Delota Corp. (TSXV: LOTA)

Delota Corp. (TSXV: LOTA) is a growing micro-cap Canadian vape and cannabis retailer. Given its low trading liquidity and market cap, it is suitable only for smaller accounts. Delota has run-rate revenue of $23.1 million a year (annualized based on the last reported quarter ended April 30, 2022) on a market cap of $4.6 million. The Company also has $1.1 million in debt. It trades at an EV to sales ratio of 0.24x highlighting the opportunity as its growth masks its potential profitability.

Description

Delota Corp. is an established vape and cannabis retailer that owns and operates a portfolio of Canadian retail brands that is well-positioned to capitalize on the evolving nicotine and cannabis retail sectors. Its current retail banners include 180 Smoke Vape Store and Offside Cannabis.

The company currently operates 30 brick-and-mortar retail stores (26 - 180 Smoke Vape Stores and 4 - Offside Cannabis dispensaries) and a leading Canada-wide e-commerce presence for nicotine-based vape sales. Delota's goal is to build the most popular retail nicotine and cannabis brands in Canada by aggressively growing its retail footprint and online presence.

History and Restructuring

Delota Corp. (formerly, Spyder Cannabis Inc.) was an orphaned, publicly-listed entity that lacked scale and investment capital and required strategic direction.

In 2021, Spyder Cannabis was restructured and rebranded as Delota Corp. and is now a company with strong recurring revenue from its 30 brick-and-mortar retail locations and e-commerce presence.

The company’s transformational event was securing a strategic investment partner, Plant-Based Investment Corp. (CSE: PBIC), to finance the acquisition of 180 Smoke, one Canada’s largest nicotine-based vape retailer.

In 2022, Delota completed an $11.1 million debt for equity settlement in order to deliver a clean balance sheet, leaving it with total outstanding debt today of approximately $1.1 million.

Currently, the company has a clean capitalization table with 26.8 million shares issued and outstanding with approximately 21% held by directors and officers of the company.

Industry Background

Nicotine/Vape Market

•         Nicotine-based vape is the fastest growing opportunity in tobacco.

•         Revenue in the Canadian vape segment is estimated to be $1.6 Billion in 2022.

•         The Canadian vape market is expected to grow annually by 4% (CAGR 2022 - 2025).

Ontario Cannabis Market

•         Ontario represents 38.9% of Canada’s total recreational cannabis sales according to the Ontario Cannabis Store quarterly review (July 1 – September 30, 2021).

•         Ontario’s legal cannabis sales recently overtook the illicit market for first time, capturing 54% of sales during this period.

Delota’s Retail Strategy

•         Both the vape and cannabis sectors continue to see growth.

•         Both sectors are fragmented at the retail level and are ripe for consolidation.

•         By having a presence in both sectors, Delota has opportunities to:

o   Cross-pollinate customer bases;

o   Diversify revenue streams; and

o   Share infrastructure costs and overhead.

180 Smoke Vape Store Operations

180 Smoke is one of Canada’s largest specialty vape retail chains with 26 retail locations in Ontario and the largest Canada-wide e-commerce presence.

•         180 Smoke currently generates run-rate revenue of $20.4 million a year through its diversified and recurring revenue channels.

o   Average gross margins of 45%-49% on vape products.

o   180 Smoke’s e-commerce platform accounts for 25% of vape sales. This channel experienced significant growth during the COVID-19 pandemic.

o   180 Smoke has over 130K in-store accounts and over 190K online accounts.

•         Delota acquired 180 Smoke in March of 2021 to provide:

o   Access to infrastructure, processes and a workforce;

o   Access to a portfolio of retail leases with growing recurring revenue; and

o   Customer cross-pollination opportunities between vape and cannabis.

•       Unlike other specialty vape retailers, 180 Smoke has secured “store within a store” relationships with big tobacco to have experiential hubs for their products. This provides 180 Smoke with a key competitive advantage to offset retail overhead and protect gross margins on products.

Offside Cannabis Dispensary Operations

Offside Cannabis is an Alcohol and Gaming Commission of Ontario (AGCO)-licensed dispensary brand. Offside is a value-centered dispensary brand that believes in boutique bud products and services at big box bud prices.

•         Offside Cannabis currently generates run-rate revenue of $2.7 million a year.

o   Average gross margins of 23%-25% on cannabis products.

•         Current footprint includes 4 Ontario-licensed dispensaries with a 5^th location to open pending final licensing.

•         The Offside Cannabis brand has focused on growth in the region surrounding the Greater Toronto Area - Niagara Falls, Hamilton, Pickering and soon-to-be Port Perry.

•         Delota developed and launched the Offside Cannabis brand in 2021 leveraging 180 Smoke’s infrastructure and retail processes.

Management

Delota’s senior management team has strong experience in public company management, M&A and developing and operating retail brands. At the operations level, management has operated 180 Smoke since its inception in 2013 and has developed streamlined processes to operate efficiently and are specialists in both brick-and-mortar and e-commerce consumer experiences.

Growth Initiatives

Delota has a two-pronged approach to growth; organic and through M&A.

•         Organic growth is focused on identifying net new retail locations in underserved areas and implementing templated store designs, staffing and training as well as centralized support for efficiencies of sale.

•         Delota is also well positioned to streamline M&A growth to roll-up the fragmented retail space into the public vehicle without significant regulatory or audit requirements given the company’s strong recurring revenue and balance sheet.

Valuation

Delota is using its current profitability to organically grow and introduce net-new retail locations. Assuming the company halted growth and related growth overhead, and using average net retail profit margins of between 3% and 5% on $23.1 million of sales, net income could be between $0.69 million and $1.15 million. If we use a 8x earnings multiple (given its small size), Delota could trade between $0.21 and $0.34 per share, resulting in between 24% and 100% upside.

Catalysts

Catalysts include:

•         - Re-rating of the vape and cannabis sectors;

•        - Continued sales growth through organic growth and M&A; and

•         - Low valuation

Risks

Risks include:

•         - Governmental changes legislation making it challenging to achieve vape and cannabis growth;

•         - Slow-down in sales of vape and cannabis products; and

•         - Risk of dilution

Conclusion

Given its low valuation, its growth masking its potential profitability and its ability to grow both organically and through M&A, Delota represents a compelling opportunity in the vape and cannabis retail space.