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Elixinol Global (ASX:EXL) HY 2019 Stock Analysis

Fabregasto — Wed, 25 Sep 2019 22:33:19 +0000

Elixinol Global (ASX:EXL): It's Not Easy Being Green

It’s high time we checked in on Elixinol Global (ASX:EXL) post the release of the company’s 1H19 results late last month and following a very busy last several months which we’ll summarise in this update. This time however we’re going to do things backwards and start with the financials – where some of the developments since we last published on Elixinol in February have begun to manifest. Then we’ll triangulate the numbers to the narrative to understand where the company is at this point in time.

Financial performance 2019YTD

Let’s start with an overview of the company’s quarterly cash flow statements released since its IPO in very early 2018 (including quarterly revenue numbers announced to the market at the same time).

The most striking thing about these cash flow numbers is the significant blowout in negative operating cash flow. This is predominantly as a result of what looks like increased investment in the supply chain (in the form of significant purchases of raw materials) and also increased investment in the business – both ahead of revenue. The blowout in negative operating cash flow has also not been helped by a slowdown in revenue growth.

The table below illustrates more obviously the material acceleration in net operating cash outflow over the last 2 quarters, with quarterly net cash outflow increasing by ~$17M between December 2018 and June 2019: caused by a ~$14m increase in outflows and a ~$3M decline in quarterly receipts on an absolute basis (although revenue has increased versus the corresponding quarter in FY18: +25% and +21% respectively for March and June).

This increase in the operating cost base of the business over the first 6 months of this year is the key driver behind the material decline in financial performance for the period reported by Elixinol late last month (as summarised below left) – in which the company reported 1H19 opex nearly equal to that incurred for the whole of FY18 and an EBITDA loss of $11M. Note that the P&L reflects only the increased investment in the cost base; the suspected advance stockpiling of inventory is borne out in the balance sheet (below right) – which of course won’t go through the P&L until corresponding revenue is generated from the sale of those raw materials in future periods. The inventory build itself is not necessarily a concern – I understand that the shelf life of raw materials is several years.

This material increase in the cost base plus advance investment in raw materials was no doubt a major reason for the $50M capital raising announced around my birthday in June (guys, you really *shouldn’t have*) – presumably as well as the flexibility to make opportunistic investments. This was the second capital raising in 9 months following a $40M rattle of the tin in September last year, and the $86M net monies raised (net of costs) basically explains entirely the $85M increase in Net Assets between June 2018 and June 2019.

Significant increase in competitive activity

So, let’s rewind back to April and the release of Elixinol’s 4C (quarterly cashflow report) for the March quarter. As can be seen from the first table in this update, quarter-on-quarter revenue declined from $11.9M in December 2018 to $8.4M (which was still up ~20% from the March 2018 quarter – but absolutely below what the market was expecting). In that 4C management announced a change in strategy to pivot away from lower margin private label sales in the US and instead focus on higher margin Elixinol-branded products. This makes sense strategically – not just from the perspective of theoretically generating higher margins, but also from the point of view of not enabling competitive product. One would then expect that the natural result of this strategic decision would be an increase in gross margin, all else being equal.

The table and chart above however suggests that all else has not been equal over the past two quarters, with gross margin in fact declining from 56% for the June 2018 half to 47% in the June 2019 half – at the same time that the proportion of *higher margin* Elixinol-branded products as a proportion of total sales has increased from 31% to 43%. While to a degree this can be driven by sales mix, one would not ordinarily expect a gross margin (%) decline of this magnitude. What this suggests is that pricing for Elixinol’s premium product has decreased – and the most likely driver of this is pricing pressure from increased competition.

In a previous article on Elixinol in February 2019, we noted that on the FY18 results investor call, management had acknowledged that a significant number of new competitors had entered the market in response to the relaxation of the regulatory regime in the US. Further, we opined that “it will be interesting to see how successfully the company can defend and grow its market share as the market expands at a rapid rate and new competitors flood into the space – and the impact that this will have on margins”.

Management made a point of saying on that February 2019 investor call that it was confident that the combination of its premium product, long history and market share, and large production capacity would position it well to defend its market position. We should remember that consumers don’t necessarily care that much about a longstanding brand in what they perceive to be a brand new and rapidly expanding market. The excerpt below from the 1H19 results release suggests that competition over the first half of 2019 has indeed been intense and that sales have been impacted by a flood of lower quality competitive products into the US marketplace (where Elixinol has historically generated the vast majority of its sales).

