Here we are again.

A company that hasn’t been able to execute on pretty much anything its’ ever attempted limps along, bleeding capital brought in by a pitch deck promising great things back in March. And April. They had to promise great things (over two months) because that ‘overnight raise’ took 7 weeks to close.

Existing shareholders got mugged, and the ‘new’ shareholders saw $0.30 of each incremental dollar they ‘invested’ go to pay fees & optionality. The rest was dedicated to purchasing the biomass and equipment required to run a business (Premium 5) that they never planned to own, nor run.

$CANN’s share price has puked, money is getting shovelled out the door, there’s been massive option grants, and a capital firm is peeling off $CANN’s assets and IP.

Their ex-CEO – an unaccomplished fence renter who publicly insulted yours truly just last year – has given the shop over to an extract kid who I honestly believe either: a) fell off of a turnip truck on his way to the county fair, or, b) has always been working on behalf of the capital firm’s interests.

Potato, po-tah-to. ‘Idiot’, or ‘useful idiot’ are synonymous to myself, as the results will be the same as $CANN’s economic prospects dwindle.

I’m reminded of our look at the extraction segment of the value chain (published way back in July). Sure as hell: I have no pecuniary interest in $CANN – but like a car accident – I find it hard to take my eyes off of it. I can’t help but wonder if $CANN is a proxy for the wider space. The ‘two-quarters out’ refrain of the paid placements and adherents to a penny equity religion <can I get a ‘Hallelujah!’ for Zenabis ($ZENA) or Namaste ($N) here?> that’s been tested by the grim economics (and reality) of extraction in Canada.

I’m currently revisiting a prognostication of 3 1/2 years ago, where we mused about the mechanism of industry consolidation. I’m thinking that industry consolidation will happen by fusing components of the ‘best-in-class’ of each segment.

Extraction/2.0 – does it really boil down to $VLNS v $XLY at this point?

And what about the whole flower segment? Tilray ($TLRY)made a hammer of a move early on in buying Broken Coast – and I can’t help but think somebody’s going to start aggregating the Norton’s and Decibel’s (and similars) that are worth something product wise. Did Constellation’s ($STZ) buy of Supreme ($FIRE) signal a beginning, or a one-off?

Our recent trip to the US has me thinking about how the various segments in the US might (or might resist) consolidate (consolidation).

Staying true to form, $CANN’s highly touted and anticipated freezee-pop concept – the cannabis infused ‘Radsicle’ – never materialized. $CANN’s remained silent on the product’s current status <here’s a hint: ever heard of a Popsicle^®? If so, you might also have heard the phrase ‘Copyright Strike“>. Anyhow, let’s look at the House that the fence renter Clint built – and see how things are going. Our last Structure was a little downbeat on $CANN’s short/mid/long-term prospects.

$CANN’s stock price is in the trash, they’re running out of cash, and as mentioned, assets are being stripped sold to one of Merida’s private investments – making $CANN borrow the money to make it happen (LOL).

To the financials!

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• Cash down $6.4MM to $2.1MM, it looks like they spent on equipment and biomass and solvent. Inventory up $2MM QoQ to $14MM. 
• They still have $2.4MM in GIC’s – but – A/P at $4.7MM.
• $CANN mentioned ‘record sales’ in July. They’re up $400k QoQ in total.
• Sequentially, inventory in build. Given $4MM in revenue, that’s 3 quarters of product now ‘in-stock’. Last Q’s sales were $3.6MM, so, there has been some sales expansion. WIP up $2MM, FG down $1MM, biomass flat (and lean). 
• None of this suggests there’s much demand for what they’re sitting on, but that the company is producing by/for order/SKU.
• 29% margin, pretty much the speed of what extractors are settling into. Unfortunately for $CANN, $1.2MM of gross margin ran into $3.8MM of SG&A.
• Add another $927k in management comp/consulting and professional fees, and they burned $3.5MM cash this quarter just by existing. Ouch. 
• Explains the absence of an EBITDA calculation in the MD&A, adjusted or otherwise. After 3+ years of trying to figure out a business model, it looks like what they bought that isn’t viable. 
• $979.00 even in SBC. Yep, it’s that bad. 
• $24MM in ‘brand’ and ‘distribution rights’ of the ‘Premium 5’ acquisition being amortized over three years(!). Somebody decided to step on the pedal. Perhaps that’s the only asset expected to exist, and Merida wants to get the balance sheet as clean as possible around anything that’s touching it,
• They bought ‘Premium 5′ for $42MM, and it came with Goodwill and Intangibles of $47MM. It makes little sense to hammer this sort of a revenue stream with $16MM/yr of amortization (that 3 year tenor) on its’ face. I have little doubt there is a clear and compelling reason but I don’t know what it is. Perhaps it’s to smack the deferred tax liabilities ($6MM) which came in with Premium 5. 
• Greasy feel all around.
• White label sales were $1,900 in the quarter. This level is a signal that the CO2 units they’re selling aren’t/haven’t been operational for some time, and that $CANN doesn’t have any friends or B2B activity in the sector. As some of you might know, being the unpopular kid in high school can be a tough slog.
• Not 13(c) will hit the inner lender in you in the kidneys.

Ok. This is unpleasant.

Back to Premium 5. There’s a contingent liability of some $11MM on the books, payable to Premium 5. It caps at $20MM, and centres around whether Premium 5 could get to $16MM in sales by end of next January. Looks like they’ll hit about 80% of that if run rates stay intact. But it raises a couple of questions.

First, that it’s calculated in the fair value hierarchy by way of DCF – which implies its’ expected to be cash settled. There is little chance that $CANN will be able to generate cashflow required to satiate this liability via operations. Which, also implies that David Schwede (the seller of Premium 5 and new CEO of $CANN) was sold…..and happily accepted………. a bag of magic beans:

Now that the share price has shit the bed – and Clint & Co. haven’t had the RSU sun rise upon their landscape (ie: Merida said ‘no’) – back to 5 year Monopoly money to keep the kids pulling levers. 35% reserved for upper management…..:

And we find that Premium 5 wasn’t profitable before (quelle surprise), nor is it now. Worse, its’ ass gets to drag $CANN’s corporate overhead…..net of inter-company sales, natch:

A hangover from a previous deal that nested in a margin pull looks like it’s taking a cut of the Premium 5 cut. Another year and a half to go. The sailor who sold Clint his boat tied his knots well:

“Cash is King” – and cash is what $CANN’s running out of.

A thin business model based upon paper and optionality running a gauntlet of credit. The reader might want to shed a tear for Medipharm ($LABS) here…..but I’m not sure their business model is that disparate to $CANN’s. It appears $LABS found enough friends to do forward product swaps at least (if that’s what occurred. We can’t be certain). $CANN – prima fascia – didn’t:

Well, what to say. One might perceive $CANN is an outfit that packs a cannibalistic business model……peeling retail cash to fulfill management’s desire to fund self-enrichment. Another take might see a company in flux – with bright horizons and a ’10 bagger’ in share price just around the corner.

My personal take is towards the former, based upon financial statements of the past three years.

Please note: according to the Chairman of $CANN’s Board…..I’m simply a ‘mental munchkin’.. Take that for what its’ worth. If it’s as much as his share price, it ain’t worth much.

The preceding is in the opinion of the author, and is not intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $CANN, nor $LABS,