Dixie Brands vs. Vireo Health: Which Marijuana Stock IPO Holds More Upside?

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Two Cannabis Companies Going Public

Marijuana companies are going public at a dizzying rate this year. Blink and you might miss an initial public offering (IPO). No need to worry though, because here’s some fresh information about two upcoming marijuana stock IPOs: Dixie Brands and Vireo Health Inc.

The former is headquartered in Denver and makes weed-infused beverages like lemonades and root beers. Meanwhile, the latter is a Minneapolis-based company with operations in three different states.

Both will (probably) go public as micro-cap stocks.

What’s great about these equities is that they would enter the market early in their life cycle, giving investors a shot at tremendous upside that’s usually reserved for private equity and venture capital.

Just look at OrganiGram Holdings Inc (OTCMKTS:OGRMF, CVE:OGI), which shot up 122% in less than one year. OrganiGram was squarely in the micro-cap space when we started covering it, although its market value has since swelled to $497.8 million.

Chart courtesy of StockCharts.com

We keep an eye out for these opportunities. Of course, not every marijuana penny stock is a gold mine. Some aren’t worth the transaction fees it takes to invest in them. But the few winners that come along are the ink with which rags-to-riches stories are written.

With that said, let’s review the two upcoming marijuana stock IPOs.

Vireo Health IPO

Outlook: Positive

First is the Vireo Health IPO. Vireo is a medical marijuana distributor with operations in New York, Pennsylvania, and Minnesota. (Source: “Vireo Health’s $17M Round Will Fund Expansion, 50 New Jobs in MN, IPO in Canada,” Twin Cities Business Journal, August 7, 2018.)

The company raised more than $16.0 million in its Series D funding round, which began on June 20. The initial goal of $12.0 million was increased to almost $17.3 million after Vireo received an unexpected influx of demand. The final tranche will close in the coming weeks.

After the funding round is complete, Vireo intends to spend it quickly on hiring hundreds of new staffers.

“We anticipate hundreds of jobs will be created under the Vireo Health umbrella over the next 36 months,” said spokesperson Andrew Mangini. “Vireo Health [also] intends to invest millions of dollars into existing markets.” (Source: Ibid.)

Scaling up is an important factor in the marijuana market right now. In fact, it might be the most important factor for Vireo, since it has an opportunity to carve up most of Minnesota’s burgeoning market for itself. At the moment, there’s one competitor in the region.

So, by acting quickly, Vireo could secure a revenue base that would finance future expansion. But that’s not all. The funding round also serves a second purpose: setting Vireo up for an IPO.

My guess is that the listing will take place on the Canadian Securities Exchange (CSE). We don’t have confirmation on that point yet, but that’s where all the marijuana stock IPOs have been taking place.

Dixie Brands IPO

Outlook: Positive, particularly as an acquisition target.

The first thing you should know about the Dixie Brands IPO is that it’s technically not an IPO. It is a reverse takeover (RTO). (Source: “Cannabis edibles maker Dixie Brands outlines plans to go public in Canada,” Marijuana Business Daily, July 26, 2018.)

Regular readers of Profit Confidential are probably familiar with this concept because we’ve covered MedMen Enterprises Inc (OTCMKTS:MMNFF, CNSX:MMEN) going public in a similar fashion.

For those in the dark, however, allow me to explain.

  1. Dixie Brands finds a stock that’s listed on an exchange but isn’t really in use. (Its choice was Academy Explorations, a defunct mining company still occupying valuable a space on the CSE.)
  2. Dixie then “buys” the public company that is underlying that stock (once again, Academy Explorations).
  3. The two companies merge, adopting Dixie Brand’s name and identity for the new business.
  4. Voila. Dixie is listed on a stock exchange, no IPO hassles whatsoever.

This approach is useful for companies going public in hurry. It avoids a ton of red tape. And, to be frank, it can save a sizeable amount of legal fees.

However, there are downsides to consider, such as poor transparency, weak reporting guidelines, and the inability to raise fresh capital. Dixie is taking over existing shares, not issuing new ones, so there’s no additional cash flowing into the firm’s coffers.

In order to get new funding, the company is holding its final private placement. It will raise somewhere between $12.0 million and $20.0 million, $2.0 million of which will come from a debt-to-equity swap.

Analyst Take

While both Dixie Brands and Vireo Health Inc. are promising, I think Vireo might be the safer option.

Why? Well, because unlike most marijuana stocks, Vireo Health comes from a small market: Minnesota. It can become the big fish there, then enter the ocean fully fed and ready for a fight. Meanwhile, its competition will have squandered millions of dollars on crumbs that, when expenses are tallied, won’t even yield a profit.

I’m clearly not the only person thinking along these lines. Why else do you think Vireo’s Series D funding was oversubscribed? Wall Street and the smart money are already there.

Don’t get me wrong though, Dixie Brands is also looking pretty good. The company is expected to produce $20.0 million in revenue in 2018 and $50.0 million in 2019. However, I don’t like Dixis’s debt-to-equity conversion, particularly in light of the RTO.

So, overall, I’m leaning toward Vireo Health stock.