Cannabis: Elixinol Global kills medical pot, holds fire sale for Aussie hemp

Elixinol Global (ASX:EXL) is bleeding money and is holding a fire sale of its global hemp and medical cannabis assets.

Today the company said it was selling its Hemp Foods Australia subsidiary to a Chinese buyer for just $500,000.

It is killing off its Australian medical cannabis division entirely, and will sell the land.

Both will create a $17.3m hit to the company, which will be recognised in the annual accounts as an impairment charge.

An impairment is when an asset’s original value in a company’s accounts is diminished, leading it to be ‘written off’.

Yunnan Lvxin Biological Pharmaceutical Co is buying the hemp subsidiary, and Elixinol will licence it to use the company’s trademarks and IP for three years to make and distribute Elixinol-branded hemp cannabidiol (CBD) products in China, Taiwan, Hong Kong and Macau.

A really bad quarter

The company led its latest quarterly report with the drop in year-on-year and quarter-on-quarter revenue — worse figures than the drop in cash receipts.

It said there had been a 44 per cent decline to $4.4m of unaudited revenue from the September quarter, and a 59 per cent decline year-on-year.

The new CEO, Stratos Karousos, said revenue over the last six months had been “disappointing”.

“We have taken steps to reduce our cash burn to account for the delayed development of the hemp derived CBD market, in particular in the US and Europe & UK,” he said in a statement.

The company blamed slower than expected growth in demand for human and pet hemp-derived CBD, and a lack of guidance and rule-making from the US Food and Drug Administration (FDA) on CBD which has created confusion in a market crowded with both quality and inferior products.

When hemp-derived CBD was legalised in the US in late 2018, the market was flooded with products.

The FDA has been slow to catch up however and has only offered guidance around CBD in food based on pre-legalisation rules, which say it’s not approved for sale.

This has created problems for CBD sellers who are restricted as to how they market products, as the US market in particular becomes more consumer-focused.

“The FDA is yet to lay out a regulatory path for the retail sale of hemp derived CBD products. While such a legal cloud hovers over commerce in safe, quality-assured, popular CBD products, many inferior products crowd the market,” the company said.

“Congress has begun to act with a bi-partisan effort taking steps to force the FDA’s hand. In January 2020, a bill with bi-partisan support was introduced (HR 5587) that would allow FDA regulated, hemp derived CBD to be marketed in dietary supplements and as food and beverage additives.”

Cutting costs

Elixinol has “adequate” inventory on hand for the rest of calendar 2020, and has either lost or made redundant 26 employees.

It’s spending on marketing to capture market share in the most competitive segment of the cannabis market, hemp-derived CBD, and made the final payments on equipment and the fit out of its new Colorado production facility.

Elixinol won’t invest further in a Northern Colorado hemp farmer, and will take a $1.7m impairment on this investment, as the US market has been flooded with hemp and spot prices for hemp biomass have collapsed.

The company has signed eight agreements with distributors in Europe and Asia.

It has $20.4m in cash left in the bank, and expected upcoming quarterly outgoings of $13m. It took $6.7m in receipts in the last quarter and burned $11m.

In other ASX cannabis news:

Cann Global (ASX:CGB) spent $407,000 on corporate costs but took in only $304,000 in the December quarter. It says it has “significantly reduced” costs associated with its still living mining division. The company manages bauxite assets, and multiple hemp and medical cannabis divisions via a network of 13 brands and companies.

Zelira Therapeutics (ASX:ZLD), after telling shareholders late on Friday that it planned to spend almost all of its remaining cash reserves this quarter, has gone into a trading halt today pending a capital raising.