Like many in-sector, Radient Technologies ($RTI) took advantage of COVID relief from the exchanges, which led to a lag in reporting over the past couple of quarters.

While we’ve talked about the company a fair bit, TheCannalysts have only done a single Structure on them. There wasn’t much to base an outlook on then, and they subsequently missed 2 quarters of sales guidance provided (since removed).

Speaking of removals, $RTI recently made changes to their front office. There’s likely none of ‘new’ management’s fingerprints on these numbers, as they were installed only with a couple of weeks left in quarter. Probably won’t be much visible next either, as sales pipelines/business development can take time. If there is any immediate impact, one might expect it to show up in SG&A or capital expenditures. Since $RTI announced a strategic review of operations at the same time as CEO Dennis Taschuk’s departure – it’s already underway. They also mention that they’ll be “evaluating…. under utilized assets”….. a serious issue that GoBlue’s been examining recently, which he refers to as “under absorption of fixed costs”. This condition will be more acute if operations are integrated (and not modular).

Maintaining throughput is the core objective of any extractor, and capacity utilization is the speed gage.

To the financials!

___________________________________________________________________________

• Cash under $200k (yep). $28.5MM in current liabilities.
• Need to get to Note 14 (Subsequent Events) to see they picked up another $905k in a private financing at $0.10. Lights will be on for awhile, more below.
• Still paying creditors in shares. Share count up from 278MM to 322MM in past three months. Expect this to continue for as long as it can.
• A sign of how tough things are is living in their finance costs. A related party coughed up $2.5MM for a 2 month bridge loan back in late January 2020. It was due February 28th, and if not paid on time, penalties of interest and a daily fee were to kick in. $RTI missed that payment, and as of the date of these financials, the net $2.4MM borrowed back in January is now sitting in current liabilities for $3.1MM.
• They’ve pulled down almost a million in COVID relief from the feds.

Ok. That’s all for now. I’ve been staring at these for a while, and there’s not much to say. $RTI’s got some serious problems, and I suspect they’ll be getting knocks on the door. Perhaps before Christmas.

$RTI is still showing an $8.2MM payable related to their facility. This likely flows from the sale/leaseback they transacted on their house, ostensibly to get financing. Over the two quarters since that deal closed at the end of March, $RTI has reported sales of $145k and $102k respectively. Yikes.

These revenues would have included sales of the Premium 5 brand – at least for some of this quarter. The brand itself appears to be well known and well received, but sales are immaterial at these levels. Mentioned because exotic extracts (live-resin/diamonds/shatter) have strong connoisseur cache. TheCannalysts are suspect about the total market size for exotics at this stage of the market’s evolution. BDS Analytics data from California, Q2 2017 suggests that in Canada, derivative cannabis extracts (excluding vapes) will end up being around 7% of the total market:

$RTI was able to secure another private placement, a 25% uptake of an offer made in early October. They made that offering while announcing an issue of 6.5MM in at-the-money stock options (half to employees). Put out at market (a dime), those options likely represent the bulk of payroll for the period.

Like last time, there’s ominous sounding phrases strewn about the MD&A:

While one can see where $RTI is now, seeing how they got there probably isn’t giving much comfort to other extraction shops. $OILS, $CANN, $PUMP – these are all smaller outfits facing the same supply pipelines $RTI does, and competing for the same retail dollar. 2.0 hasn’t been a moment, it’s been a process. As markets continue maturing, consumers orient, and producers respond to sales….pricing is in flux. New product classes disrupt inventory flows, all while existing products need to capture incremental facings and consumer’s attention.

The ‘bulk’ tolling model has not borne out, LP’s are moving towards extraction in-house, and extractors are having to develop brands and compete directly with product they themselves have produced. There’s been 21 additional processing licenses issued by Health Canada since October 1st of this year…and more incoming.

I don’t think it’s a leap to assume that extractors will be facing their own set of challenges in overcapacity – much like LP’s are now. The business model does have some options available to it that producers don’t, but if it’s going to live as a standalone component within the value chain, it’ll need to prove it adds value beyond its’ cost.

An argument could be made that business models underlying standalone extractors is unproven. $RTI had a great pitch deck, has put more than $100MM in capital towards facility realization, only to find itself with $30k/month in sales. As a guess….everything that’s happened at $RTI suggests to me that the technology they run is cost prohibitive.

Still….sales across extractors has been pretty consistent in heading lower.

Watch out for signs in some of the other ‘mid-tiers’ of an inability to gain sales traction, and see whether promises of white/private-label success are being realized. If 2020 has been a rough ride for producers, 2021 is shaping up to be a year that’s going to be equally rough on extractors.

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 position only in $PUMP.