Questionable Management
The biggest risk for Namaste, in our view, is its highly promotional and inappropriate management team. The key milestones highlighted below best illustrated the disastrous path Namaste has chosen to walk down over the past few months. First of all, the share buyback was a total disaster as discussed. The infamous pledge party made headlines nationally, in a bad way. The Nasdaq listing is nothing but a dream now given the questionable track record of the company and a plunging share price.
Namaste's promotional corporate culture was best illustrated when it had to make a press release announcing that its NamasteMD Android app was approved for publishing. To borrow a quote below:
"I'm disgusted sometimes when I read some of these press releases" - Vic Neufeld, CEO of Aphria (APHA)
Besides a highly promotional management, Namaste also appears to have unrealistic goals and misleading guidance. For example, the company announced in a press release that it aims to have a 50% gross margin for its CannMart sales. However, without in-house production, Namaste has to acquire its products from its partners who are licensed producers. We struggle to see a scenario where Namaste will be able to obtain a 50% gross margin assuming they have to pay $5.0-$6.0 in the wholesale market and retail price $8.0-$9.0 inclusive of the $1.0 exercise. Again, management has provided unsupported guidance that is overstating its future profitability while its existing vaporizer business continues to struggle.
With Namaste's medical cannabis "sales-only" license imminent, the Company anticipates a sharp increased revenue and margin with Cannmart booking full revenue amounts from patient ordering and the Company will aim to maintain a minimum of a 50% gross margin on cannabis products sold directly on its website.
Conclusion
We think Namaste has a very simple story here and investors should not be confused by the promotional materials disseminated by the company. The vaporizer business stalled this quarter which means limited value for this segment. NamasteMD had negligible sales almost 6 months into launch which is worrisome. CannMart finally received its licenses but we struggle to see how it could compete with the provinces in online sales due to inferior product assortment and an unclear value proposition. Namaste has some interesting technology and unique propositions, however, the management has lost all of our respect after the shareholder pledge and more recently share buybacks. Investors need to focus on investing alongside quality and credible management teams which is crucial for the cannabis industry.
Cornerstone Investments
