Elements from the MD&A
I've picked through the MD&A and this one was a far better than the previous ones. The strategies are so very clearly outlined now. I'm not summarizing this but I'm pointing things out that I think are important or may be overlooked or will be the hot topics over the next several months.
California Manufacturing
"In California, Nutritional High expects to commence manufacturing operations upon completion and licensing of its Sacramento facility. The focus will be on the development and execution of a new in-house brand in the wellness category and one that is not directly competitive to the third-party brands that are commercialized through Calyx. There will also be an opportunity to white label for the California market, enhancing facility economics and throughput. Timing of the launch of manufacturing in California will depend on availability of financing."
-This is worth taking note of. They still have a credit facility and may have access to new Asian money. I believe they're aware of market sentiment towards the idea of doing a general share issuance to raise money. At current prices, they'd have to issue way too many shares. You may not trust them to take care of shareholders but the BOD holds lots of shares and I'm sure they would be loathe to erode their own value to such a degree, especially in light that the exact language mentions timing rather than a "if". This will be an issue at the top of our discussions as it develops.
-This also appears to make clear that they won't be doing Fli products in Sacramento to avoid pissing on Calyx's client Plus Products. It sounds like they'll be doing a new CBD product ("wellness"). This is likely related to the Golden Triangle deal.
California Manufacturing Permit
"Based upon discussions with the City regarding its decision, the Company is moving forward with the build-out and is in the process of applying for a new Business Operating Permit (“BOP”) with the City under a new subsidiary of the Company, NH Processing (California), LLC. The Company anticipates the BOP being finalized before the completion of the build-out, expected in spring of 2020."
- This is the new marker for the appropriate licence is spring 2020.
Retail in Nevada
"Potential for joint ventures to build an expanded grow facility and to build out the Douglas County retail location. The Company will seek strategic partners for these projects which will enable the Company to further focus on its core operations and develop strategic relationships with key upstream and downstream customers and suppliers."
- I was wondering what they were planning to do with this licence. Since they're trying to control costs as a strategic objective, according to the MD&A, this approach aligns with that (we'll see how that aligns with the increase in compensation expenses as our discussions continue in the coming quarters).
Oregon
According to the MD&A they're manufacturing Fli products here. Clearly in its infancy: $30,216 is the reported revenue and an entire state garners only 2 paragraphs.
Washington
-Adam talked about during the last investor call. The company is just going hold its Washington assets without further development to wait and see how the market there develops. Marley Naturals has been sub-licensed at what appears to be a write off.
Asia
-Clearly defined fee (or profit split) structure for the Golden Triangle Deal. Adam talked about this during the last investor call. He considers this to be low risk.
The Expenses
"Salaries, benefits and consulting fees were increased by $8,357,021. Total salaries and consulting fees in Calyx, Pasa Verde and Oregon were $6,040,925. The remainder increase of $2,316,096 related to hiring and recruiting costs, additional members to senior corporate management and several strategic advisors. The Company transitioned the characterization of its workforce during the year which resulted in approximately $1.5 million in payroll taxes."
- This is somewhat vague when all summarized together and none of us can pretend to be able to unpack it. This includes sales staff and other "teeth" but I think it also includes a substantial amount of "tail". It's not clear how permanent these increases are. How many are 1 time? How much is related to payments factored into the buyouts? If this is the current fixed level of expenses, the profitability gap is $4.1 million a month, which is 2x larger than I had previously estimated. This also doesn't include the Fu family in Nevada.
-I'd also like to note that MSOs all suffer from this issue because they have to make a separate company in every state. Even so, this seems high to me and I think this should be better explained.
Concentration risk
"During the year ended July 31, 2019, line of products produced by one supplier represented approximately 80% (2018 - 70%) of total sales."
-I've said this several times, keeping Plus Products happy is Nutritional High's primary concern. This is likely why they're moving over to manufacturing wellness products. And it's the right move.
80% of their total sales are $18,720,000.
They have about 2 years until any payments are due on the credit facility. It's more than enough time. They've got new brands coming online and that's a very good thing. While Plus Products is Calyx's mainline, they make about $4.7 million selling the other stuff. I have reasonable method to guess the impact of those new brands (2 in the reporting period and 4 after, is what I can garner. Is that correct?). But, a lively distribution business demands volume. And someone they carry might end up being the next Plus Products.