I see Valens ($VLNS) dropped their financials yesterday, I’ve just opened them up (I’ve been ill past couple of days, but back to sorts now) – but I wanted to have a quick look at an extractor that’s been off of our radar for awhile: Medipharm Labs ($LABS).

GoBlue declared on our podcast once that “$LABS is dead to me” – and I heartily concur. But, as $VLNS has yet to show repeated profitability and $CANN burns bags of cash – I want to see if $LABS is in the same extraction ‘boat’.

I think it’s important – as their product classes make up some ~=45% of the market – there will be demand for the assets at some point, even if the initial companies falter. If there’s a brand or process that’s desirable – there might be interest in picking up the residual leftovers. Yeah – that kinda sounds like a eulogy. Because once past the initial over buys preceding legalization – none of these dogs have come close to hunting.

Auxly ($XLY), initially late to the game but (imho) far better managed than the rest has a different issue in Sunens…..as well as too little throughput via Dosecann and Kolab – despite being number one in extracts in the country. I’m gonna catchup with them in the next couple of days to confirm. <An aside – Village Farms ($VFF) – for all their relative success in discount flower – they’ve had challenges getting off-take for their 2.0 products. We’ll get another look at them in early November. As most are discovering, bottom feeding with price isn’t terribly profitable….. yet starving the competition into submission is a well-known business strategy>

So. $LABS, $CANN, $PUMP, $OILS, $NEPT, $RTI. Man, that’s a list.

Add in outfits with a broader production platform – yet 2.0 primary – we get $VLNS and $XLY. Boyo. If there’s an ‘extractors index’ in this sector, Canadian pullers are likely the worst of it all. I think it’s an under-looked opportunity for a trade. I’ll come back to this. Honestly – the relatively broad and deep ‘failure’ thus far of extractors has been under-reported. Most likely because folks prefer watching a RomCom with a happy ending rather than the last 10 minutes of ‘Old Yeller” on continuous loop.

What is also surfaced by these “Canadian Extractor Follies” is what I view as the core distinction between the US and Canada: Canada went to scale and centralized production; the US has distributed production, with supply growth more closely matched to demand. Was/is the US lucky? Perhaps prescient?

We’ll never know – but I’m pretty confident they were ‘lucky’ as heck – driven by the regulatory high centre the US has been on for the past 4 years. At any rate, that’s academic at this point.

What isn’t academic is if we can spot a path forward for these Canadian outfits. Whether that trajectory is consolidation, scaling down, additional write-offs, M&A, or outright dissolution – I think there might be an opportunity.

I’m gonna run through them all and expand on what I see as a potential trade &/or investment.

Our last Structure on $LABS saw them initiating a restructure, anemic white-label revenue, and one of the most expensive raises I’ve ever seen anywhere (finding a superlative for that expense fails me). $LABS also said they’re gonna find a bunch of new customers, and have been promising significant performance improvements for almost a year now. Ex-CEO/Chairman Pat McCutcheon remains listed as director (although he hasn’t updated his Linked-In page since last December and is still listed as both). Ultimately, the ‘new guys’ have had a couple of quarters under their belt.

Let’s do a quick run through and see how that restructuring is going. Their share price has had a sell-side heel on it’s neck, and despite a couple of brief spikes in front of earnings, it looks like a slowly deflating balloon:

To the financials!

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• Cash down $5MM to $38MM QoQ, A/P $14MM, A/R $32MM. Working capital looks good.
• Except that $20MM of that A/R is greater than 180 days old – comprised of that ancient $HEXO deal and another un-identified customer. In litigation.
• They did fully reserve another $800k for write-off. I gotta say, the A/R aging schedule sucks. $LABS doesn’t provide the *very* standard presentation of a ‘greater than’ – instead presenting ranges of days overdue. Ugh.
• Inventory dropped by $9MM. Oh. That’s because there’s been $5.7MM in inventory written off. Kinda. More below.
• $5.1MM in sales this quarter, and eliminating that inventory write-down, it shows they had a negative gross margin of -39%. Yet, that too doesn’t hold.
• SG&A of $6.2MM. They pulled in $3.7MM as an emergency wage subsidy (man, that’s a lot). Ultimately they burned $8MM in operations.
• White label sales down $1MM QoQ (from $2.3MM to $1,3MM), Private label up modestly ($2.3MM to $2.9MM).
• International sales now make up 49% of total sales, with both Germany and AUS showing increases. Domestic fell by $900k though. One bright spot offset by one very dull one.
• SBC almost negligible. Given that just more than a year ago they were paying $10MM/yr in executive comp and SBC – what else can one say. They were heading straight into a wall.
• $LABS seriously could’ve used a Credit Department at any point.

Ok. Some good disclosure – especially around segmentation and expense itemization. Yet – COGS isn’t included by product/region. And – I can’t tie to their reported COGS (Note 14). The report $3.4MM in COGS – which implies a gross margin of 32%. But, by my trusty napkin:

This is because $LABS reports attribution on a 6 month basis – so one needs to grab prior period values and impute (I know how much GoBlue dislikes this kind of thing, and include it for our readers as illustration of how much more work is required when companies report on a YTD basis). Ultimately, COGS got hit by that ‘obsolete inventory’ charge this quarter and ~=$800k in an A/R write-off. It’d take me more time than it’s worth to decompose.

There was a demand call by convertible debenture holders to accelerate (one assumes when they heard $LABS was going to raise they picked up the phone – or possibly – $LABS went to raise because they got a phone call before they raised). We spoke about how expensive that raise was in our last structure – the convertibles were duly extinguished, and $LABS reported a notional loss of ~=$10MM last Q. It likely reveals why the cost of money was so high: “when you need it so bad, you can’t say no”. Book-runners (and lenders) are aware of this. Net of it all was a $10MM ‘finance charge’ last quarter. This quarter is back to normal at ~=570k:

Regarding inventory, it appears $LABS has never reported WIP in their inventory until this period. Seems an odd thing on it’s face – because “Raw Materials” doesn’t seem logical that they become “Finished Goods” in one step. WIP appears for the first time this quarter, it’s been absent in the previous 2:

The tour I had recently with NextLeaf ($OILS) might provide some insight here, in that I was told extractors set up batches in discrete runs, then takes them right through processing/packaging in one lump shot, banging it out in one solid push. That’s how Nextleaf does it anyhow.

Germany is a bright spot – as is AUS – but the question is whether or not they’ll supplant the decay in Domestic revenue. I can’t imagine $LABS is happy about home turf backing up, and it’s a dark portent. Overall, sales are down QoQ. Cash is *kinda* sorta there, but $13MM in liabilities and the possibility of the A/R taking a $20MM punch adds risk to working capital. Apparently, that $HEXO litigation is expected to be decided before end of this year.

Overall, absolutely nothing to see here. Should International blow out, it’d be a positive. Otherwise, $LABS has simply presented essentially the same financial statements for multiple quarters now.

The MD&A is littered with ‘selected’ values – it means little to myself. There’s no mention in either of their statements to the ‘operational review’, they’ve reported losses of $20MM on $10MM in sales YTD. Their customer base is extremely shallow, and there hasn’t been much traction in expanding that base as of yet, at least domestically. Share count has gone from 155MM to 263MM since the start of the year.

Kinda took me awhile to get to that last paragraph, which I think is really all that needs to be said at this point.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in any of the companies mentioned.