of Eqova Life Sciences might have stuck paydirt. What you essentially have are two industry veterans, powerhouses in their own right, coming together to sell the hottest selling product in the nutraceutical space utilizing their industry acumen and contacts. The question yet to be answered is do they have the right plan to rapidly scale the business? Their industry experience seems to be perfectly aligned to target the commonly ignored practitioner market. A strategic investor with startup capital seems to be in place and the dilution has come to an end setting up the perfect storm for stock appreciation. With potential sales news on the horizon, and the build out of product labels and inventory this could be a fun story to watch unfold. With 46 mil shares outstanding and a market cap of $1.15 mil this seems undervalued given the potential of this team. It’s way too early in the story to set price targets but the earnings potential of this business is amazing compared to the last acquisition target they were looking at when the stock was trading at $.15/share.