Is Epsilon Healthcare Ltd (ASX_ EPN) Probably a Good Investment Or Not?

Why Epsilon Healthcare Ltd Could Be The Next Big Thing?

Epsilon healthcare(EPN) is a global pharmaceuticals company that was recently known as the THC Global group. The change in name is in line with the change in the vision and brand of the company. The focus of the THC Global group has changed from providing health care, to innovating in the health care market through the use of technology and focusing on the young medicinal cannabis sector. This rebranding does not mean that the company is going to stop its previous operations. In a statement, the company made it clear that the earlier operations will continue like they used to but from now onwards the company is going to focus more on the medicinal cannabis sector in Australia and Canada.

The rebranded Epsilon health care is a global pharmaceuticals company that operates in a diversified manner. EPN has invested in a number of cannabis based assets and intends to carry out research and development of new products.

As stated above, EPN is a diversified healthcare provider. EPN has currently got investments into the following products and projects.

  • GMP Pharma Manufacturing: Largest cannabis manufacturing facility in the Southern hemisphere.
  • Medimar platform: A complete end to end eCommerce platform to allow access to medicinal cannabis in Australia. Medimar is also a marketplace for nutraceuticals and wellness products.
  • Cannabis medicine development: Australian TGA and EU GMP bio floral extraction facility, which is operational and developing into various medicinal products.
  • Turnkey cultivation solutions: Through a Canada based hydroponic equipment wholesaler, EPN providers turnkey based cultivation solutions in Vancouver.
  • Healthcare clinics: EPN has got healthcare clinics with a focus on Australian cannabis-based medicine.
  • Licensed cannabis retailer in Canada.

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Financials

THC now EPS has a positive revenue trend in 2020. The revenue grew from almost AUD 5 million in 2019 to over AUD 6 million in 2020. However the company continued to sustain a net loss. The company has been running a net loss consistently since 2017. The figure for net loss is around AUD 12 million, which is almost twice that of the revenue.

The increase in net loss in the last few years has been mainly because of the operational expenses, which include research and development expenditures for the new cannabis based products. If you have been reading our blog, you will know that the medicinal cannabis sector in Australia is in its infancy and almost every company has got a similar set of financials.

This sector is so young that it is in its research and development phase. Companies therefore can forget about churning profits at this point because this is the time to invest into products. The time for profit churning is going to come at least 4 to 5 years down the line, when the industry has got enough products to create steady demand that can help the companies recover the investment.

In spite of the net loss the profit margin of the company has increased. On the other hand the cash flow position is showing a good trend. Detailed analysis of the cash flow position of the company shows that

  • Operational cash flow declined, which shows that the company spent more money on its operations and generated less.
  • The investing cash flow also showed an outflow of almost AUD 1.7 million. This outflow consisted of cash spent on purchase of assets and capital expenditures. This shows that the business is spending its cash on assets that will in future generate potential returns. .
  • The cash flow from financing activities was around AUD 16 million. This means that during the year, the company raised finance either through stock issue or debt.
  • The net free cash flow for the year was negative AUD 10.68 million. If we look at the trend then on a year on year basis, the net cash flow situation has worsened.

If we look at the balance sheet we can see that the liabilities stand at AUD 10.55 million and the total assets of the company stand at almost AUD 36 million. This means that although the company raised a lot of money through financing in the last year, most of it was not through debt instruments. Furthermore the assets to debt ratio is also quite low and stable.  

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If we take an overview of the whole situation we can see that while the revenue situation is positive, there is a net loss. Further inspection of the financial situation reveals that the net cash flow is extremely negative but the majority of the cash is being spent on research, development, capital items and asset purchase.

There is however a point of concern. Last year the independent auditor K.S. Black & Co issued a qualified opinion for the company. In the audit report, the auditor stated that it could not verify the sales forecast for cannabis based oils that the company is selling. The auditor stated that it could not understand the financial forecasting model used by the company.

For investors, EPN is not a great investment at the moment because like other companies in the medicinal cannabis sector, it is investing heavily in to R&D but the return for investors is not there. The company is also burning through its cash reserves fast, which is going to create a need for more financing either through debt or share issue. Furthermore, there is no news of any breakthrough coming from their R&D, which means that the share price is expected to remain constant.

Disclaimer

Australia Unwrapped provides only general, and not personalised financial advice, and in no way has taken your personal circumstances into account. Investments go up and down, any questions talk to a financial advisor. This blog is opinion only and in no way should investment decisions be based on this information.

Australia Unwrapped does not endorse or vouch for the accuracy or the authenticity of postings, comments or the article

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Dave Peterson

Dave Peterson Passion for adventure and sharing his life long journey with as many others as possible. "What lies behind us and what lies before us are tiny matters compared to what lies within us." HENRY S. HASKINS

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