Accelerating global expansion and significant new investments

It’s unlikely that competition is elevated in the US market alone; competition is likely to be rising all around the world in response to the emergence of CBD nutraceuticals and hemp food products, and the once-in-a-lifetime relaxation in the regulatory regime surrounding medicinal and recreational cannabis – including a landmark Australian development announced yesterday (see final paragraph).

Diversifying outside of its home US market has for some time been a strategic imperative for Elixinol. In early February, the company announced its direct expansion into Europe via the establishment of sales offices in the UK, Spain and Netherlands, and the appointment of a European MD and the recruitment of a European sales team. Pleasingly, over the last 4 months further progress has been made in the region:

In April, the company announced a new partnership with UK pharmacy buying group Cambrian Alliance Group (which represents ~1,200 UK pharmacies) and a new distribution agreement with a major UK distributor (from which it had already received a purchase order for 60,000 SKUs);
In July, Elixinol announced an exclusive arrangement with German pharmacy distributor MedVec International to market Elixinol-branded and white label products to its network of more than 15,000 German pharmacies, and also revealed a partnership with PharmaCare to create CBD capsules for UK retailer Holland & Barrett; and
In August, the company announced a new distribution agreement for Belgium and Luxembourg with Belgian distributor 25^th

Elixinol has also made further inroads into the US with the appointment in April of US retail broker Presence Marketing (which services ~15,000 US stores), and the first agreement (via Presence Marketing) to commence distribution to a large US retailer (which I understand to be Albertsons) – 330 stores in initial phase, expanding to more than 1,000 stores in time.

In June the company announced the formation of a 60:40 (respective Elixinol: RFI ownerships) joint venture with US-based RFI Ingredients to develop CBD-infused ingredients for the food and beverage and nutraceutical industries, and then in July Elixinol acquired the global intellectual property rights for Bionova’s microencapsulation technology – in order to deliver Elixinol’s CBD-infused product via capsule form. Presumably this JV will be key in the supply of CBD capsules to Holland & Barrett in the UK.

Most interestingly of all (at least to me as a near term driver of volumes), in April the company also acquired a 25% stake in Pet Releaf, a US manufacturer of CBD-infused products for pets, for ~US$4M in cash and $2M in EXL scrip. With Elixinol having been Pet Releaf’s exclusive CBD supplier for more than 4 years, this acquisition further cements this relationship. Then in early August the two parties entered into a contract under which Pet Releaf will purchase a minimum of US$18M of Elixinol’s CBD product over an initial 18-month term. I believe this is significant as it underwrites a material increase in the company’s annual revenue run-rate, and also signals that demand for Pet Releaf’s products is increasing at a rapid rate (especially as Pet Releaf’s total FY18 sales were just US$8M).

Closing thoughts = highwire tightrope

Both the current September 2019 quarter (for which the company will lodge a 4C in late October) and the next December 2019 quarter (4C end of January, followed by FY19 results in late February) are going to be pivotal for the company. DUH, me.

The material inventory build over 1H2019, the flurry of new distribution agreements in both Europe and the US, and the new take-or-pay contract with Pet Releaf suggest that the company is likely to report a material increase in revenue over the next few quarters. If that occurs as expected, then the current comparatively lower growth half-year period will have been a necessary period during which time a significant amount of recalibration has been undertaken – not that management has been resting on its laurels, with a number of key agreements executed during this period.

There are clearly a LOT of moving parts here. In amongst all of the above described developments over the past several months and against the backdrop of intense (and potentially irrational) competition in the US, there have been some material changes in the leadership team. Significant new regional hires have been made to lead the growing new markets Elixinol has entered into. In April, Board member Stratos Karousos became more hands-on as Chief Commercial & Legal Officer, and then in July became even more hands-on as the new CEO (with long time CEO Paul Benhaim transitioning to Chief Innovation Officer).

