Namaste Technologies just printed its latest quarterly earnings and I wanted to jump into the stock to see where this puts this cannabis company. There were positive inroads for Namaste as it moved away from its legacy issues. There are still a few steps that need to be taken until the company gets to where it is ultimately going; profitability. This is a fairly popular stock that garners a lot of followers. I wanted to make a fair assessment of the company given the metrics and what could happen here. But, this analysis is going to be slightly different as I reverse-engineer the financials.
Current management is exercising diligence and prudence as they continue with their plan. There will be some additional bumps in the road. And, I think that $NXTTF will drop from this level. But, I also think that if the plan is executed and the product mix is capable of garnering a strong customer base, there will be an opportunity here. It is going to take time, however.
The real story, however, is the deal with High Tide through CannMart. Namaste has a 49% stake in CannMart, an online platform where Namaste is pursuing an Amazonesque style of direct-to-consumer approach. High Tide just obliterated revenue projections in its most recent financial release. Can Namaste replicate this same success on the same platform? This may be an upside potential opportunity. While 100% of High Tide’s revenues were not from CannMart, an online-only platform has a lot of merits.
Let’s first look at the stock chart for $NXTTF:
Namaste is actually sitting about as low as it can go. But, then again I think it just might go lower before it goes upwards. To answer why just let’s start with cash-on-hand.
Namaste Cash On Hand
Namaste just did a bought deal for C$20M. That translates into about $15M USD. Here is a look at the most recent financial data to show where Namaste was just before the bought deal:
Total cash on hand would change to about $22M as of right now. That is sufficient for this year’s financing needs to extend forward. But, that takes into consideration that net losses remain steady or improve. That is going to take some serious movement in other metrics at this point. I see the recent bought deal as buying time before the inevitable, another round of considerably more working capital.
To put this into perspective, let’s move to net income.
Namaste Technogies Net Income
For now, Namaste’s net losses are fairly consistent. Simultaneously, they are also improving:
Given the cash-on-hand, it is important that the restructuring and moving away from the legacy issues is on pace. There is still more room to go, obviously. But, the progress is positive and the eventuality is that Namaste will achieve its stated goals of creating a foundation for selling its products and then EBITDA and Net profitability.
The reason I wanted to highlight this is simple: Namaste needs more cash. Period.
Namaste now has enough cash for this year and then nothing more. They still have some steps to take with getting to profitability or completely arresting the hemorrhaging of cash. Having enough cash for this year is just that, having enough cash for this year. But, they will need to do another bought deal to carry them through to the end of next year as well, about the time necessary for them to hit Net Income positive where the company’s efforts can start to add to its own books.
Namaste Technologies has some 386M shares outstanding and I think they will need to add an additional $20M USD for its piggy bank. The current price is $0.20 per share which would mean an additional 100M shares sold. That is about 25% of shares outstanding as of right now. So, that could mean that the share price moves lower by some 20% to compensate for the increased share dilution.
Namaste Net Revenue
The cannabis industry is seeing double-digit growth rates for gross revenues. Namaste is not. I got a DM from one of my social sites saying that all one needs to do is wait for US Federal legalization and US growth will add significantly to revenues for Namaste. Why would US Fed legalization be the catalyst for revenue growth? Aren’t states already allowing for cannabis legalization? And, couldn’t Namaste be selling in these states already?
I thought that comment was too much buying into hype of cannabis and missed quantification. US Fed legalization is alredy being said to defer to states. What would improve the outcomes of US Cannabis stocks is the SAFE Banking act which will reduce costs. This is something that I think is the real catalyst for US cannabis companies.
But, maybe US Federal legalization does allow for use of postage and package delivery companies. That would improve the bottom lines of existing companies, of course.
Namaste Revenue Moving Forward
In the meantime, Namaste needs to begin the process of hyper-growth of its products. They have a foundation upon which to grow and at this point that needs to happen. They are partnered with High Tide in Ontario to sell its cannabis out of High Tide’s online CannMart.com retail store. Namaste needs to promote this opportunity and acquire more avenues similar to this.
Namaste Gross Margins
Gross margins are actually some of the worst in the industry, and that may be an opportunity for management:
Write-downs for product actually shows up in gross margins (Other write-downs for operational losses show up in other metrics). As Namaste gets a better grasp on its future demand the gross margin will improve because less product not sold will not be produced.
Again, the turn-around is in place and I am looking for future margin metrics to improve. Until then, I hate to say it but even Canopy Growth and Aurora have better gross margins.
But, that is the opportunity as management steers Namaste towards its new direction. If management were to get a better grasp on its costs and sales, the cash-urn will lessen and so will the need for additional capital.
Namaste Operating Efficiencies
I saw a video where Nemi, the CEO mentioned that operational cost increased 7% for the year whereas gross revenues were up some 60%. That is important:
This ends up being a mathematical equation derived from total operating costs over total revenue. As reveneus increase, and assuming that management can continue to increase revenues while simultaneously maitinaing prudence with costs. That is one of the leading things I look for in the quality fo management. This prudence will pay dividends. But, ultimately, management has no choice simply because of its cash position and burn rate.
Look for continued movements lower in operational efficiencies as proof that management is continuing with its job of prudence.
Is Namaste Technologies a Good Buy?
Namste will be looking at about $50M in potential revenue (My projections as the company has not guided us). Running 60% gross profits, 35% total operating costs, an additional 10% continuing costs, Namaste can end up with about $15M in net revenue. Given 500M shares outstanding, this would bring in about $0.015 EPS. At 100x future earnings, that would bring the stock up to $1.50 per share.
But, there is CannMart. This is the wildcard that I am looking towards. High Tide jsut printed exceellent revenue increases using the same platform (as well as other sales avenues). CannMart may be something of a hidden gem. And, that hidden gem may be attractive to a potential outside buyer: Namaste may be bought out.
In the meantime, the cash position is a burden. Namaste will have to bring in new cash and that may dilute shares. My expectation is that there will be an additional 100M shares out there at some point; this will dilute shares by 20%.
But, afterwards, the worst may be over for Namaste and they can continue to focus on productive projects that add to the top and bottom line. For those in $NXTTF, my thinking is that this may be a long and boring year. But, there is very likely a payoff. The proof will be continued revenue gains. If the following quarters continue to print postiive growth then you will know that the products are being well received while management finds new avenues to sell its products.
As for perspective buyers, I would not get in to Namaste until after the cash situation is solved for what remains after this year. Don’t look for revenues, margins, costs and ultimately net income to save the company’s cash position.
Wait for the dip if you are looking to get in. Then, take a very long-term approach.
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