Readers should have a pretty good idea about World Class Extraction’s ($PUMP) position in the legal cannabis space. We’ve been covering them long before CEO Rosy Mondin fused her company (Quadron) with $PUMP and took it over.

Our last structure was way back in April – and now we get to see her year end.

I view the extraction space having challenges with severe overcapacity – and viewed through that lens – one might view diversification as necessity for extractors operating within it. And to that very point, Rosy’s been shopping. She picked up a good chunk of a delivery service, as well as the secured debt of some sort of a self-described R&D shop. We won’t be able to see much of the results as the deal was signed in late March, but perhaps she’s been selling product or proprietary equipment in the interim.

Our last structure wasn’t brimming with optimism. $PUMP’s bank account wasn’t getting any larger, and from what we’ve seen, it didn’t look like they were fully operationalized (meaning, they’ll be needing cash to operationalize).

No time like the present.

To the financials!

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• Cash: $5.6MM. Sales up 10x over quarter prior (from $75k to $750k), but total sales for the year barely broke $1.1MM.
• Gross margin works out to be some 47% (good)
• Impairments for the year grew by another $6MM this quarter, to a total of $35MM for the year. More below.
• In late August, they acquired another block of Pineapple Express, bringing $PUMP’s ownership up to 23%.
• That ‘alkaline water’ thing they got wrapped up with….just…yeah. More below.
• 625MM shares out. The ‘sky’s the limit’.
• 9MM in 4 year $0.05 options went out to staff after the year end. Cash conservation to be sure.

Ok. There’s nothing much to see. I could remark on several things, but the observations themselves wouldn’t give much else to see. Annual statements are expected to be longer than interim’s, but these run to 63 pages. I could go on, but if you ‘can’t say something nice‘…..

We find out a little more about the HydRx buy, in that the person who owns the other half of $PUMP’s subsidiary (Cobra) that bought the debt is a person names Richard Goldstein, and that he was ‘not involved in the acquisition of the Debenture‘. Go forward though, beneficially……. anything that accrues from the deal will only contribute 50% to $PUMP’s revenue. By being uninvolved in the purchase, it likely means that Rosy is responsible for what happens afterward – and that further capital infusions will require either Rosy to DIY, or by appeal to Cobra.

Revenue disaggregation gives us a glimpse into what the company is doing, and it shows that $PUMP’s core business – that of extracting and extraction equipment manufacturing – is barely even visible:

A closer look reveals that in the entire quarter – April through June – they sold a total of $36k in vape pens. Eesh. The upshot is that Pineapple Express looks to have hit the ground running. Since the deal was done March 27th, it looks like a pretty good run rate, more than likely helped by COVID restrictions.

The down side is that the delivery service ‘as is’ isn’t breakeven, even with that margin. One should expect this to improve – the business was showing improvement prior to Rosy’s buy, and there is probably some costs that will get leaned out over time. Hey, it’s only the first month in operation here, right? According to the MD&A, there’s been much activity around deliveries, with deals done with Shoppers and $WEED to provide same day service for medical customers. There’s been deals done to service new areas and regions and provinces, and the division looks to be going full tilt.

The alkaline water thing (mentioned in our last year end structure on $PUMP) ended up exactly where it looked like it was heading: a wastebasket. What we said at the time:

Well, we waited. What’s to see?

Yep. $2.4MM gone – which I’d guess was probably spent on one of the original founders of ‘World Class’ – who held a bag of rocks that needed to be unloaded before they’d sign any paper. These are the things press releases don’t usually mention…for good reason. It didn’t last more than a year, but it did last longer than $7.7MM blown on ‘sonic’ technology IP that turned out to be what we suspected: absolutely nothing. Probably the original money wanting out before coughing up that listing:

That’s $31MM gonzo in the first three lines: $20.4MM in Goodwill on Quadron, $7.7MM on ‘sonic’ IP, and $2.5MM on boxed alkaline water. Gone. In the first year of the company’s existence as is, and only the second quarter of operations.

The ‘ugly’ though in these financials though centres on the performance of their core business. No equipment was sold, and only the equivalent of a couple of cases of vape pens were moved during the period. To say ‘this isn’t good‘ is an understatement. And if it’s a portent for other extractors – it’s a serious warning sign that overcapacity/LP’s bringing capabilities in-house are a serious strategic challenge to an extractor’s viability. They’re even negotiating with a counter-party over extending terms on a note receivable that looks like it was created by an equipment sale.

We don’t know the status of HydRx – but the conditions of the ‘acquisition’ aren’t a good sign. Ostensibly, a dead piece of paper was factored by creditors. That implies that most anyone who looked at it thought it was a dead piece of paper too. Or perhaps not viewed as immediately accretive. In the real world….assets with cashflow brings a premium……and promises about asset potential get discounted. I wouldn’t expect anything to come from HydRx immediately, it certainly doesn’t look like the deal was about cashflow. But even then, Rosy’s only got 50% of it, and probably some sort of capital commitment will likely need to be addressed. With these operations, I can’t see how that can be done absent a raise, that I also can’t see being done.

So…with a core business that doesn’t seem to getting much traction, a delivery service that’ll prospectively bring in $500k in margin per month (assuming things go swimmingly), and an R&D segment that’s currently an unknown….it doesn’t present a bright outlook. Unless and until $PUMP’s ‘core’ business ignites, this company will be a ‘frozen moment’, adding a supply of shares quarterly that’ll ensure that the only thing certain is bids lifted the moment they come into existence..

As stated, I’m doubtful of $PUMP’s viability. I can’t see a way forward for the company looking at these financials. While the delivery service *may* bring in some positive cashflow, it isn’t enough. What it might do is buy them time to figure out what they claim they are: an extraction company that sells extraction equipment and extracted product.

In the absence of a pivot or takeout, every quarter that passes that they aren’t actually doing what an extract company does will reduce the chances of survival. Hard price drops were announced in retail this morning across Crono’s 2.0 SKUS, $CANN has got 7 SKUS coming ‘soon’ in BC and MAN (hey, they issued a press release about it), white-label products from $VGW and $LABS are heading out to shelves, the ‘Big Ones’ in 2.0 ($XLY/$ACB/$APHA) are entering a period of protracted ground war for market share, and $LABS is even putting out some 18 SKUS of their own product to try and capture a piece of a fast growing segment. New entrants at this point are going to have to be ‘elbows and knees’ to get facings and attention. And they will.

Despite some good looking revenues from delivery (relatively speaking), $PUMP’s prognosis remains unchanged in my eyes. We might get to see them get to another year end, but unless something big happens (and even if they do make it to publication) – there won’t be much to look at except an exchange listing waiting for the next ‘big thing’ to come along.

This company is now (in my eyes) officially a zombie. Delivery services on their own won’t be the cure. Rosy’s in a tough spot, but investors are in a tougher one. This is a worst case scenario, all around.

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 a position in $PUMP. It won’t last long.