The aftermath of my first, and last, article covering Namaste Technologies (OTCQB:NXTTF) was characterized by intense vitriol and highly emotional personal attacks on anyone who also questioned the viability of this non-company.
I was admittedly deserving of this as 'Namaste Technologies: Possibly Building The Amazon Of Bagholders', was written in a state of extreme shock. This was induced by the high level of degenerate behavior displayed by the company and the volume of shareholders who supported this behavior with their capital.
Would a random analyst on Seeking Alpha describing a stock I hold a long position in as "one of the worst companies, if not the worst, within the fledgling cannabis space" tick me off? It would. And so I sympathized with the anger, restricted myself to reading news stories about the company, and then retreated into the hills.
Namaste's Potemkin Business Will Collapse Post-Sean Dollinger
Sean Dollinger was incredibly adept at making Namaste’s business look more significant than it ever was or would ever amount to. He made a crippled and malnourished horse languishing in despair look like a winged unicorn descending from the sky as the sun illuminated its descent. To any third party observer, Namaste was nothing more than an amalgamation of legacy e-commerce websites selling vaporizers in a number of countries.
They admittedly did this quite well as evidenced by the broadly positive reviews of their websites. But Dollinger created a narrative of a company with the largest global cannabis reach, possessing superior 'AI technologies', with a future as the Amazon of cannabis.
The developments by Sean Dollinger was enough to include Namaste within the baskets of stocks where cannabis euphoria propelled their value to astronomical heights. Namaste was trading at US$2.20 on September 26th, 2018; the company now trades at US$0.50 per share.
Without Dollinger at the helm, Namaste will have to truly find itself. It will have to shift its focus to improving its dire fundamentals and cultivating a business model that takes full advantage of Canada's recreational cannabis market.
Dollinger's exit might, therefore, allow Namaste to install a more coherent management team. However, his carefully constructed Potemkin village was instrumental in supporting the valuation of the company, so his exit could spell further share price depression.
The Financial Optics Are Terrible
Namaste's last reported earnings were for its fourth quarter ending August 31, 2018. Revenue at US$3.01 million was flat year-on-year, and the company recorded a net loss of US$6.65 million.
Namaste does not face any near term liquidity risk as it reported cash and cash equivalents of US$26.36 million before the closing of a CAD$51.75 million bought deal financing last October. However, the company has a history of negative free cash flow, a characteristic likely compounded by the suspension of its Brazillian operation.
Namaste Begins Its Death March
When Namaste's replaced its previous auditor MNP LLP with PwC, Dollinger painted this as a success for the company as it had taken on a big four accounting firm. This move was also used as a defense by longs against accusations of improper actions at the company. The simple argument went, why would PwC agree to audit Namaste if the company was engaged in improper actions?
PwC's resignation and Namaste's stated intention to delay the filing of its financial statements beyond its deadline of March 31, 2019, has countered this non-argument. It also raises a number of red flags beyond what was detailed in Namaste's March 5, 2019, corporate update.
Sean Dollinger, ex-CEO of Namaste Technologies
The Future Of Cannabis TM
Namaste created an almost picturesque image of itself as the future of cannabis. Within its investor presentations, it compared itself to Uber and Airbnb, two great American technology upstarts. The company touted the strength of its "AI technologies", the strength and inherent superiority of its e-commerce platform, its telemedicine approach, and Uppy (a convoluted attempt to mirror Leafly's strain reviews) which would allow the company to collect vast amounts of data on the effects of cannabis strains.
Namaste Technologies is not the future of cannabis because in my opinion it has no future. The company is a perfect case study of how the allure of easy wealth leads stock investors to disregard any sense of prudence that they would otherwise have exercised.
The signs were always there, the warnings also. And while Namaste might find a way to end its death march, this would at best be pyrrhic. The company still trades at more than 10x the revenue for its 2018 financial year. A steep metric considering revenue growth has not only flatlined but is likely to have decreased.
Set against this bleak reality of revenue declining at pace, negative free cash flow, and a business model that is fundamentally unfit for any adult use recreational cannabis market, it looks like Namaste will collapse further into an abyss of capital destruction. I would expect its assets to be picked up at discounts to their book value during the future insolvency proceedings.
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.