Emerald Health Therapeutics (TSXV: EMH) released its third quarter financial statements late Friday night, revealing a pending cash crunch at the firm as market expectations fail to meet reality. The issuer reported net revenues of $9.3 million for the period ended September 30, 2019, with a net loss of $17.5 million.
Revenues were up for Emerald Health on a quarter over quarter basis by 101%, with last quarter seeing revenues of $4.6 million on a net basis. However, the firm has yet to post a positive gross margin for the fiscal year, which has severely impacted Emerald’s ability to find a path to profitability. The third quarter marked the first quarter in which cost of goods sold was not higher than net revenues for the current fiscal year, however high production costs resulted in a third consecutive negative gross margin for the year.
Gross margin loss was further compounded by the fact that an inventory write-down occurred during the quarter, to the tune of $2.8 million. The write down consists of $801,197 in dried cannabis that was related to product deterioration and limited remaining shelf life. An additional $2,022,781 was written down due to harvested hemp not meeting quality standards for being extraction grade.
Emerald Health posted a negative gross margin of $4.5 million for the third quarter.
This negative gross margin resulted in further cash outflows at the firm, with operating expenses coming in at $10.1 million for the quarter. Expenses consisted of $4.3 million in general and administrative, $2.9 million in share based compensation, and $1.2 million in sales and marketing.
In terms of cash flows, $6.5 million was utilized in operating activities, while $14.5 million was used in investing activities. Investing activities primarily consisted of further investments in the joint venture to the tune of $6.8 million, while $7.8 million was put towards the purchase of equipment. Cash outflows were partially offset by the firm receiving net proceeds of $24.8 million during the quarter from financing activities. Emerald’s cash position improved during the quarter as a result, from $2.6 million to $6.3 million.
While cash increased during the quarter, inventory decreased from $21.4 million to $16.3 million, a result of inventory write-downs in addition to significant sales increases. Accounts receivable increased marginally during the quarter from $5.1 million to $6.1 million. Total current assets remained flat at $45.3 million.
Current liabilities meanwhile decreased over the quarter, from $49.5 million to $39.9 million. Despite this, accounts payable grew to $15.1 million from $12.2 million, leaving Emerald questioning how it will pay its bills on time. Payable to joint venture decreased during the quarter, from $16.8 million to $10.0 million. The firm has since fallen behind on these payments in a highly publicized nature however, with Village Farms (TSX: VFF) (NASDAQ: VFF) now claiming it has majority ownership of the Pure Sunfarms joint venture. Working capital improved during the quarter, from ($4.2 million) to $5.4 million.
Also of note, is that the Pure Sunfarms joint venture currently claims that Emerald Health owes approximately $7.2 million as a result of a top-up provision in the supply agreement signed between the two parties. Emerald has since disputed this figure, and its unclear if the $7.2 million figure is represented on the balance sheet presently.
Events surrounding the joint venture and Emerald Health’s ownership has lead to pent up investor frustration. Such frustration spilled over into Emerald’s conference call hosted this morning, with one individual venting his frustration directly to management related to Emerald’s potential loss of equal ownership in Pure Sunfarms. Twitter user @BullionNation managed to capture the moment via a recording, which can be heard at left.
Outside of Pure Sunfarms related events, Emerald Health has other struggles to deal with. Given the fact that the firm has failed to post a positive gross margin, let alone provide a hint of profitability, it’s unclear where the issuers future lies. The lack of a positive gross margin provides no current path to the issuer being able to be cash flow positive. While the firm recently announced that it has conducted layoffs of approximately a third of its workforce, those efforts began in August according to the firm. Thus, reduced expenditures should have been evident within the current quarter.
Emerald Health Therapeutics is currently trading at $0.41 on the TSX Venture.
Information for this briefing was found via Sedar, Emerald Health Therapeutics, and Village Farms International. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
