Stocks Investment

Chemesis International Is Still A Special Situation Weed Stock To Watch (But Not Buy)

Investment thesis

In my article of 10/27/19, I stated that I expected the oversupply of product would negatively affect the price of cannabis in 2020. I also said that the upcoming industry shakeout would materially affect valuations and may result in widespread consolidation and business failures. This article discusses how Chemesis International Inc. (OTCQB:CADMF) has weathered the challenging environment of 2020, which has been stressed by the COVID-19 crisis. Although the company has made strides in addressing several serious financial and operational issues and has a compelling value proposition, I am maintaining my hold status on the stock for reasons detailed in this article.

2020 Macro environment

Source: newcannabisventures.com

2020 has been a very challenging year for the Canadian cannabis sector which has materially affected valuations. The above chart shows that there has been a 27.8% decrease YTD in the Canadian Cannabis LP Index, which is leading industry indicator. My own proprietary index, which readers are invited to learn more about at TalkMarkets.com, (a SeekingAlpha partner) had decreased 36% as of 6/30/20. It appears to me that many companies have no clear path to profitability and industry consolidation is likely to increase going forward.

Chemesis has significantly outperformed 3 other stocks in their peer group YTD

Let’s review the following key financial metrics of 3 stocks (Transnational Cannabis Ltd.(PINK:WLDCF), Smart Cannabis Corp. (OTCPK: SCNA) and Halo Labs Inc. (OTCQX:AGEEF) which SeekingAlpha classifies as their peer group.

Company Symbol

CADMF

WLDCF

SCNA

AGEEF

52 W HIGH

$1.09

$0.12

$0.47

$0.68

52 WK LOW

$ 0.25

$0.00

$0.00

$0.00

MARKET CAP

$22.4M

$12.6M

$16.2M

$ 43.3M

PRICE 8/4/20

$ 0.74

$0.02

$0.003

$0.09

YTD % CHANGE

+123.7%

+54.6%

-27.5%

-61.9%

Source: Fidelity.com

In my 8/23/19 article I stated that “both the YTD stock performance of CADMF and AGEEF and their recent stock prices is far superior to SCNA and WLDCF, both of which I believe will underperform for the foreseeable future.” As the above chart shows, that is what has happened since, and I believe will also be the case going forward.

Why Chemesis?

Source: SeekingAlpha.com

As the above historical chart indicates, CADMFs current price of $0.74 is 122.2% higher YTD, which is quite impressive compared to many other stocks in their sector. Trading in the last 3 weeks has been significantly higher than the 90-day average, which is a bullish indicator. I believe that the following developments which have occurred subsequent to 3/31/20 may have contributed to an increased interest in the stock:

?The Company announced the appointment of Josh Rosenbergas President of Chemesis, who is a seasoned corporate executive with a proven track record in global food service and other product distribution and executive leadership.

?Chemesis announced an exclusive partnership with Via-Touch Media for its VICKI IoT (“Internet of Things”) self-checkout solution for retail across North America.

?In the month of May 2020, Chemesis closed two private placements for an aggregate gross proceeds of CDN $1,346,250.

?The Company announced the intention to spin out La Finca Interacviva-Arachna MED SAS (“La Finca”), its integrated Colombian cannabis company, into a wholly owned subsidiary,

Source: sedar.com

Chemesis has also recently experienced increased visibility in the investment community Here is a link to a themarketnewsreport.com article that stated Chemesis International is “on the high road to success.”

Company financials

In my article of 8/23/19 entitled “Chemesis International Is A Special Situation Weed Stock to Watch (But Not Buy)” I referred to the company’s financials as “pretty ugly” for several reasons. My review of the condensed consolidated interim financial statements for the 9 months ended 3/31/20 indicates that CADMF has made strides in remediating their cash balance by an increase of $444,548 as shown by their Condensed Consolidated Interim Statement of Financial Position:

CADMF sales at 3/3/20 are ~20% higher Y/O/Y and they have significantly increased their gross margin from 17.7% at 3/31/19 to 34.4% at 3/31/20 as shown by their Condensed Consolidated Interim Statement of Loss and Comprehensive Loss:

­

However, despite these positive initiatives, Chemesis has not been able to control costs and continues to bleed red ink, and has a YTD loss of $31,506,42 as shown by their Condensed Combined Interim Statement of Cash Flows:

The stark reality is that CADMF is severely challenged financially as acknowledged by their audit firm’s note in their 6/2/20 filing at sedar.com which states that there is material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. .” As a former CPA with significant audit experience, I can attest that a note of this nature is a serious “red flag” which requires that management develop a plan to address this issue forthwith.

Conclusion

Based on the foregoing analysis of CADMFs unaudited financial statements for the 3 months ended 3/31/20, the company continues to be confronted by daunting financial challenges and has no clear path to profitability, as shown by their $31,506,425 YTD loss The “going concern” note discussed herein is extremely problematic and will in all probability be included in their audited financial statement for the year ended 6/30/20. Based on my review, it appears to me that the company will need a sizable infusion of capital sometime in 2020 or perhaps in early 2021 to continue operations, which will result in more dilution for present shareholders Although I intend to revisit Chemesis International going forward contingent on their ability to demonstrate meaningful progress in addressing their issues at this point in time I am maintaining my “neutral” rating on the stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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