This is a copy of the May 19th edition of our weekly Newsletter, which we have been publishing since October 2015.
One of the big criticisms of the publicly-traded cannabis sector over the past few years seems to be fading: the lack of revenue. We introduced the Public Cannabis Company Revenue Tracker almost two years ago. At the time, there were only 12 companies that met the qualification minimum standard of US$2.5 million quarterly revenue. Today, the list of companies numbers 33, even though we have raised the requirement for inclusion to US$5 million quarterly revenue. The leading company generates more revenue than the entire dozen did two years ago.The introduction of the revenue tracker is likely responsible for the expansion of more informed shareholders across the cannabis industry. The tracker serves many goals, one of those is to shed light on the fact that out of nearly 800 cannabis companies, only 5% make material revenue. Thus, there is an extraordinary amount of noise out there, and our goal at New Cannabis Ventures has always been to quickly inform and educate our audience on what’s important.
As the cream continues to rise to the top, the concern for the lack of profitability is a recurring criticism we have been hearing. As we said earlier this year, we are expecting investors to move beyond revenue and to focus on profitability. For this reason, we have upgraded the tracker to include a profitability measure as well. The new “Adjusted Operating Income” metric that is now included takes the reported operating income and eliminates the impact of fair value adjustments for biological assets that many companies are required to make under IFRS accounting.
Currently, 6 of the 33 companies that have a minimum of US$5 million in quarterly revenue are profitable under this method. At the same time, 6 generated adjusted operating losses in excess of US$50 million, with several of these and a total of 13 of the 33 reporting adjusted operating losses above the level of revenue.
While we think that the focus is shifting away from revenue exclusively, we want to caution readers that being profitable in the early stages of an industry might not always be the best strategy. An excessive focus on near-term profitability may lead a company to lose out to competitors in the longer-term. Still, investors are becoming more sensitive to this issue, and some companies may struggle to raise capital to fund operational losses unless they can demonstrate a path to profitability. Fortunately, many of the companies are already beginning to focus on profitability. With New Cannabis Ventures now spot-lighting profitability, we expect to see improvement!
Congratulations to Organigram, a client of New Cannabis Ventures, which begins trading on Tuesday on the NASDAQ with the symbol OGI. To learn about Organigram, which is one of the leading Canadian LPs in terms of revenue and profitability, visit the company’s Investor Dashboard that we maintain on its behalf and click the blue Follow Company button.
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Alan & Joel