One recent development we haven’t yet covered relates to Nunyara - Elixinol’s early stage Australian medicinal cannabis business. In July, Nunyara obtained a licence for the manufacture of medicinal cannabis, but is still waiting for a licence to cultivate the cannabis to be used in the manufacturing process. Management has flagged (somewhat ominously) that the company will review its capital requirements in relation to Nunyara. So, despite the $48M cash balance at June, and my feeling that operating cashflow will improve considerably over coming quarters as the net $14M inventory build over 1H2019 converts into sales (and therefore cash – though may well still be negative), it is entirely possible that there is another capital raising in the next 6-12 months to support the establishment of a manufacturing facility.

As an illustrative datapoint, ASX-listed Cann Group will have spent upwards of $130M (funded by a mix of equity and debt) to construct its large cultivation and manufacturing facility in Mildura which will be able to process 70,000kg of dry flower annually. Cann’s situation is different to Elixinol’s: Canadian cannabis major Aurora Cannabis holds a 23% stake in Cann and earlier this year the two entered into an offtake agreement under which Aurora will acquire all of Cann’s output until 2024 (beyond that needed for Australian medicinal cannabis demand). I’m certainly not predicting that Nunyara will require a manufacturing facility anywhere near this size – or will even need any additional equity funding at all – but this should give readers a feel for what may be another material capital raising on the horizon.

As we have flagged since we initiated coverage of the company in October last year, EXL is a high-risk investment – and right now it is arguably higher risk than it was back then. *Fortunately* (spoiler: actually not at all fortunate for existing EXL shareholders like yours truly), the company’s share price is materially cheaper than it was – and at yesterday’s closing price of $1.96 is down 67% from its peak in early April at the height of the cannabis boom. The haemorrhaging of the Elixinol share price has no doubt in part mirrored the malaise of cannabis stocks globally as the air has come out of the cannabis balloon. Former poster child Tilray, for example, is down 84% in the last 12 months and is down 67% over the past 6 months. But make no mistake, the market was underwhelmed by the half-year results released by Elixinol last month and the quarterly 4Cs for March and June – delivering results below expectations is a sure-fire way for the air to come out of a momentum stock’s share price.

With news yesterday that the ACT has become the first Australian jurisdiction to legalise the possession and cultivation of cannabis for personal use (and one would expect other regions to follow in time), it is possible that the ASX cannabis stock rollercoaster may reignite for a period. Readers should temper their enthusiasm for what this will mean for Elixinol specifically (given its focus on the US and Europe and comparatively miniscule operations in Australia). Readers should also continue to view the company as a higher-risk speculative investment – but believers in the long term widespread use of CBD products and cannabis more generally will be heartened by this news. At this stage I plan to keep holding my Elixinol shares – though I will be keenly watching the 4C released late next month.

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Disclosure: I (@Fabregasto ) have a position in Elixinol. In the future I may add to or sell my position –though not for at least 2 days after the publication of this article. I also hold a position in Cann Group (not covered by Ethical Equities) mentioned above, and also in Ecofibre (which we do cover – please see here for our coverage of Ecofibre’s FY19 results).

Please note Claude Walker has previously broadcast his intention to sell his Elixinol shares here and here – and having followed through on that, no longer owns the stock.

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Elixinol (ASX:EXL) Quarterly Cashflow Q1 2019: A Weak Result

Claude Walker — Wed, 24 Apr 2019 02:06:38 +0000

Elixinol Global Ltd (ASX:EXL) Quarterly Cashflow Q1 2019

Cannabis oil company Elixinol (ASX:EXL) yesterday released its quarterly cashflow report, showing that cash receipts were not impressive, given that it operates in a growing market. As you can see below, the receipts from customers decreased significantly, but expenses did not -- leading to a very poor operating result.

The company said that this reduction was “driven by Elixinol’s strategic decision to reduce focus on low margin private label business in the US to enable increased capacity for expected future growth of higher margin branded products and provide the ability to capture further market share.” This is extremely concerning.

However, it is also confusing because the company also said “Private label sales were significantly lower largely due to the Company restructuring supply arrangements with a private label customer whereby the Company will no longer perform private label services but instead will supply only bulk CBD products.”

It is not obvious to me why moving from private label services to bulk CBD products is a higher margin activity. In any event a couple of sentences seems like an alarmingly flippant explanation for what is, on the face of it, an extreme quarter-on-quarter drop. If this was indeed a carefully thought out strategy, then it should have been justified at length and in very precise detail.

