The Top Line
Elixinol – ASX's hemp giant under threat?
- Elixinol Global delivers subpar quarterly results
- Quarter on quarter revenue declines 33%
- Cash burn of $10m with cash balance at $27m
Ecofibre – the new gladiator on the block
- Ecofibre lists on the ASX end of March
- Stock up over 100% since then
- Huge revenue projections for 2019 with aggresive US focus
The ASX-listed battle begins. Time to swap?
Elixinol Global, through its three business units, has a global presence in the cannabis industry focussed on hemp-derived CBD dietary supplements, hemp food, and wellness products, as well as cultivation and manufacture of medicinal cannabis products.
The company is comprised of three business units.
Elixinol USA, founded in 2014, is a manufacturer and global distributor of hemp dietary supplement and skincare products, with operations based out of Colorado, USA.
Hemp Foods Australia, founded in 1999, is a leading hemp food wholesaler, retailer, manufacturer and exporter of bulk and branded raw materials, and finished products.
Nunyara Pharma, formerly known as Elixinol Australia, was founded in 2014 to participate in the emerging Australian medicinal cannabis market and submitted licence applications for cultivation and manufacture to the Office of Drug Control in early 2018. These applications are currently pending approval.
The company was one of the best performers on the ASX in 2018 and delivered phenomenal returns to its shareholders over this time. A great story that rode the Hemp wave in 2018, and beyond, as Hemp was legalised in the US via the Farm Bill of 2018.
Elixinol has long been a favourite of The Green Fund and indeed has been in the Green Fund's Paper Portfolio since its inception in January 2018. We have continuously pointed out to our readers why we saw so much value in the company and how well they were executing on their business plan. Simply put – it's a great story.
But, like all great investors, one cannot be married to a stock or a story. When information and/or the situation changes, great investors should have the maturity, humility, and understanding to change their position too. With that in mind, let's share the story of Elixinol's latest quarter, and it doesn't make for great reading.
Elixinol reported Q1 total revenue of $8.2 million, which represented growth of 21% from a year ago but was 31% below Q4 sales of $11.8m. It is important to note that all players in the hemp market are seeing quarter on quarter growth, as the booming hemp and CBD industry opens up. Hence, a backward quarter is no good at all.
The company explained that the quarter on quarter revenue decline was driven by Elixinol's strategic decision to reduce the focus on low margin private label business in the US, to enable increased capacity for the expected future growth of higher margin branded products, and to provide the ability to capture further market share.
We have no issue with companies looking to control margins and believe this should be top of the agenda for a lot of cannabis companies. However, we cannot understand the logic of not preparing the market for this. Surely, at the end of the previous quarter, management's thinking around margin should have been given as guidance?
Compounding the matter is the fact that the company stated in the last quarter that revenue was their primary goal. CEO Paul Benhaim flagged increased costs in the March quarter when he stated that Elixinol was focused on chasing revenue.
"Our focus is not on profit… our focus is on growing revenues and taking advantage of the growing space to increase our market share. We feel that that is the most important thing to do right now," he said.
Ambiguous at best
There is also much ambiguity about future margin. In speaking of the current situation in the US and UK markets, CEO Paul Benhaim said, "in the US, we are experiencing strong interest from national retailers to stock our products on the back of growing consumer demand. We are very excited to receive our first order from one of the largest national retailers in the US.
In the UK, significant retail agreements were signed during the quarter, which will see our CBD products advertised on TV and stocked on shelves in major retail stores and pharmacies in the coming months. We see similar opportunities across many of the global markets that we are currently operating in, with ongoing discussions expected to lead to further agreements over the coming quarters."
It's clear that Elixinol is planning, preparing and discussing the potential opportunities with suppliers and retailers, but not much substance to these discussions is being provided. It simply isn't clear who is showing interest in the Elixinol product range. But it certainly isn't CVS or Walgreens, as both have recently started stocking a range of CBD nutraceuticals from Elixinol's competitors such as Curaleaf, Charlotte's Web and CV Sciences.
The value of these ongoing "discussions" and the associated increased margins will become more apparent in the next Quarter, and this is something for investors to keep an eye on. At the end of the day, Elixinol's management has stuck their neck out and declared their position with respect to future margin. Now they need to deliver on it.
Is the runway long enough?
Elixinol's $8.2m in revenues was offset by just over $18m in operating expenses, resulting in a 288 per cent increase in cash burn ($10 million compared with $2.6 million in the previous quarter). To put this increase in cash burn into perspective, net cash used in operating activities for the entire 2018 financial year was only $5.8m. This is in sharp contrast to its US peers Charlotte's Web and CV Sciences, who both generated positive cash flow from operations in their recent quarters.
Elixinol started the quarter with a strong cash balance of $43 million. However, they used $10m in operational activities and invested another $5m, leaving their cash balance at $27.4 million at the end of the quarter. Additionally, if one considers their guidance for the coming quarter of $24.7 million in cash outflows, it is clear that Elixinol has enough cash for the next two quarters, but will require more capital to fund the growth (and losses) of the business post that.
Overall, this is a shocking quarter for Elixinol and one that has us nervous about their prospects for 2019. The hemp-derived CBD market is getting more and more competitive every day. With the passing of the Farm Bill of 2018, more and more companies are moving into this space, including the large, cashed up, Canadian LP's (Canopy Growth as an example, just invested $150m to launch its hemp play into the US market.)
