A capital raise is cause for concern about MediPharm Labs (MediPharm Labs Stock Quote, Chart, News, Analysts, Financials TSX:LABS), says Mackie Research analyst Greg McLeish, who delivered an update to clients on the company on Tuesday. McLeish downgraded his rating on LABS from “Hold” to “Sell,” while expressing doubts over management’s moves and its ability to forecast revenue.
Toronto-headquartered MediPharm Labs is a cannabis extraction company which was the first Canadian licensed producer to be exclusively licensed for cannabis oil under federal regulations. MediPharm focuses on downstream extraction methodology, distribution and derivative product development for the Cannabis 2.0 market.
The company on Tuesday announced an increase to its previously announced bought deal offering of units, now totalling 50 million units comprised of one common share at $0.58 per unit and one share purchase warrant with an exercise price of $0.70 for a period of 24 months following closing. Gross proceeds would be for $29 million, up from the original $20 million announced on Monday.
MediPharm said it will use the net proceeds to fund growth of the company’s derivatives portfolio, to expand its medical products and Active Pharmaceutical Ingredient portfolio for export, for its pharmaceutical registrations, research and development related to clinical trials, for sales and marketing and for general corporate purposes including funding working capital.
MediPharm has seen its share price decline over the past two years, going from a high of about $7.00 in August of 2019 to $0.53 by the close of 2020. So far in 2021 the stock is up 25 per cent, with LABS hitting a recent high of $1.00 on February 10.
The recent rise in share price has McLeish wondering whether now is the right time to be going back to the capital markets. In his report, McLeish pointed out that a number of cannabis companies have recently raised capital to shore up their respective balance sheets and fund future growth, taking advantage of the secular tailwinds coming from the Democratic election in the US this past November.
But in MediPharm’s case, the company had a cash balance of $36.5 million at the end of the third quarter 2020, causing McLeish to write,
“Why are they raising additional capital now? We are now worried that the company is burning through cash much faster than we have modelled and this is very concerning and we are questioning management’s ability to execute on their business model. Additionally, why didn’t the company try to access the capital markets in early February when its shares were trading closer to $1.00?” McLeish said.
McLeish also questioned management in his report by referring to LABS’ third quarter 2020 results, delivered on November 16. There, the company reported revenue of $4.9 million, which turned out to be 65 per cent below the consensus forecast and 69 per cent below McLeish’s own $16.0-million call.
“As a result, we have become increasingly concerned about the company’s near-term ability to forecast revenue and as a result we are lowering our target EV/EBITDA multiple to 10x from 12x,” McLeish said.
A further issue pointed to by McLeish related to the discrepancy between MediPharm’s Q3 revenue and its inventory, which stood at $31.7 million at the end of the third quarter, a big number, the analyst said, considering the much smaller $4.9-million in quarterly revenue.
“We have seen other extraction companies writing down older inventory and we would not be surprised to see MediPharm record an inventory write- down in the coming quarters,” McLeish wrote.
The analyst adjusted his forecasts and is now calling for MediPharm to generate full 2020 revenue and EBITDA of $35.4 million and negative $29.3 million, respectively, 2021 revenue and EBITDA of $42.7 million and negative $11.5 million, respectively, and 2022 revenue and EBITDA of $71.5 million and $9.8 million, respectively.
Along with the revised “Sell” rating, McLeish has dropped his price target from $0.60 to $0.50 per share, which at press time represented a projected one-year return of negative 26 per cent.
In other developments, McLeish noted that in October of last year, MediPharm became the first and only producer in Canada to launch a consumer-sized, 99-per-cent pure CBD isolate, with retailers in six provinces having received shipments over the fourth quarter. McLeish said initial sales have been strong as LABS’ CBD Isolate is still the only product available in its class.
In January, MediPharm said it achieved record finished goods shipments of 550,000 over the fourth quarter of 2020. Of the units shipped, 100,000 were private label MediPharm SKUs compared to just 25,000 SKUx in the third quarter. MediPharm said it had ramped up production and contract manufacturing to many of the country’s top cannabis brands, with the shipment including 25 different vape SKUs.
“Shipment volume is a key measure that illustrates growing market demand and our ability to meet that demand through our GMP-certified facilities,” said Keith Strachan, President and Interim CEO, in a January 11 press release.
“This new milestone is something to celebrate but also to surpass as we focus all efforts on accelerating growth and improving profitability in 2021 consistent with the action plan introduced in November,” Strachan said.
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