Shares of Medipharm Labs (TSX: LABS) slid nearly 18 per cent Monday after the Canadian cannabis extractor reported a sizeable quarter-over-quarter decline in revenue in the final three months of 2019.
The Barrie, Ont.-based pot firm released its financial results for the fourth quarter and full year ended Dec. 31, reporting total revenue of $32.4 million and $129.3 million, respectively.
While the company cited being a top-five Canadian cannabis company by revenue, its fourth quarter sales dropped 25.4 per cent from Q3.
The pot processor attributed the revenue dip on a reduction in volume of bulk extract sold and average selling price.
However, MediPharm also reported a decline in almost every important financial metric on a quarterly basis.
The company said its positive adjusted EBITDA fell to $2.7 million in Q4, down 74 per cent from the $10.1 million it reported in the third quarter.
Net income before taxes of $5.4 million in the third quarter turned into a net loss of $2.4 million in Q4, according to the report.
Despite the fourth-quarter setback, MediPharm CEO Pat McCutcheon called 2019 a “transformational year” for the company considering it was one of few legal cannabis companies to become profitable.
“We established ourselves as a high-quality extract company, earning our first GMP certification, positioning ourselves to become a global supplier of pharma-quality products as future brands, larger consumer packaged goods companies and pharmaceutical companies begin to enter the market,” he said in a statement.
McCutcheon also noted that MediPharm finished the year with strong capital strength and liquidity to weather industry headwinds in future quarters.
According to the company, it held almost $39 million in cash at the end of 2019, and reported a fourth-quarter operating cash flow of $14.1 million.
RESULTS: @MediPharmLabs Reports Q4 & Full Year 2019 Results & reaffirmed its strategic priority to build a multi-jurisdictional, GMP-certified pharma-grade platform to serve world’s most attractive emerging cannabis medical markets. https://t.co/8AhdJuFjZc $LABS $MEDIF $MLZ pic.twitter.com/FeY3iNT8NI
— MediPharm Labs (@MediPharmLabs) March 30, 2020
MediPharm says Canadian pot sector faces ‘significant challenges’
McCutcheon said MediPharm was able to reach operational and financial milestones in 2019 “despite the significant challenges faced by the sector in Canada.”
In a conference call, the CEO cited how the rollout of physical Canadian cannabis retail stores has been at a much slower pace than the industry expected, which has also slowed the extractor’s own growth.
Over the last 18 months, he said major producers in Canada had problems growing pot and getting products processed, packaged and onto store shelves.
McCutcheon said history is being repeated with the slow rollout cannabis 2.0 products like vape pens, edibles and infused drinks, as companies struggle to get those items to market since they became legal Oct. 17 and available to sell on Dec. 18.
“Companies were not fully prepared for 2.0 lacking manufacturing capabilities resulting in their inability to convert bulk concentrate into finished consumer products,” he said. “In addition others face significant quality issues with finished products resulting in product returns and other issues.”
He said those inefficiencies have resulted in increased volumes of bulk cannabis oil in the market, which put downward pressure on pricing and effected MediPharm’s fourth-quarter revenue and gross margin.
The company reported gross margin of 31 per cent in Q4, compared to 34 per cent in Q3.
While the company expects those trends to continue in the near term, it also expects that prices will stabilize once producers figure out how to get more finished 2.0 products onto store shelves on a regular basis.
“The consumer demand for these 2.0 products is high and we are ready and well positioned to take advantage,” McCutcheon said.
Company eyes future growth
In the last month, the company launched its own CBD wellness product line and made its first cannabis topical shipment in Canada.
MediPharm says it has aggressively developed its international business operations.
In 2019, the company signed export agreements with an Australian medical cannabis company and a German pharmaceutical distributor, and ramped up shipment volumes into Australia this month.
MediPharm said it expects to receive EU GMP certification at its Canadian facility and GMP certification at its Australian facility to spur further overseas growth.
The company, however, did not provide any update on the $9.8 million lawsuit it filed earlier this year against Quebec producer Hexo Corp. (TSX: HEXO).
In a terse January press release, MediPharm said it filed the suit in the Ontario Superior Court of Justice against an unnamed “licensed producer” for not paying the $9.8 million related to a cannabis oil sale contract. BNN Bloomberg later named that producer as HEXO.
Top image via MediPharm Labs