It’s been feast or famine for financial statements during this pandemic, with many outfits electing to take advantage of exchange rules and defer publishing. After a dry spell, they’re now coming in hard and fast.

Medipharm ($LABS) has been an innovator in the extraction space……offering the sector a ‘forward product swap’. Of which, several LP’s signed up for, but probably didn’t really think it through. Declining revenue, inventory gluts, sluggish international uptake….its’ not been an easy road since $LABS came out last year with numbers that are now just a distant memory.

Third quarter is out….let’s see what’s happening.

To the financials!

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• $36MM in cash, $25MM in receivables. Current liabilities at $14MM.
• Finance cost at $2.4MM (up from $600k prior quarter). There’s that last raise…running at $10MM/yr. More below.
• Sales this Q down to $5MM (from $14MM previous). And unlike last quarters 16% margin (woot), this quarter sees a massive swing to negative margin based upon cost of sales. What gives?
• Write-downs in inventory and prepaids. More below.
• $6.2MM/Q in OPEX.
• A note holder has been converting a whack of convertibles since mid October, taking out some 10MM shares at a $0.10 discount to market – including the last 2MM exchanged on November 13th. Maybe they thought the quarter would be good, or, simply crystallizing credit exposure. Could be either.

Ok. In general, I like looking at extractors financial statements because of relative simplicity. There isn’t much quantitative other that what’ll be outlined, but qualitatively….this outfit is complex.

When your press release on earnings begins with this paragraph….its meant to prepare readers that they shouldn’t set expectations too high. $LABS verbiage now surrounds itself with the concept of ‘potential’:

And that paragraph sets up the announcement of a restructuring. I consider the first line item the equivalent of getting a confession from a witness stand (read: we promise we won’t do forward product swaps anymore):

They’ve also been transitioning from B2B to ‘white label’ for a couple of quarters now. Maybe that operational review will speed that whole thing along. Yeah, that’s a little pithy.

Seriously though, it’s not as if this restructuring operational review came out of the blue. That $38MM raise they did under the wire last quarter was some of the most expensive money TheCannalysts have seen in-sector. Creditors taking a pound a flesh – and being agreed to – is rarely a good sign. It reminds me of a trip I took.

I’ve been going to Las Vegas for some 30 years now, and know the city as well as a tourist can. I also like downtown. It’s downmarket, it’s got flavour, and comes with some hair on its’ teeth. Great breakfasts too. There’s a barber shop on the second floor of the El Cortez I highly recommend. Around the corner from that barber is a pawn shop. One day as I walked by, the pawn shop had no less than 10 Rolex Submariners lined up in a window display, all ending up there from the sports books and punters that litter the area. Perhaps someone needed a buy-in for a poker game.

Lenders of all kinds exist, just like folks need loans at different times for different things. If you don’t know, pawn shops aren’t a ‘retail outlet’ per se, as a business……they’re financiers.

In my eyes, the $38MM $LABS raised was a trip to a pawn shop. Let’s revisit the terms attached to the credit acquired:

Revenue this quarter sees detailing of their ‘white label’ business, as well as their own in-house product. At these levels though, throughput over the quarter must have been low. Even white label was down QoQ:

Inventory moved around too, as it dropped by $9MM on $5MM in sales. I’m not sure if white label provisioning results in title transfer – but it’s unclear whats moving around. $LABS has said they’ve written off $6.3MM in inventory and another $1.5MM in prepaid capital expenditures (of all things). There’s a story in that latter one I’m sure….:to me it looks like price risk was embedded in prepaid capital expenditures. $LABS was probably getting in front of the year end auditors here:

As to inventory, the write-downs across the sector can be viewed loosely as a mark to market:

Where does management see challenges laying in front of them? Lower wholesale prices, lower consumer prices, declining B2B volumes, and a shrinking customer base. Indeed, 91% of all revenues come from only 2 customers:

Announcing a restructuring was the only realistic path forward given all of this, and their ‘action plan’ intends to address the future through layoffs, an operational review & process re-design, product research and creation, and….(as I read it) leaving forward product swaps behind.

