Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Introduction Cann Group (CAN)
Cann Group (CAN) is an Australian medicinal cannabis company. Cann aims to research, cultivate, and manufacture a range for medicinal cannabis products for patients in Australia and Globally. The medicinal cannabis market does not have legal hurdles. The Therapeutic Goods Administration (TGA) allows cannabis for palliative care, chronic pain, nausea, vomiting, multiple sclerosis, and young adult epilepsy. Second, to that, cannabis can be legally prescribed to patients without relying on the black market.
Instead, the challenge is understanding the genetic makeup of cannabis mixtures for different medical conditions. Also, medical cannabis companies must have positive cash flow, healthy revenues, and profits to match their clinically validated products.
Key Stock movements between 2017-2018
During 2017 and most of 2018, Cann was financially and operationally progressive. If you were shareholder, you would have been happy as you watched the share price grow.
2017 started with CAN receiving their Research license (February) and Medicinal Cannabis Cultivation license (March). These licenses enabled CAN to cultivate cannabis for research purposes and produce Australian grown cannabis for medicinal purposes. Second to that, Canadian pot Giant Aurora Cannabis Incorporated took a 19.99% investment in CAN. The licenses plus the Aurora investment saw the share price surge from $0.58 (July) to $1.23 (August).
Moreover, in November, the stock price skyrocketed to $2.97. Primarily due to two reasons. Firstly, the Office of Drug Control (ODC) approved CAN’s license variations. In turn, CAN expanded its southern Victorian facility and extended cultivation, production, and research to their northern Victorian facility. Secondly, the ODC granted Cann an import license of cannabis. In turn, Cann can import Canadian cannabis to analyse its genetic makeup.
2018 followed a similar trend of surging stock prices. Cann’s commissioning of its Northern cultivation and R&D facility in Melbourne saw the share price rise to $3.56. Moreover, the federal government permitted medicinal cannabis producers to export to the global market. Consequently, Cann’s cultivation increased, providing shareholders with more confidence in financial return. Leading to Can’s all-time high of $3.70 on May 2018.
Overview of 2019 for Cann
Despite the early 2018 success, Cann’s share price has declined from mid-2018, throughout 2019, and continues to as we speak. Investors began to feel the bitter taste of capital losses.
Cann’s constructed a new cultivation plant in Mildura, Melbourne in early March. Second, to that, Cann Group established a five-year offtake agreement with Aurora. Within the agreement, Cann will supply dry flower, extracted resin, and medicinal cannabis to Aurora until 2024. Both events sparked a small surge in the share price.
Despite the temporary increase following the March events, the share price has declined throughout the rest of 2019. But why?
Firstly, Cann is not a profitable company. Profit is usually a must requirement for investors. Thus, making it no surprise when the company reports net profits losses throughout 2019 that its share price also declines.
Secondly, Cann reported an operating cash loss of $3.55 million from customer receipts for the Q3 2019. Additionally, Cann has spent 17.66 million into its Mildura facility. The cash loss and lacking profitability has created the excitement for Cann to diminish as the harsh financial reality sets in.
The future of Cann: Where to from now?
Despite the lack of profitability, investors should examine Cann’s revenue growth. Cann Group increased revenue by 2842% over the last year (Q2 2018- Q2 2019). Cann’s revenue growth is a positive result.
Cann’s operating cash loss might be a disappointment for some investors. However, Cann’s cash on hand ending Q3 2019 was $25.2 million, with an anticipated cash outflow of $20.32 million for operational costs. Thus, providing cash optimism. Moreover, according to Cann Group, once Mildura is finished Cann “is expected to generate annual revenues of approximately $220 million to $280 million based on dry cannabis flower”. Therefore, providing possibly promising revenue returns.
The share price drop is not appealing to many investors and may have disappointed pre-existing investors. However, do not allow the decrease to overshadow the potential of Cann Group. The challenge in the medicinal cannabis industry is financial health and understanding the genetic makeup. The company has proper cash management for the future, indicating short term financial health. Secondly, Cann’s low amounts of debt will allow them to take on more debt in the future. Lastly, Cann’s link with Canadian producers Aurora and Anadia enables the company to understand the genetic makeup to treat different medical illnesses.
Watch out for financial results, updates and especially for the completion for the Mildura facility completion in 2020 (Q4). Cann holds huge potential in our opinion from extensive research but this will be determined in 2020.
Here is our free, uncomplicated, and extensive ASX portfolio
The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Author: Written by associate of YIG, Patrick McLoughlin.