In the worst case scenario, the strategic decision only made sense because private label customers were increasingly low margin. That is, they were putting continual pressure on Elixinol to reduce prices, or else they would go elsewhere. If that’s the case, Elixinol made the right decision, but are unable to compete on price, which shows they either lack scale or low-cost operational systems.

In the best case scenario, Elixinol has decided to use its capacity to fulfill its own branded business, which was being constrained by the private label services. While this scenario could be true based on the announcement, I don’t think it is explicitly stated, so it may not be an accurate understanding. In this case, we should see a stonking improvement in both receipts and operating cashflow next quarter, and the thesis would remain viable.

However, even in the best case scenario, in my opinion, the company has shot itself in the foot.

It is better business to ensure you are a trusted and reliable business partner, who will not suddenly stop supplying a customer private label services because it no longer suits you to do so. Rather, in my view the company should manage its own capacity so that it can maintain its business relationships, while also growing their high margin direct sales. Ultimately, that will allow it to be a more powerful player in the cannabis oil market than it could be if it focuses only on its own brands.

There might well be a time limit private label clients, but if we are at the beginning of a rapidly expanding market, I’m not so sure that it makes sense to do that now. And in any event, if that is what the company has chosen to do, then the decision should be explained and justified clearly to shareholders.

As a result of this analysis, I can only conclude that in the best case scenario my confidence in the company is now lower than it was, and two days after this post, I intend to sell a significant chunk of my Elixinol shares.

I do note, however, that Fabregasto, who wrote our initiation report on Elixinol, is currently more optimistic about this quarterly than I am.

Claude Walker owns shares in Elixinol and will not sell for at least 2 days after the publication of this article.

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This article contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.

Elixinol (ASX:EXL) FY 2018 Full Year Results: Greens Are Good For You

Fabregasto — Wed, 27 Feb 2019 04:27:58 +0000

Elixinol (ASX:EXL) FY 2018 Full Year Results: Greens Are Good For You

Elixinol Global (ASX: EXL) released its full year FY18 results today and followed up with an illuminating investor call. The share price climbed ~7% to $3.55 in response (not far from the all-time high of $3.69 reached earlier this month) – though there arguably wasn’t a whole heap of new or surprising information in today’s news.

EXL had already flagged full year revenue of $37M (as detailed in our report on the company’s 4C in late January) - however it was pleasing to see $0.7M of underlying EBITDA of $0.7M for the year (albeit after a considerable investment in ramping up capabilities ahead of the growth expected in the business for the new year – including continuing to fund the start-up Nunyara medicinal cannabis business). We flagged this likely investment in our previous report:

“…… readers should be cognisant that given the significant market opportunity available to Elixinol as a result of the opening up the US hemp market, it’s also possible that near term profitability is deliberately put on the backburner while the company invests in its supply chain and sales & marketing capabilities to meet the accelerating demand for hemp-based products – with the expectation that this would hopefully result in a significant boost to market share and profitability over the medium term.”

The table below summarises FY18 performance for the business, and splits the financials between the two main businesses: Elixinol in the US (which accounted for 87% of full year sales and all of the group’s profitability) and Hemp Foods Australia (“HFA”).

Providing true comparable historical financials for EXL is made difficult by:

HFA’s switch from a June year end reporting period to a December year end prior to listing (with no comparable HFA December year end numbers included in the prospectus for 2015 and 2016);
No pro forma historical 2015 and 2016 numbers included in the prospectus for the consolidated group; and
A change in the amount of detail reported for each division in today’s FY18 results vs what was provided in the prospectus – though not unusual for a fast-growing newly listed entity.

So we’ll work with what we have. We can see that the lion’s share of group growth in FY18 was generated in the US business – recording an impressive 144% growth rate. However, the EBITDA margin declined from 19% to 14%, due to a combination of significant growth in lower margin private label volumes and increased investment in sales & marketing costs (including a complete makeover for the consumer-facing website and a large promotional campaign). The company is positioning for a substantial expansion of the market in 2019, particularly following the signing of the Farm Bill just before Christmas and the resulting opening up of the mainstream retail market. Interestingly, the company reported that the US product range had increased by 50% from 30 at August 2018 to 45 currently, with further products to be launched this year.

