Going concerns notices raised for ASX cannabis players Cann Group and Althea

Material uncertainties have been raised about two of the largest medicinal cannabis companies listed on the ASX to continue as going concerns, after Cann Group (ASX: CAN) and Althea Group (ASX: AGH) incurred December half losses of $14.3 million and $16.6 million respectively. 

Althea is in a relatively better position when it comes to debt, but the boards of both companies have asserted there are reasonable grounds that they can continue to operate, including significant revenue growth.

The material uncertainties were mentioned in both companies' financial reports released after the market close yesterday.

At the end of 2023, Althea had around $2.26 million in cash and net current liabilities of $1.8 million, compared to Cann Group's cash on hand of $1.64 million and total debt of $64.1 million, the majority of which is owed to National Australia Bank (ASX: NAB).

Underpinned by its high-tech cannabis production facility in Mildura which has been ramping up yields, Cann Group reported a 46 per cent lift in sales to hit $8.5 million in the December half and the company has highlighted "large repeat orders for oil and flower products".

There is a certain stickiness to Cann's position at the moment as this cash flow rise is unlikely to be enough to cover its debt covenants, and the company only has $2.8 million of its total facility that has not yet been utilised.

Cann received a $2 million loan lifeline in November from Obsidian Global LLC, and in a notice after the market closed yesterday it said management was "currently pursuing several funding options in order to fund the company through to its next stage of development".

"The company has signed a non-binding agreement for a debt facility with a counterparty who is currently completing its due diligence. Additional sources of funding, including the sale of certain assets at its Mildura facility that are currently not being used, are also being pursued," Cann Group said.

"Expenditure in the company is undergoing a critical review by management to ensure it is at appropriate levels for the next stage.

"On the basis that the company is successful in its pursuit of additional financing, the directors are of the opinion the company is a going concern."

Meanwhile, Althea has reported a 30.3 per cent jump in revenue to $15.9 million in the December half - $2.4 million of which came from its budding operation in the UK, representing year-on-year growth of 66 per cent.

The group, founded by its CEO Josh Fegan, recently secured a loan facility of $1 million, and last year its finances received a boost from the sale of its Canadian subsidiary's facility for CAD$4.6 million ($5.2 million), allowing Althea to pay back borrowings of $3.9 million in full.

In a discussion of the material uncertainty around Althea's ability to continue as a going concern, it was highlighted that the business is a startup in "an industry that is at best immature on a world scale" with the group "progressively working towards break-even operations and ultimately sustainable profitable operations with positive cash flows".

"In the absence of conventional loan funding opportunities, the availability of which are dependent upon a history of such positive cash flows, Althea Group Holdings Limited has raised capital a number of times and sought borrowings from sources available to it wherever possible," the company said.

"The operating cash outflows of the consolidated entity are expected to significantly improve over the next six to 12 months.

"The Directors believe that the consolidated entity is approaching a sustainable break-even operating position and is expected to generate positive cash flows by the end of the 2024 calendar year."

Althea also noted the recent completion of an extensive organisational review that identified further reductions to administrative, operational and supply chain expenditure, which are "expected to create significant annualised savings and substantially improve the group's cash flow position in the near term".

At the time of publication, AGH shares are down 11.43 per cent at 3.1 cents per share (cps), while CAN shares are flat because securities were suspended from quotation immediately this morning pending compliance with Listing Rule 19.11A relating to the independent auditor's review of its half-year financial report.

Another major ASX-listed company in the space, Little Green Pharma (ASX: LGP) which is upbeat on the implications of Germany's legalisation of cannabis and recently shipped its first flower products to Poland, released a going concern notice in its half-year financial report released in November.

Whilst its September half loss of $2 million was a significant improvement on the $7.5 million loss in the prior corresponding period, it noted "material uncertainty that may cast significant doubt on the group’s ability to continue as a going concern and therefore the entity may be unable to realise its assets and discharge its liabilities in the normal course of business".

This is due to dependence on achieving forecast cash flows with increased patient numbers and market share at home and abroad, and being able to manage costs and production as well as the timely receipt of research and development rebates. The directors are "confident" of Little Green Pharma's ability to continue as a going concern.