Extraction specialist MediPharm Labs Corp.
Back in Q1 2018 the firm brought in revenue of $10.2 million and posted a net loss of $3.5 million. In the first three months of 2019 the net loss narrowed to just $573,000 and revenue shot up to $22 million as a result of soaring demand for its services.
The revenue growth can largely be attributed to the $7.6 million it received for the first shipment of large private-label cannabis oil with an unnamed major licensed producer.
“Our revenue and adjusted EBITDA performance, which more than doubled to $22 million and $4.3 million in our first full quarter of operations, illustrates the value of our specialized focus and ability to execute as the Canadian market’s leading extraction experts and providers of high-quality cannabinoid-based derivative formulations at scale,” said chief executive Patrick McCutcheon.
He added that it demonstrates MediPharm’s ability to convert revenue into positive operating cash flow. The firm only received its sales license in November 2018 and McCutcheon is pleased with the swift progress towards positive cash flow it has made.
Can Extraction Companies Justify Hype?
There is a great deal of hype surrounding extraction companies right now as edibles grow in popularity in the U.S., while Canada is poised to permit sales in Oct. 2019. Some large producers are taking extraction services in-house, but most use specialist firms like MediPharm, Valens Groworks. and Neptune.
MediPharm is one of the three largest Canadian companies in its field in terms of its capacity. It confirmed it is on track to increase annual throughput capacity from 150,000kg to 250,000kg during 2019 and it has already secured deals with several leading producers to create white-label products for them.
MediPharm does not have a huge cash balance, but it is profitable on an EBITDA basis and it received more than $7 million in cash proceeds from warrant exercises subsequent to Mar. 31, 2019 to cover a liquidity gap.
It is burning through cash at a rate of roughly $5 million per quarter as it invests in inventory and boosting its capacity, and it needs to generate more revenue or reduce costs to break even in the year ahead if it is to avoid a dilutive cash raise. However, demand is rising for its services and McCutcheon’s confidence is understandable.
One issue for shareholders is that MediPharm’s capacity will vastly exceed the amount of cannabis oil the firm has been contracted to produce. It needs to secure more contracts if it is to run at full capacity and meet consensus estimates and EBITDA estimates.
Demand for cannabis oil is a lot smaller than the projected capacity of the industry and it needs to shoot up for firms like MediPharm, Valens, and their peers to flourish long-term.
MediPharm’s share price opened at $6.35 today, a significant increase on the $1.80 it started 2019 at. It is one of the darlings of the industry right now due to the hype around concentrates, and it could have further upside if it announces more deals in the short-term. However, long-term it will need demand for vaping cannabis and edibles to seriously increase.
Canada alone produces 900,000kg of cannabis flower per year and that figure is rising, so extraction firms will have a strong opportunity going forward as consumer demand is likely to move past flower and into concentrates, as we have seen in various U.S. states.
Consumer demand for CBD oil is also soaring, although this offers a far lower price than cannabis oil. Yet McCutcheon is convinced his firm can thrive going forward.
“In anticipation of expanded legalization in the fall of 2019, we are advancing our distillate and white label solutions platforms to enhance our position for vapeables, edibles and topicals as we expect our addressable market and consumer demand to significantly increase,” said McCutcheon. “Our white label offering will be an enduring advantage and attractive solution for LP’s, direct-to-consumer brands and CPG companies, which we expect will also accelerate our growth in the months and years ahead.”
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