The Australian business also recorded an impressive lift in sales versus FY17 – however a restructuring of, and additional investment in, the sales & marketing function dragged EBITDA for HFA to a $1.5M loss. A number of new products were launched by HFA in late 2018 and early 2019, and management has high hopes for continued strong growth in 2019.

No financials were reported for the fledgling Nunyara medicinal cannabis business – there is no real update since the release of the December quarterly cashflow report. The company is still waiting to receive licenses from the Australian Office of Drug Control for medicinal cannabis cultivation and manufacturing. In the meantime, the ramp up of this business continues with construction of the “state-of-the-art” (per management) 5,000m² fully integrated greenhouse cultivation, extraction and manufacturing facility scheduled to commence this year. Management expect to commence production (1-2 tonnes of medicinal cannabis in Year 1) and sales in 2020, and described the facility as designed in a way as to enable rapid modular expansion should market demand warrant it (a good example of long-term planning).

Operating cashflow was -$5.7M for FY18 – which includes prepayments to suppliers in order to lock in hemp requirements for 2019.

Earlier this month Elixinol announced its expansion into Europe – via the establishment of sales offices in the UK, Spain and the Netherlands, a sales team of 12 and a European MD. This followed the company’s $40M capital raising late last year to fund future growth opportunities. The company has been selling into Europe via distributors since 2017, but has decided to take control of its destiny in this region, so to speak. Supply will come from locally-based contract manufacturers. EXL has an ambitious goal of becoming a top-5 CBD business in Europe in 2019.

The investor call and investor presentation also touched on recent developments and initiatives that were already known – but which in combination point to a year of further growth in 2019:

Launch of the new Sativa Skin Care range (moisturisers and creams, shampoos, deodorants) in the US (and also available in Australia on the Hemp Foods Australia website);
Launch of the Essential Hemp branded snack bar range in Australia and earlier this month the launch of ready meals (including Hemp Burgers – looking forward to trying that one personally);
Increased R&D investment in the future product pipeline – with a number of new products scheduled for release in 2019;
Commissioning of the new Colorado manufacturing facility which double production capacity – which management expects will deliver meaningful gross margin improvement; and
Entry into the New Zealand market in January via the sale of products on a prescription basis.

Management did also reveal the recent launch of a new range of CBD powdered drink mixes (rapidly dissolvable in water) – comprising three daily drinks: Create for the morning, Build for during the day, and Dream at bedtime. Based on the CEO’s enthusiasm for this product on the investor call, the company has high hopes for this new product.

And finally the company did also flag likely expansion into Asia (outside of Japan, where EXL is already the #1 brand) and Latin America in the near term – which could provide a meaningful catalyst for increased sales and earnings and a higher share price.

The most important takeaway for me personally from today’s investor call however was management’s acknowledgement of a significant number of new competitors entering the market in response to the relaxation of the regulatory regime in the US. This wasn’t surprising given the enormous potential of cannabis products in many verticals from food & beverages, to medicine and cosmetics. The investor presentation and results announcement contained updated medium term market size estimates for both the US ($22 billion in 2022 per the Brightfield Group) and Europe €116 billion by 2028) markets.

It’s these sorts of mind boggling numbers which attract the attention of new market entrants and quicken the heartbeat of excited investors. That's fair enough, but we need to remember that it’s difficult to accurately predict medium term volumes for such a fast-growing space, and that these are likely estimates of the total market including segments (such as alcoholic beverages and tobacco being just one example) in which EXL does not currently play.

It will be interesting to see how successfully the company can defend and grow its market share as the market expands at a rapid rate and new competitors flood into the space – and the impact that this will have on margins. On the investor call, management iterated that it was “very confident” of the company’s market positioning. This confidence is based on its long history (comparatively, having launched in the US in 2014), brand equity, existing market share, large production capacity, ability scale, and also the significant investment being made to expand its sales & marketing activities to drive sales.

The company gave no hard guidance for FY19 – which was not unexpected given the rapid growth environment and the sheer number of moving parts here – but the CEO did sound very bullish on the opportunity ahead of the company. The combination of the huge growth potential of the market and Elixinol’s progress to date are reasons to be optimistic, in my view. As such, this paragraph from our initial report on the company still holds true in my view:

“We still think that EXL is a comparatively smarter post-hype (or first wave of hype) way to play the potential cannabis boom – as the only listed ASX cannabis player which is (1) generating meaningful revenue, and (2) profitable, albeit only recently and potentially with meaningful near term profitability deliberately pushed back while the company attempts a Land Grab in the US market.”

