Last week’s Heritage Cannabis (CSE:CANN) earnings preview was poorly received on the CEO.CA forums, where an active contingent of CANN supporters can be found trading optimistic outlooks for the aspiring extraction businesses and abusing anyone who dares express otherwise. CANN-nation was predictably not bothered by the fact that the company’s Q3 financials, filed on SEDAR Friday after market without a company announcement, showed no material income from cannabis sales. The message board posse is adamant that this company is still in the build-out phase, and will begin producing extraction revenue in the fourth fiscal quarter.
$4.1 million worth of cash invested in property, plant and equipment this quarter is consistent with that sentiment. Certainly, an operation needs to be built before it’s used. But a total lack of any extraction income at all from any of the licenses causes us to wonder how far along the development curve these operations are. This period is the first in which CANN has presented with inventory, which consists of $1.8 million worth of dried cannabis and $103,000 worth of cannabis oil (all figures CAD). If one were to forecast the forward sales available from that inventory profile, it wouldn’t amount to much, even assuming that the first batches of concentrate CANN cranks out are of competitive grade.
By way of comparison, operating extractor Medipharm Labs (TSX:LABS), carried $42 million worth of inventory at the end of June. In LABS’ quarter ending March 2019, the first time the company reported any cannabis inventory, they carried $22 million.
Presently, with no commercial sales license, Heritage can only sell its concentrates and extracts to other LPs, or directly to patients. With a 55,789 litre stockpile of finished oil among LPs nation-wide in June, and only 9,614 litres sold in the same month, it’s fair to wonder about demand.
There is such a thing as innovating their way to a product that moves, but such innovation can’t begin until the product is being shipped to clients – the more volume the better – and we aren’t yet seeing that out of CANN.
The period also saw Heritage acquiring a 20% interest in US-based mail-order genetics company Endocanna Health Inc. Endocanna’s gimmick is to run the same kind of mail-order DNA test that can tell people they’re a descendant of Danish nobility or whatever and use it to tailor a cannabis dose.
It’s not clear how effective DNA-based cannabis profiling is, but it might not matter. A captive audience of patients who have been given a dosing profile and have a valid cannabis prescription with a Canadian address can be sold oils and extracts customized to their profile by any one of the Heritage licenses. There’s no word on how many Canadians Endocanna counts as clients or how many of them have prescriptions, but it’s a bit early for that anyhow.
A custom products business takes an active and relentless sales effort on a scale at least the size of Heritage’s IR efforts. Endocanna makes a great leading edge of a sales funnel, but there’s lots to be built out behind it, and it isn’t clear that any of that is being built. Neither Heritage Cannabis’ website, or the websites of subsidiaries CannaCure Corporation, Purefarma or Voyage Cannabis have any active patient registration initiative.
While this lack of progress does not seem to bother the more vocal proponents in the Heritage Army, the market is unimpressed. Heritage sold off another 11.5% Monday to close at $0.27, twelve cents off of their year low of $0.15.
Our estimate of the Heritage shares outstanding in last week’s earnings preview didn’t account for the various warrant exercises and the Endocanna transaction, so please adjust your spreadsheet totals to 473.6 million outstanding Heritage shares, 131 million shares of which were issued in consideration for CannaCure at a deemed value of $0.023. Monday’s $0.27 close puts the company at a $127 million market cap.