Labat Continues to Bleed; Battles with SARS, But Confident of Cannabis Strategy Going Forward
Labat drops R25 m in 6 months to February 2022, roadshow to raise more money
Labat Africa posted an operating loss of R24,9 million for the six months ending in February 2022. That’s 37% worse than the comparable period ending February 2021. But it insists that “having regard to the current status and the future strategy and prospects of the group, the group has sufficient resources to continue as a going concern. The group is projecting positive cash flows for the period ahead from its existing and new businesses.”
Labat says “the cannabis business is showing clear signs of improvement with the second half of the year expected to be much better than the first. There is no doubt that the diversification into the Healthcare business with a strong cannabis focus has put severe pressure on the resources of the group. The current period continues to be a transformational period for the industry and for the company and the country.
The JSE-listed company issued “a short-term, announcement” on SENS on 2 June 2022 that the loss came on revenue of R20,2 million, which was down 5,7% on the previous period. This loss per share was marginally down at 4,3 c/share compared to 4,5 c. The unaudited financial results for the period show Labat had cash reserves of about R12 m as of end February 2022.
The company explained that the decline was “mainly as a result of the delayed export of the product to the international markets and the decrease in revenue from SAMES (South African Micro Electronic-Systems, a Labat tech hub) due to the silicon chip shortages worldwide.”
It says “the company began the period with the extended COVID-19 restrictions and the Government’s accelerated for a totally deregulated cannabis industry in the country.
The legalisation and subsequent creation of a new industry comes with expected challenges. Anticipating discerning consumers, supply challenges and price compression for mid to low end products, The company took a differentiated approach from its peers. The company measured its success beyond yield and capacity, the pursuit of excellent quality for a long-term competitive advantage is what drives Labat’s business strategy.”
New fund-raising roadshow underway
But it still needs more cash. Labat says it intends raising further funding by embarking on an aggressive capital raise strategy to accelerate and expand its cannabis offering both locally and abroad. The capital will be utilised to make targeted acquisitions and to grow these businesses to scale.
Acquisitions will be paid for using a combination of listed shares and cash. Labat has successfully completed the dual listing of its shares on the Frankfurt Stock Exchange. This will attract foreign capital for the business and provide an exit mechanism for investors.”
Labat says “ directors are currently on a targeted road show to raise additional funds, mainly to fund its expansion program in the field of manufacture of medical cannabis and industrial hemp. This has met with some success locally, albeit slowly. Shareholders have been informed that the company is in discussions with potential investors to place shares for cash.”
Recovery hopes pinned on new acquisitions underpinned by Californian credit line
The group has a R300 m credit line with Californian investors GR Global Ventures LLC which it can draw down over the next 30 months. This will see GRV increase its equity in Labat by between 14 m and 28 m shares in the foreseeable future, the proceeds of which will be to expand Labat’s Eastern Cape operations.
It’s putting part of its recovery hopes on new acquisitions, Sweetwaters and Echo Life. Sweetwaters, a SAHPRA-licensed Kenton-on-Sea facility has just produced a ton of high-THC flower that it will export to an Australian customer, its second shipment to Down Under.
“During the period under review, the Company acquired Echo Life (Pty) Ltd. The company was acquired for R2.5 million, settled through a cash payment of R500 000 and the issue of 2 million shares at R1.00 per share, with effect from 17 November 2021” said the company. According to the February 2022 financials, Labat’s shares were valued at 18 cents. As of the beginning of the financial period, the shares were trading at 21 cents. The company says “the decrease is mainly as a result of the amortisation of intangible assets.
The company says “the acquisition of Echo Life greatly complements the Healthcare retail business through its unique range of product offering. The products will be marketed and sold through the CannAfrica retail stores as well as the Labat online retail platform.”
Overall in the last six months Labat has issued an additional 28 192 111 shares, approved by shareholders at the company’s last annual general meeting held on 16 May 2021.
As always, there’s SARS….and a few other legal disputes
Labat has disclosed that it is in a revenue tussle with SARS over VAT but says it “is still in a net tax receivable position and discussions are on-going with SARS to conclude on these matters.” Labat believes it is owed R17 m by the Receiver. .
It says: “Taxation consists of significant individual tax related assets and liabilities receivable and payable by the group in terms of the Income Tax and VAT Act. Due to the significance of these balances, they have been disclosed separately within the consolidated financial statements. The nature of these accounts relates mostly to disputes with SARS surrounding outstanding VAT receivables and VAT payable by/to the group and the payment of employee related income tax.
“There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
“The group is still in a net tax receivable position and discussions are ongoing with SARS to conclude on these matters. Judgement was used by management, based on information provided by legal counsel, when determining the amounts that would be recoverable from SARS regarding the VAT recoverable.
The group also says it is involved in litigation with other parties: “The group has various claims and counter claims made by and against Labat Africa which have arisen in the normal course of business as previously disclosed. These matters are being dealt with by the company’s attorneys. Changes to litigation have occurred since the previous corresponding period which included two judgements in favour of Labat Africa against GEM”.
Brett Hilton Barber