Given the significant run in the share price from $1.34 in September to $3.55 today, I would expect a some profit taking – especially as there may not be any share price catalysts until the release of the company’s March quarter cashflow in late April (unless the company announces new developments separately of course). As a “pot stock” I would also expect a degree of share price volatility over the course of 2019 as the market grapples with how to value a fast-growing company like this (as we await further financial updates on progress) – so we continue to recommend the company only to readers with a higher appetite for risk. Personally, I will continue to hold my EXL shares while I wait to understand how successful the company is in delivering on its growth ambitions.

Note from Claude: I have nothing further to add other than to say that the valuation makes me nervous, especially since we haven't really had a set of clean results as a result of acquisitions and the IPO. As yet I have not sold any shares, but I am not buying at these prices, and I may choose to reduce my position size at some point in the future.

Disclosure: I (@Fabregasto ) have a position in Elixinol – though sadly not added to since our initiation report or the previous December 4C update – and may add to my position in the future – though not for at least 2 days after the publication of this article. Claude Walker also owns shares in Elixinol (and will not trade within 2 business days of publishing this article).

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This article contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.

Elixinol (ASX:EXL) Q4 2018 Quarterly Update

Fabregasto — Thu, 31 Jan 2019 21:50:23 +0000

Elixinol Global Ltd (ASX:EXL): Growing But Still Early Stage

A lot has been happening with Elixinol Global (ASX:EXL) since we initiated coverage on the company in late October. During that time the stock price has more than doubled to hit a high of $3.55 earlier this week, before falling 11% today in response to the release of EXL’s 4C (quarterly cash flow report) for the December 2018 quarter.

As a quick refresher, EXL is a profitable US-based vertically-integrated manufacturer and distributor of hemp-based nutraceutical, dietary supplement and skincare products, and also here in Australia a manufacturer and marketer of hemp food and cosmetic products. The company also has designs on becoming a cultivator, manufacturer and distributor of medicinal cannabis products (leveraging its expertise with hemp goods) via an early stage Australian business (recently renamed Nunyara Pharma per the Dec-18 4C). Please refer to our initiation report on the Elixinol and to some background detail on the science of cannabis and cannabinoids, the global hemp and recreational and medicinal cannabis markets, and also a snapshot of the evolving regulatory landscape.

There has been a lot of enthusiasm towards the stock in the past few months, fuelled by the signing just before Christmas of the 2018 Farm Bill by President Trump – which ended the prohibition of hemp under the Controlled Substances Act. As we foreshadowed back in our October articles, hemp is now classified as a standard agricultural product (naturally, hemp was the world’s largest agricultural crop for thousands of years and farmed for food and as an industrial fibre in clothing, building materials and medicine). Broadly, this means that hemp farmers will now be able to access crop insurance and US Department of Agriculture programs, and will have greater access to banking services and mainstream payments technology; and (2) hemp products can now be transported across US state lines, and are able to be advertised in mainstream journals and newspapers – thereby opening up the national mainstream retail market. The positive ramifications for EXL’s US-based CBD-derived hemp products business are obvious.

More generally, media commentary and market analysts continue to focus on the increasing momentum in the US and globally for the legalisation of medicinal and recreational cannabis, while there has been a string of M&A deals in the past couple months both amongst existing cannabis players and companies looking to enter the space, as well as more tie-ups between cannabis operators and food & beverage and healthcare companies – all ahead of the expected regulatory reform and opening up of regional – and potentially global - markets.

But we’re getting ahead of ourselves – there is some way to go before global legalisation of medicinal and recreational cannabis – and from EXL’s perspective the company is focused in the meantime on executing the rapid expansion of its profitable hemp products business. Shortly after the signing of the Farm Bill, the company announced that it would proceed with appointing national advertising, PR and marketing agencies to improve awareness of the Elixinol brand and immediately commence its assault on the US national retail market.

