Cann Group, Are They a Good Investment?
Cann group was established in 2014 in Australia with the vision of researching and developing cannabis based products. It was the first company in Australia to obtain Cannabis Research and Cultivation Licences by the authorities in Australia. These licenses allow Cann group to grow cannabis in Australia for research and medicinal purposes.
These licenses were granted in 2017 and since then the company has been researching and developing cannabis based products. Cann group has set up research labs and cultivation facilities to help facilitate research on Cannabis. The company aims to create feasible conditions, in order to set up basic infrastructure and a fully integrated business model for the legalised cannabis industry.
Vision
The vision of cann group is to become a leading developer and supplier of cannabis and cannabis based medicinal products.
Business Model
The business model of Cann group is a fully integrated business model which means that they have gone for complete upstream and downstream vertical integration. They have got the total control over their supply chain that begins from genetic engineering of the seeds, in order to produce productive seeds. Cann group has also got leading edge cultivation and production facilities in Australia. The cannabis produced is then processed in labs that have cutting edge analysis technology. The packaged product is not just sold in Australia but also other countries. Cann group has got supply agreements with customers in New Zealand, Europe, South America and Canada.
The fully integrated business model approach allows Cann group to minimise costs and have total control over the whole supply chain, thereby allowing the company to not just maintain quality but also supply at any given time.
Many companies simply cannot implement the fully integrated business model because it requires heavy investment, however those like Cann group who do can achieve exponential growth rates because they simply control a lot of growth factors by virtue of being fully integrated. This, therefore, is one of the strongest points of cann group, one that investors can bank on while investing with the company.
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Research and Development Facility
Cann group has got a state of the art research and development facility. Cann group has a collaboration network in place with the leading Australian medical scientists, who carry out research to discover, analyse and use the medicinal properties of cannabis. Their research is focused upon the different bio active ingredients present in cannabis such as cannabinoid and terpene. The aim of this research process is to separate the bio-active components and optimise their usage for specific therapeutic conditions.
The medicinal cannabis feedback loop of Cann group, as stated on their website is as follows.
- Identify new clinical research opportunities
- Develop elite new medicinal cannabis strains, tailored at patient needs
- Prescribe clinicians and gain insights for testing different strains
- Publish findings of the tests and trials and carry out case studies of outcomes
- Develop strain specific therapeutic evidence
This feedback loop is meant to make sure that the development of cannabis based medicinal products is done on proper medical and scientific grounds, to make the products that meet the needs of patients and also help advance the industry through collaborative efforts of different research partners.
The research partners of Cann group include
- CSIRO
- La Trobe University
- Olivia Newton John Cancer Research Institute
- Pancare Foundation
Investors
Some of the notable shareholders of Cann group include
- Aurora cannabis – 16.37%
- Flag Capital – 3.53%
- Mullacam Pty ltd – 2.86%
- Supernova fund pty ltd – 2.36%
- National nominees limited – 2.24%
- JP Morgan Nominees Australia PTY limited – 0.94%
- HSBC Custody nominees – 0.69%
- Chevron Corporation – 0.63%
- Commonwealth scientific and industrial research organization – 0.62%
- Citicorp nominees PTY limited – 0.60%
- BNP Paribas nominees PTY ltd – 0.60%
Financial Fundamentals
Presented below is a brief analysis of the financial fundamentals of Cann group
Revenue
The revenue position of Cann group has fallen significantly in 2020 as compared to 2019. The revenue in 2019 was almost AUD 2.3 million but in 2020 this can be reduced to AUD 0.6 million. This shows a reduction of almost 73%. Other income has also fallen from AUD 1.9 million to AUD 1.2 million approximately.
Revenue therefore has fallen very sharply, which is not a very encouraging sign for new or old investors. Although it has not been specifically stated but the Covid-19 induced lockdown may be a contributing factor to this sharp decline in revenue.
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Total Comprehensive Loss
The figure for total comprehensive loss in 2019 was AUD 10.9 million which has increased to AUD 16.9 million in 2020. The increase in loss corresponds with the decrease in revenue. The amount of expenses has also shown a slight increase.
Due to consecutive losses, the company has not paid any dividends therefore there is no earning per share figure for Cann group. The loss per share figure was 7.82 in 2019 which has risen to 11.91 in 2020.
Assets
The total assets were worth AUD 82 million in 2019 and these have fallen to AUD 76.4 million in 2020. It seems that the company is undergoing major reconstruction as the non current assets were worth AUD 30 million in 2019 and they have grown by almost twice the amount to AUD 63.8 million in 2020.
The greatest increase has been in the property, plant and equipment which means that the company has carried out capital expenditure to increase its non current asset base, in order to expand the operations of the company. Intangible assets of the company have also increased, which mean that the licenses and patents of the company have increased from AUD 112594 to AUD 827636. The right of use assets have also increased by almost a million AUD which means that the company has purchased assets on lease.
Current assets on the other hand have significantly declined from AUD 51.7 million to almost AUD 12.5 million. The greatest decline in this category has been in the cash and cash equivalents which have declined from AUD 46.3 million to AUD 15.5 million. Receivables have also decreased whereas inventories have increased from AUD 3 million to AUD 9.4 million. This may suggest stuck up stock that could not be sold or a change in company policy to hold higher levels of stock.
Liabilities
The total liabilities of the company have also increased significantly from AUD 4.8 million to AUD 15.3 million. This has been mainly because of an increase in the long term liabilities that did not exist in 2019 but do exist to the tune of almost AUD 2.2 million in 2020.
Equity
Equity has remained more or less unchanged, the overall size of the balance sheet has reduced by almost AUD 16 million whereas accumulated losses have increased by almost AUD 18 million. The company has also raised about AUD 8 million in convertible loan notes in 2020, which hints towards the fact that although the financial position of the company is looking very precarious in 2020, investors have some level of trust. However convertible loan notes are primarily debt, so even if the company defaults on payment the creditors would have preferential right over the assets.
Cash Flow situation
The level of cash and cash equivalents at the start of 2019 was almost AUD 46 million, this has dropped significantly to AUD 15.5 million in 2020
Financial Analysis
Looking at the financial statements, there is no need to carry out a detailed ratio analysis for the company. Cann group is simply not displaying good financial indicators at the moment. The liquidity and profitability both look poor. The company was already operating in loss but now it is also becoming illiquid because cash reserves have fallen quickly.
The directors report does not hint at any major restructuring but it does state that the company has purchased a new property and plant, which is under process of being developed for future use. In addition to this the company has also purchased a number of licenses and other intangible assets, as a part of their efforts to carry out more research and development. The directors report therefore does not hint at any restructuring.
However for a company that began operating fully around 2014, it is still too early to show full steam. Furthermore the medicinal cannabis industry is still in its nascent state as well and any positive growth that could have been achieved in 2020 has been marred due to the Covid-19 pandemic.
It can therefore be said that the company is suffering from financial difficulties and since the company has posted consecutive losses, it does not seem likely that the company will be profitable for at least the next two to three years. This means that only long term investors may find it feasible to invest in Cann group at the moment, banking on long term recovery and growth.
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