In looking at $LABS’ last two sets of financials, we’ve noted their optionality and compensation levels. For the most part, how much the *suits* are getting paid is a relatively subjective exercise, notwithstanding the ‘industry’ standards and comparisons that can be had and used as a baseline for reference.

With legal cannabis, there really isn’t much of a track record yet, and profitability and performance in-sector may be best described as ‘not quite there yet’. I’ve been critical of Supreme ($FIRE) in this regard, but they aren’t the only one who has caught my eye.

One of the upsides of extractors is the relative simplicity of their financials and business model (at least in theory). No, the business itself isn’t easy – with scheduling and logistics and trying to hit the moving target of consumer demand. One needs to schedule months in advance, or have a very nimble manufacturing line that can be redeployed fast if conditions change.

Assets used in them aren’t that expensive (compared to a production facility), and in practice, inventory carry is more of a ‘choice’ based upon capacity of the balance sheet. At least in most cases….with RTI being an apparent exception.

These guys aren’t like a Valens with a broader array of extraction methods, but live in CO2. The bulk product from this is essentially a soup, with secondary processes (via distillation) to get specific molecules pulled out from it. $LABS is building out for API’s (99.9%+ purity), the ultimate extension of extraction. They claim R&D complete, and plan on going to scale – ordering a commercial scale chromatography unit no less.

$LABS and Valens GroWorks share prices have seen less relative declines than much of the producer set has over the past 6 months. Let’s see if there’s more information we can glean about extraction as a business model, and how $LABS is faring.

To the financials!

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• Revenue up to $42MM, inventory to $54MM (!).
• $10MM in finished goods – wow. 
• Gross margin down a couple of points to 34% – with price compression on sales getting the blame. This in spite of growth in revenues/throughput.
• Which, 2% GM decline isn’t a lot. But, an interesting look into a competitive environ that might already be beginning to emerge as extractors perhaps try to woo customers.
• Share count is up 34MM over the year, half of that amount from warrant and option strikes. Another 13MM of $0.86 warrants and 11MM of options – all in the money.

Ok. And dang it. These are relatively boring, but what’s not disclosed is what I’m after.

Some of the bulk extract agreements are substantial, the ‘undisclosed one is curious:

The ‘White Label’ service they offer is much thinner:

And tolling rounding out throughput:

There’s a real challenge in the financials in that these service lines aren’t segmented. Mostly because of competitive concerns I’m sure, but it’s a challenge to get a handle on profitability of each. Another thing is inventory: how much is theirs, and how much is not? I assume title transfer (ie: inventory) occurs under the bulk program, but not the ‘While Label’ nor tolling lines. In this case, it’s difficult to see the ‘what’s’ of what’s in here. Their disclosure on segments is thinner than a pamphlet, running to a total of 2 sentences, and identical to the last statements:

This is significant to me, because I can’t tell what comprises that revenue mix. If one is growing dope and selling it – hey – it’ll show. Here, product and service line mix/profitability is the guts of this type of operation, and there’s little to look at. 

There’s nothing too much to remark upon beyond this, the capital structure, and SG&A being equal to SBC at $4.2MM.

In looking at SBC, we note some $1.3MM in compensation to directors thus far this year, which, is somewhat modest if we assume 10-14 of them. If so, it implies relative prudence around cash in this respect – especially when compared to the larger sector. If it’s 5-7, well, prudent wouldn’t be the word I’d use.

Still, 20MM shares have walked out the door this year with exercises, expanding the float from 97MM to 117MM. They’ll be at 147MM in no time with full dilution.

They’ve got cash, a whack of capacity, IP in development and deployment, and a decent ratio on payables/receivables. The Australian build is underway, and most appears orderly. The June raise north of $5 looks ‘purty in the rearview, and these guys shouldn’t have to go the bank for a spell. They mention some of the G&A is attributable to ‘one-time’ costs of GMP certification which we’ve found out (like $LABS obviously has) can be expensive.

In extraction, I’m already looking for where revenues are appearing to subside, because the run rates we are seeing in this part of the value chain at this moment is essentially both product provision *and* pressurizing sales channels. A cynic might view this period as the big bang of 2.0, and it’s essentially a golden period for the industry. Consumer sales and rates of use are going to determine run rates beyond the next 2 quarters: are consumers going to keep showing up? Will there be price pressures as some of the more marginal/smaller extractors chase lower margins to get cash flow? 

Valens recently got their sales license, and has begun a white label service line as well. Could a  race for the bottom begin soon? Could physical/regional location/presences be exploited?

Combined with in-industry capacity, the ultimate size and run rates of extraction is somewhat of an unknown. Seeing the initial pricing of 2.0 offered so far – it doesn’t look like anyone wants to get into a race to the bottom, yet. But demand is really the question. With $VGW and $LABS generating $60MM in combined revenue over their last 3 months of operations, how much is sustainable? Far more to come as 2.0 launches?

Lots of questions, and answers are largely predictions about the future. It’s already bad enough that QUE and NB have balked on the vape format, and HC doesn’t seem to be of that mind for now. Things could always change in this regard, but hopefully it remains doubtful.

$LABS has emerged as the heavyweight in extraction for now. Given the share price though, it seems pretty dear to me for a half billion fully diluted market cap. With $45MM in sales that generates $5MM in pre-tax net income – it implies a share price of a third of what it is on my trusty napkin.

After all we’ve seen in the sector so far, it’s not terribly surprising either with so many unknowns.  What we do know is that 2.0 has officially begun, and that $LABS has a crappy spell checker:

This company is different than $VGW given inventory and current operations, despite being essentially the same business overall.

I like many things about this outfit except for their current share price. Above all – watch the combined revenues of extraction outfits for signs of sales/throughput waning. We might see some revenue subsidence after initial orders are moved, which makes sense with pressurization. Perhaps some individual companies will slow as the space begins to separate out, but that overall throughput number is *the* number to watch to myself.

Wish I could offer more about Medipharm, but they aren’t saying.

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 $LABS