In addition, Elixinol's traditional competitors, Charlotte's Web, and CV Sciences are both generating positive cash flow from operations, and are already gaining brand awareness and exposure on the shelves of some of the largest retail chains in the US.
But there is a new competitor that has entered the gladiatorial hemp arena. And a formidable one at that.
Brisbane based Ecofibre has experience in breeding and growing hemp — knowledge that's been commercialised over the past two years with growing sales and strong margins across its business units. Similar to Elixinol, Ecofibre's hemp-centric business is comprised of three different business units.
Ananda Health provides high-quality hemp derived nutraceutical products to the US market. This business has been in commercial operation since January 2017. By owning the whole value chain, from seed to shelf, they produce products for human and pet consumption, as well as topical creams and salves.
Ananda Professional brings to market the first fully compliant and legal CBD oil product line created specifically for the needs of independent pharmacies and healthcare professionals. This exclusive professional line meets strict safety standards with its pharmaceutical grade full spectrum cannabinoids.
Ecofibre currently has its cannabis-infused products in more than 2,000 US pharmacies, and according to Chairman, Barry Lambert, "is now at economic scale, profitable and growing rapidly."
Ananda Food, in operation since January 2018, provides 100% Australian grown hemp food to the Australian market. The business is focused on developing and ensuring supply of Australian grown hemp food and has a deep conviction that food safety, full traceability of supply and truth in labelling will underpin a sustainable quality business and lead to future opportunities in domestic and export markets.
Hemp Black will provide sustainable hemp-based solutions that improve the technical properties of existing consumer and industrial products across a range of industry segments, including fashion, athleisure wear, healthcare, composites, and building materials.
Essentially, Hemp Black is a high-tech fibre textile with broad application. The fibre's anti-microbial properties limit the spread of germs, and so it can be used in 3D printing, in hospitals or even for office furniture.
This business is expected to be a major future earnings driver with its innovative hemp-based products in textiles that Ecofibre is developing in partnership with Thomas Jefferson University in Philadelphia.
Top tier management
As mentioned above, Ecofibre's Chairman is rich-lister Barry Lambert, best known for building Count Financial, which he sold in 2011 to Commonwealth Bank for $373 million. Lambert got involved with medical cannabis after his granddaughter was diagnosed with Dravet Syndrome – a severe form of epilepsy. The company's CEO is Eric Wang, who was the former CEO of Perpetual, and it also looks pretty good on paper that Lambert holds a 24% stake in the group, while Wang controls 18%.
Ecofibre officially commenced trading on the ASX on the 29 March 2019. It opened at $1 per share and quickly rocketed from there. The company issued 20 million shares for pre-IPO proceeds of $20m which, unusually, was done without the help of any brokerage house.
The funds raised from backers like IMF Investors and Perennial Value, as well as Ecofibre founder Phil Warner and Caledonia fund manager Will Vicars, will be applied to expand Ecofibre's businesses, with a strong emphasis on developing its high-tech fibre textile, Hemp Black.
Recently, Ecofibre released their March 2019 quarterly update. They didn't have to, given the next reporting period post their listing would be the Q4 and Full Year 2019 results. However, as with anything in life, if you have something good to say…say it.
The numbers and guidance
Unaudited consolidated revenue of $10.1m (primarily from the Ananda Health business) resulted in an operating loss of only $1m. With their balance sheet fresh from the IPO, their net cash and cash equivalents position at the end of the quarter was $24m. At the current burn rate, that's over 20 quarters of runway.
They also gave guidance that there will be a small profit for FY2019, following a loss of $8.7m in 2018. These results are expected to include:
- FY19 Revenue more than 5.5x FY18 Revenue, driven primarily by Ananda Health
- FY19 Gross Profit more than 11x FY18 Gross Profit due to scale efficiencies achieved in the vertically integrated Ananda Health business model
- FY19 Operating Costs less than 2x FY18 Operating Costs, including costs associated with the growth of Ananda Health, investment into Hemp Black and Ananda Food, and costs associated with the recent listing of the business.
Elixinol's quarter left us with many questions. They have forgiven revenue growth in search of the holy grail of higher margins, and they are going to need these, as their operating expenses are set to continue to increase, based on the guidance they gave. It is frustrating to put so much emphasis on margin decisions, and yet not give any guidance as to what they expect margins to be in the coming months and quarters.
This is the second bad quarter for Elixinol. In the previous quarter, they went from generating an operating profit, to an operating loss. All the talk of being the "only profitable" ASX listed pot stock went out the window, and this has been followed by an even worse quarter.
It's not just the numbers that have us concerned. To be honest, management seems to be a little confused as to which path they are actually walking – margin or growth? Last quarter it was a case of "forget margins, we're chasing revenue" and now, in this quarter, the double-back, reverse 360 with "revenue is one thing, but higher-margin revenue is where the focus lies."
They are going to need to raise more cash and this is sure to place downward pressure on the stock price. Although, to be fair, given the growth the share price has seen over the past 12 months, a pullback is inevitable, capital raise or not.
The new kid on the block certainly has the right credentials and the right connections. It has opened with immense strength and posted solid FY19 Q3 financials. The company is very well capitalised, and the execution strategy is fully-funded. We like the management team, the story, and the momentum, and believe they have the potential to topple Elixinol as Emporer of the ASX-listed hemp stocks.
Watch this space…
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