Their accounts receivable aging makes as much sense to me as it did last time when compared QoQ. The movement in aged receivables is hard to back into. This is the kind of crap that served Radient ($RTI) so poorly, and $LABS extending credit via forward swaps created similar conditions. This table will be important to the most recent lenders from here:

From that raise mentioned earlier, $LABS is paying out shares indexed to market for interest and issued the bulk of the raise at a 25% discount to market.

Ultimately, a lot of disclosure here that really doesn’t say much. They reveal declining sales, they say that $LABS is going to restructure, that a ramp of new customer relationships will be created during 2021, and then $LABS will be perfectly poised for ‘significant performance improvements’.

The wider field of vision on these financials is the viability of large scale extraction itself, and whether or not enough throughput exists (the biomass certainly does) to sustain existing levels of capacity. That sounds dour coming from one dud set of financials (to be honest, $LABS has had a few now), but with distributed extraction emerging among LP’s and smaller extractors able to run fast bespoke batches….is there a place for ‘big’ scale?

$LABS is undertaking actions that will address those very questions. Their stock has taken a pounding this morning as folks are thinking that revenue models that existed a year ago were perhaps illusory, and that refining is about capacity utilization, whether in energy, or weed:

To buy the $38MM runway they now have, it cost them $10MM/yr in finance expense. Look next financials for changes in sales mix between the ‘white label’ and ‘private’ business lines, and absolute levels overall. The days of forward price swaps to inflate sales has passed. Now, $LABS has to sell something to recognize revenue (in this quarter they actually recognized $69k of Australian government COVID subsidies, despite the application not having been approved yet. Immaterial).

$LABS has messaged several themes over the past couple of months, about developing their own products and white label provisioning. International. Etc. Outside of the 1st quarter of this year though, sales to Australia have been flat (sales for last three quarters: Q1: $2.5MM; Q2: $635k; Q3 $780k), tolling revenue is negligible at $321k, and a company with $43MM in expenses year to date ($73MM with write-downs) has $30MM in sales….and they are cratering over time.

Lots going on internationally – at least pitch deck wise. $LABS now fully owns their Australian vehicle, having paid $3.2MM for an outstanding 20% ownership, and there’s mention of an entry into Europe. I’m uncertain how much uplift international will bring, at least in the short term. The subsidiary will be fully accounted for next financials, but as it stands, under Note 3 (Non-Controlling Interest) there’s a $15MM (net) current liability in there.

Sales, sales, sales. We’ve seen other outfits not hit a 2.0 uplift that some expected – what I think we have seen is a single market segmenting. While there is good organic growth in consumer demand, any revenue increases outside of that growth will come at the expense of a competitor. As it is, there are lots of those laying about. I strongly believe there will be fewer of them in a year, but $LABS cash balance says they’ll likely live to see it. I’d guess there’s 2 quarters or so from this very moment to show some life is possible. If sales don’t markedly improve over that time, I suspect (just like some of those competitors) that CEO Pat McCutcheon won’t be around to see it either, even if $LABS does.

An odd signal came out of McCutcheon in the announcement about their CFO’s recent departure (listed as being due to family reasons). He said: “We look forward to commencing a rigorous search for a new Chief Financial Officer that will support the Company through our next phase of growth as a pharmaceutical company.”

Pharma huh? That stood out to me, particularly since they’ve been signalling their own products would be filling revenue gaps. I know $LABS has teased about GMP and international sales and all, so, I asked CytochromeP4 about this ‘pharma’ tagline……and if $LABS holds any IP related to API provisioning or processes. I’ll leave his reply here verbatim:

“The have zero IP, they’re a pharmaceutical company in the same way every LP is technically a pharmaceutical company.”

The operational review (ie: restructure) will likely result in them picking a direction. Good. That’ll probably be welcomed by both $LABS and shareholders alike.

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