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Cannabis Earnings Season is Heating Up

Aug 14, 2015 • 2:10 PM GMT+0000
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6 MIN READ  •  By Michael Berger
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Earnings season has started to heat up; a number of companies have already announced results. A few companies have reported results that show significant improvement, while some others have reported very lackluster results.

The growth of the cannabis industry has led to a surge in the number of publicly traded cannabis companies. Investors must perform thorough due diligence prior to investing and we recommend looking into factors such as revenue growth, institutional investment, dilution potential, share count growth, and recent trading activity.

1) Terra Tech Corp (TRTC) is a holding company that is focused on a variety of businesses levered to the rapidly growing cannabis industry. Its Edible Garden subsidiary cultivates local and sustainably grown hydroponic produce, sold through major grocery stores such as Shoprite, Food Emporium and others throughout New Jersey, New York, Delaware, Maryland, Connecticut, and Pennsylvania. Its MediFarm subsidiary is focused on medical marijuana businesses throughout Nevada. Its IVXX subsidiary produces extracted products for regulated medical marijuana dispensaries in California.

Financial Highlights

  • During the quarter, TRTC generated $5.0 million in revenue ($3.7 million during the same quarter last year).

  • TRTC generated $262,614 in gross profit (-$99,637 during the same quarter last year).

  • Gross margins improved from (2.68%) to 5.23%.

  • Selling, general and administrative expenses were $3.3 million during the quarter.

  • Recorded a $2.7 million net loss ($4.5 million net loss during the same quarter last year).

Liquidity Highlights

  • As of June 30, 2015, TRTC had an accumulated deficit of $41,559,619, a working capital deficit of $2,023,486, a $2,129,817 cash balance ($846k cash balance as of end of 2014).

  • Since inception, TRTC has raised capital through private sales of preferred stock, common stock, and debt securities. TRTC has never reported net income and they have not been able to generate sufficient cash from operating activities to fund ongoing operations.

  • TRTC said existing and available capital resources are sufficient to satisfy funding requirements through the second quarter of 2016

  • TRTC will have to raise capital through public or private financing, additional collaborative relationships or other arrangements until revenues to are at a point of positive cash flow. The issuance of additional securities may result in a significant dilution

Liquidity Needs

TRTC requires addition capital for the development of its subsidiaries.

  • If MediFarm (TRTC owns 60%), MediFarm I (TRTC own 50%), and MediFarm II (TRTC owns 55%) receive all licenses/permits, TRTC needs $11 million to execute on its operating plan. Forever Green NV, LLC, a member of both MediFarm I and MediFarm II, agreed to contribute $500,000 in debt to MediFarm I and approximately $750,000 in debt to MediFarm II. TRTC is responsible for the remaining $9.75 million.

  • GrowOp Technology: TRTC needs approximately $110,000 for commercial development

  • IVXX: TRTC requires $400,000 for working capital, inventories, salaries, and software. The company plans to allocate a portion of any proceeds they receive if and when they sell additional securities.

Outlook

The report had a few bright spots, but also raises a lot of questions. One of our main concerns is related to margins. Hydroponic produce from its Edible Garden subsidiary accounted for $4.7 million of total revenue, but only $168,693 of gross profit (3.5% margins). IVXX accounted for $127,747 of total revenue and $95,131 of gross profit (74% margins). TRTC should refine its focus to the higher margin business segments and we are going to monitor this metric going forward.

 

2) Mentor Capital, Inc. (MNTR) is a United States-based firm that invests in medical marijuana and recreational use cannabis companies. The company has $140 million capital structure and looks like a marijuana fund or cannabis index fund.

Portfolio Businesses

  • Waste Consolidators, Inc. (WCI): MNTR owns 51% of WCI

  • MicroCannaBiz (MCB): MNTR owns 51% of MCB. In April 2015, MNTR notified MCB that it was exercising its option to convert its equity in MCB into a 10 year note receivable for $74,000 from the majority owner of MCB as provided in the funding agreement.The note receivable bears interest at 6% and will be payable in monthly installments.

