It’s been a tough calendar Q1 2019 for Namaste Technologies Inc (CVE:N) (OTCMKTS:NXTTF) (FRA:M5BQ). Mired in a negative news abyss that just won’t quit, the company is in tough to stabilize its share price and mitigate the recent damage. With Namaste’s stock trading at all-time TSX Venture lows, we look into whether underwater shareholders should sell, or wait out the calamity.
Last week was undoubtedly the apex of bearish reportings for the company stretching back to last September. While alleged “sexy nurse” party allegations (and subsequent purchase agreement cancellation with Tilray), adverse reports by Citron Research/Seeking Alpha, allegations of subsidiary self-dealing, and the dismissal of company CEO Sean Dollinger have hammered Namaste stock, the sledgehammer dropped decisively on Tuesday.
It was then a double gut-punch to solar plexus was delivered. Namaste confirmed that PricewaterhouseCoopers resigned as company auditor, and that annual financial statements—due to be filed by March 31, 2019—is unlikely to meet its mandatory filing deadline. This opens Namaste to a potential general cease trade order (CTO) from the Ontario Securities Commission without further notice. Obviously, that’s a dark cloud no issuer or shareholder wants hanging over it.
Should Namaste Technologies avoid a blanket securities CTO halt for a less punitive management cease trade order (MCTO)—restricting trading in securities for the CEO/CFO/Board/insiders only—there’s still several minefields to the company must work through as it looks to normalize operations.
As part of the Special Committee’s reorganization process, Namaste has elected to suspend certain initiatives that no longer align with its strategic direction. On the chopping block is the introduction of Namaste Café and a branded food-products in partnership with renowned Australian master chef Pete Evans (H.E.A.L.). Presumably, there’s more asset shuffling to come.
More importantly, Namaste has temporarily suspended the sale of its Brazilian product portfolio pending a full compliance review, after the National Heath Surveillance Agency (Anvisa) in Brazil identified irregular online advertising of certain tobacco products on a website operated by Namaste. According to the most recent financial statements, Brazilian sales accounted for 8.09% of the company’s aggregate trailing 12-month ended August 31, 2018. Its unclear how long the current suspension may last.
Another consideration for investors is the performance of CannMart Inc.—the company’s artificial intelligence-driven medical cannabis sales platform. This property is synonymous with Namaste’s drive to become the “Amazon of the Cannabis Market” so many investors are familiar with.
The issue here is that without current financial disclosure, investors have no idea how CannMart business operations are performing. As per the latest financials release on October 31, 2018, CannMart only produced $32,233 worth of revenue for the 3-month period ending August 31, 2018—and none in 2017. While Namaste did announce record-breaking unaudited gross revenue of more than $2.6 million across its global online platform on December 3, 2018, no revenue contribution breakdown was given.
The success of CannMart—or lack thereof—is a key pillar in the company’s growth strategy. As a one-stop cannabis shopping platform, it faces stiff competition from the likes of Shopper’s Drug Mart and provincial online portals for dry flower sales, and brick & mortar/independent online outlets for everything else. Should CannMart be unsuccessful in attracting significant market share in the Canadian marketplace, it’s tough to buy into Namaste doing so in non-core international markets.
Also keep in mind that several class action lawsuits are currently ongoing stemming from an October 2018 Citron Research report accusing Namaste Technologies of fraud pertaining to undisclosed related party transactions. The Special Committee’s findings that “breaches of fiduciary duty by Sean Dollinger and evidence of self-dealing” were indeed found—cause which lead to Mr. Dollinger’s dismissal—infer the lawsuits themselves aren’t baseless.
The latest round of negative events opens up Namaste to further class action lawsuits and legal turmoil.
Hope Remains For Namaste Technologies Shareholders
While the ongoing fiasco has turned off many would-be investors, don’t count the company out yet.
The company reported cash and cash equivalents $34.40 million (August 31, 2018) before the closing of $51,750,000 bought deal financing last October. There’s been only a few minor seed investments to diminish that stash since, although net losses averaged almost $6 million per quarter for the 12-months ending August 31, 2018. Certainly, Namaste was fortunate to negotiate and close the $3.00/unit securities transaction while the sector was flying in pre-legalization times. The company isn’t facing a liquidity crunch anytime soon.
Also keep in mind that Namaste Technologies has a diversified revenue stream with a presence in 20 countries worldwide. This diversity means the company isn’t a one-trick pony, and isn’t overly subject to regulatory risk in one jurisdiction. Namaste maintains a license to distribute medical cannabis in Canada, and has fomented strong supply & partnership agreements allowing it to offer an impressive display of products.
(Source: Management Discussion and Analysis, August 31, 2018)
Now that reorganization is taking place, there’s hope that new leadership can recapture some of the lost momentum it had achieved before everything fell apart last fall. In the end, real assets and a cohesive business plan underlie the persistent intermittent distractions.
Final Thoughts
If you had discretionary capital to put to work—and were not invested in any particular cannabis stock—would Namaste Technologies be your first destination to invest? Would it be your third, or sixth or tenth? I don’t believe it would be, owing to extreme uncertainly regarding financials, lack of CannMart post-legalization performance metrics, Brazilian sales, leadership direction and more.
But for existing shareholders clinging to the notion that Namaste could still become the “Amazon of the cannabis market”, viewpoints may differ. I suppose it depends on how strong that belief is, and how much credence levied on new leadership to turn things around. Fortunately, the company is not in a precarious cash position at present, and has significant runway to turn things around. Long time shareholders who’ve invested emotional capital and cling to the story may opt to see things through to its ultimate conclusion. Some may even perceive value at these depressed levels.
Either way, the clock is ticking on the quest for Namaste Technologies stock to stabilize, and eventually, recover. After all, the stock is a prime tax loss selling candidate should we head into mid-November at these depressed levels. Provided no additional dead bodies are uncovered, we believe the stock will experience protracted range-bound price action (near the lows) until the smoke clears. The process has just begun.
We wish the company and investors success in Namaste’s reorganization efforts.