The December quarter 4C revealed a significant increase in revenue for FY18 (financial year end is December) – up 121% from FY17 – and as can be seen from the below an acceleration of growth from the June 2018 half (+107% versus 1H17) to the December 2018 half (+132% versus 2HFY17.

Full year results won’t be released to the market until late February – so til then we won’t know the level of profitability generated by the company in the fiscal year just ended. The company generated a maiden (small) profit in the June 2018 half, and in our initiation piece we hypothesised that the company could generate NPAT of ~$2M for FY18 based on a continuation of 1HFY18 growth rates, similar margins in the established US and Australian businesses, further start-up losses for Nunyara, and a degree of operating leverage with respect to opex. However, readers should be cognisant that given the significant market opportunity available to Elixinol as a result of the opening up the US hemp market, it’s also possible that near term profitability is deliberately put on the backburner while the company invests in its supply chain and sales & marketing capabilities to meet the accelerating demand for hemp-based products – with the expectation that this would hopefully result in a significant boost to market share and profitability over the medium term.

The December quarter 4C also provided an operational update which included the launch of the new Sativa Skin Care range (moisturisers and creams, shampoos, deodorants) in the US (and also available in Australia on the Hemp Foods Australia website), the launch of Essential Hemp branded snack bars in Australia and preparation for the launch in 1Q19 of a product in the “ready meal” category, the ramping up of European marketing operations, and increased R&D investment in the future product pipeline.

And as announced to the market last week, the company also entered the New Zealand market following the passage of the Misuse of Drugs (Medicinal Cannabis) Amendment Act – which enables the sale of EXL’s CBD products to patients on a prescription basis. We assume that NZ sales won’t meaningfully “move the needle” revenue or earnings-wise over the short term, but are hopeful that this development can be replicated in larger markets.

The 4C also included some commentary which one might potentially attribute to “growing pains” for a company growing so quickly: (1) some minor delays associated with the planned commissioning of the new Colorado manufacturing facility – scheduled for first half of this year, and which will double US production capacity from current levels; (2) lower than expected yields from the maiden harvest of high-CBD hemp under the NCHPP farming joint venture; and (3) frustration that Nunyara had not yet been awarded medicinal cannabis cultivation and manufacturing licences by the Australian Office of Drug Control.

It’s conceivable that this less-than-rosy commentary was a key driver for the share price decline today, as well as the lack of any specific guidance for FY19 (which we think was always more likely to be provided at the release of full year results next month), and potentially also because some market participants were hoping for higher FY18 revenue than was achieved. Given the doubling of the share price in the last few months – despite the “Risk Off” period endured in the Australian market since late August – the share price had arguably overshot and was due for a correction at some point. It’s also not unusual for high-growth companies such as EXL to be bought heavily leading into results and then sold off once numbers are released as certain investors “Buy The Rumour And Sell The Fact” etc.

The share price action since we initiated on the company (*probably* more correlation than causation, though hopefully we have some degree of EXL ownership in the Ethical Equities community) has highlighted the speculative nature of the stock, and the significant increase in the share price has made the company even more expensive in a traditional fundamental sense. On the other hand, as we highlighted back in October not many companies have the potential growth profile of Elixinol.

We still think that EXL is a comparatively smarter post-hype (or first wave of hype) way to play the potential cannabis boom – as the only listed ASX cannabis player which is (1) generating meaningful revenue, and (2) profitable, albeit only recently and potentially with meaningful near term profitability deliberately pushed back while the company attempts a land grab in the US market.

Given recent share price movements, readers will need to make up their own mind whether EXL is a suitable investment candidate for their individual portfolios – but clearly the company is not a Deep Value play and it will likely be years before it pays a dividend.

With a view on the longer term potential of the company I personally will continue to hold while I wait to gather more information on the likelihood of my personal investment thesis playing out (i.e. whether management can deliver on the large market opportunity).

Note from Claude: I am tempted to sell but also holding on for now (and I will not trade for at least 2 days after publication of this article). For me, a profitable full year result would be bullish. A loss would have me a concerned.

Disclosure: I (@Fabregasto ) have a position in Elixinol – though sadly not added to since our initiation report – and may add to my position in the future – though not for at least 2 days after the publication of this article.

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The Author of this piece, Fabregasto, and Editor, Claude Walker, own shares in one Cannabis stock Elixinol Global. This article contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.