  • Bhang Chocolate Company, Inc. (Bhang): MNTR acquired 60% of Bhang in 2014. MNTR is suing Bhang for not returning the $1.5 million allocated to Bhang. The deal fell apart and now MNTR wants its money back.

  • Investor Webcast, LLC (CAST): MNTR acquired 100% of CAST for 4,696 to-be-created Series B convertible preferred shares (valued CAST at $469,611). After one year, the preferred shares may be converted, in steps or in whole, into common shares.

  • Electrum Partners, LLC (Electrum): On March 12, 2014, MNTR provided Electrum with a $100,000 convertible note receivable. MNTR has the option to convert the note plus any accrued interest or fees into shares of equity in Electrum at any time prior to its maturity.

Financial Highlights

  • During the quarter, MNTR generated $628,386 ($509,105 during the same period last year). The increase was due to higher WCI monthly fees and revenue from CAST.

  • MNTR recorded $237,701 in gross profit

  • During the quarter, MNTR incurred $431,822 in selling, general and administrative expenses

  • During the quarter, MNTR recorded a $151,235 net loss.

Liquidity Highlights   

  • As of June 30, 2015, MNTR had $311,275 in cash and $491,790 in working capital. The company is evaluating options to raise additional funds, including loans.

  • MNTR has raised capital through warrant holder exercise of warrants for common stock.The company needs to raise capital through financing, additional collaborative relationships or other arrangements in order to execute on its plan.

Outlook

During the last month, shares are down 24% and MNTR is trading at $0.595. The company is led by a management with a proven track record, however, they have done a poor job communicating developments to the market. Shares are trading below its 20, 50, and 150 day moving average and near oversold territory (RSI=35).

 

3) Peak Pharmaceuticals (PKPH) is focused on the development, manufacturing and marketing of hemp-based nutraceutical and supplement products for the human and animal health markets. All business operations are through PKPH’s wholly-owned subsidiary, Peak BioPharma Corp.

Canna-Pet Agreement

In July 2014, Peak BioPharma entered into a license agreement with a Washington limited liability corporation which owns the brand name “Canna-Pet” and certain related intellectual property. Under the agreement, PKPH was granted a perpetual, exclusive, world-wide license to use the intellectual property for the production and sale of medical products made from industrial hemp.

In consideration of the grant of the license, PKPH agreed to pay license fees in the form of royalty payments calculated on the basis of gross proceeds.

The royalty will be calculated and paid on a quarterly basis and is equal to 15% of the first $1,000,000 of gross proceeds received during the quarter and 10% of gross proceeds over $1,000,000 during the quarter.

Financial Highlights

  • PKPH generated $317,244 in revenue and reported $178,812 in gross profit (56.4% margins)

  • PKPH incurred $663,852 in general and administrative expenses

  • Reported a loss from operations of $488,483

  • PKPH reported a $488,483 net loss during the quarter

During the last nine months, PKPH generated $751,313 in revenue (58.7% margins) and reported $440,842 in gross profit. During this period, PKPH reported a $1,893,779 net loss.

Liquidity Highlights

  • PKPH expects that they will need to raise capital to execute on its business plan. The company plans to raise capital through the issuance of debt or equity, strategic arrangements, or through other means.

  • As of June 30, 2015, PKPH had $239,621 in cash. The company believes they have enough capital to continue manufacturing and marketing pharmaceutical level products

Outlook

PKPH has been trading very weak this quarter (down 45% in last three months) but momentum has been trending up since late July. Shares are up 100% from its lows on July 20th and we view the company as a short term swing trade opportunity on weakness (below $0.07). Our primary concerns are: 1) Potential FDA inquiry, 2) Poor liquidity, and 3) Wide spread.

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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