With a massive amount of cash recently raised and operating subsidiaries in Colombia, Khiron Life (OTCQB:KHRNF) is building facilities to run a medical cannabis business. The company trades with an enterprise value of $160 million, which could increase quite a bit when the facilities are ready. The risk for investors seems very significant as the business will not be made in Canada. With that, former Mexican President Vicente Fox is on the Board of Directors of the company. A large number of investors may buy shares because of these reasons.
Incorporated on May 16, 2012, in British Columbia, Khiron commenced operating in the medical cannabis industry in Colombia after acquiring Chiron Inversiones S.A.S. and Khiron Life Sciences Corp.
Khiron has core operations in Colombia and is fully licensed in the country for the cultivation, production, domestic distribution, and international export of both tetrahydrocannabinol and cannabidiol medical cannabis.” Source: 10-Q
Investors should fully understand that the operations are executed in Colombia. Certain investors located in North America may not appreciate this feature as due diligence may be a bit expensive. The business structure is shown in the image below.
Source: OTC Markets
Khiron has not operated for a long time in the medical cannabis sector. With that, the company has obtained a very decent amount of cash from investors, and very well-known people are helping the company. For instance, Vicente Fox, the former president of Mexico, is a member of the Board of Directors.
Source: Company’s Website
Investors should take a look at the YouTube video, in which the former president talks about the opportunities for Khiron in Mexico and Latin America.
Balance Sheet And Equity Structure
As of September 30, 2018, with CAD 14.6 million in cash and cash equivalents, CAD 18 million in total assets and only total liabilities of CAD 1.8 million, the company’s financial situation is quite solid. It is also quite interesting that the total amount of cash increased by 716% in 2018. Investors seem to be very optimistic about the future of the company and are providing financing. The image below provides the balance sheet reported in the last 10-Q:
The company decided to finance its activities through the sale of equity and warrants. As of September 30, 2018, share capital was worth CAD 24 million, and warrants were worth CAD 6.9 million. Common stockholders need to review very well and understand the warrants. Keep in mind that they are convertible securities, which could lead to share price depreciation. This seems to be one of the most serious risks on this name. The image below provides the equity structure:
In 2018, Khiron did not report revenue. In the nine months ended September 30, 2018, the most significant expenses were general and administrative expenses worth CAD 6.62 million and share-based compensation worth CAD 2.2 million. Net loss was equal to CAD -13.3 million. With this level of loss, investors should understand very well that the company will require additional capital to operate. The image below provides the income statement reported in the last quarterly report:
The CFO is smaller than the total amount of losses. However, it is not that small. In the nine months ended September 30, 2018, the CFO was worth CAD -10.69 million. The cash destruction is not higher as the company is using shares to pay employees and consultants. In the nine months ended September 30, 2018, share-based compensations were equal to CAD -2.2 million. Investors should follow this figure closely in the future. Keep in mind that when Khiron issues new shares to pay employees, it creates stock dilution. This type of procedure could make the stock price decline in the near future. The image below provides further details on this matter:
Equity Structure And Convertible Securities
It seems very beneficial that the company’s float is not low. The total number of shares outstanding is equal to 75.2 million, and the float is 60.7 million. With many other companies in the OTC Markets reporting low float, investors should appreciate this feature. As a result, the share price is not expected to show large volatility risk. The image below provides share structure:
Regarding the convertible securities, investors should notice that Khiron had 15.15 million warrants as of September 30, 2018. The warrants provide the right to acquire shares at a price of CAD 1.20 for a period of two years. The amount of warrants is not small. It represents 25% of the float. The image below provides further details on this matter:
With 75 million shares outstanding at $2.3, the total market capitalization equals $172 million. Deducing cash of CAD 16 million or $12 million, the enterprise value equals $160 million.
As Khiron does not report revenues, investors should find another feature to measure the business potential. The most convenient seems to be using the number of hectares leased. According to a recent report, Khiron has leased a total of 17.5 hectares in Colombia. The lines below provide further details on this matter:
Source: OTC Markets Filing
Tilray (TLRY), which trades with a market capitalization of more than $7 billion, owns parcels that occupy 3.8 million square feet or 35 hectares. With these figures in mind, Khiron which leases a total of 17.5 hectares could be worth $3.5 billion. The image below provides further details about Tilray:
Cronos (OTC:CRON), with 1.27 million square feet or 11 hectares, has an enterprise value of $1.9 billion. Using these figures, Khiron should trade at $3 billion. The image below provides further details on the total amount of square footage of Khiron:
Source: SEC Filing – CRON
The company is trading only with an enterprise value of $160 million because the facilities have not been finished. The lines below provide further details on this matter:
Ground was broken officially for the construction of the Company’s 1,388m2 post-harvest building where trimming, drying, and extraction of the cultivated vegetative material will take place, and where the physiochemical and microbiological labs for testing will be housed. Khiron Colombia expects for all relevant infrastructure and electric systems to be completed by the end of Q4 2018. We further expect to initiate further development of the electric system to service the needs of the new expansion, to have the facility’s full security scheme and to ensure full operational commissioning by Q1 2019.” Source: 10-Q
Investors Seem To Be Buying Shares
The recent increase in the stock price shows how investors are acquiring shares and pushing the share price up. Certain investors should believe that once the facilities are ready and the company generates revenues, the share price should increase quite a bit. The image below shows the recent share price dynamics:
Source: Seeking Alpha
The most recent agreement released in February 2019 to receive up to $20 million in gross proceeds has been also quite relevant. The new cash to be received should be used to finish the new facilities. The lines below provide further details on this matter:
Source: Press Release
Conclusion And Risks
With a large amount of cash and well-known individuals like the former president of Mexico, Khiron seems promising. If the company is able to finish its production facilities soon, the share price should increase as revenues are closer.
With that, there are several risks that market participants should understand. The company is running operations in Latin America, not in Canada. As a result, investors may not be able to visit the company’s facilities. The amount of due diligence that they could make will not be very large, which means that Khiron could have issues in raising capital in the future. It could affect the capacity of the company to build additional facilities. In addition, since the operating subsidiaries are not in Canada, judges may have issues in enforcing actions against the company. With all these features in mind, many investors will pass on this name.
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.