Auxly Cannabis (CBWTF) reported its third-quarter earnings on November 21. Its stock fell 5.48% and closed at 0.69 Canadian dollars on the CVE (Canadian Venture Exchange). The stock was also down by 7.45% at $0.51 on US OTC (over-the-counter) markets.
This year, CBWTF is down 27.08% on the CVE and 26.51% on OTC markets. It has fallen less than other prominent cannabis stocks, however. Aurora Cannabis (ACB), Canopy Growth (CGC), HEXO (HEXO), Cronos Group (CRON), and Tilray are down 49.19%, 31.34%, 36.15%, 33.59%, and 70.53% year-to-date, respectively. Let’s review the key highlights from Auxly’s third-quarter earnings results.
Auxly Cannabis surpassed analysts’ revenue estimates
In the third quarter, CBWTF’s net revenue rose 97.68% YoY (year-over-year) but fell 41.45% sequentially to 1.62 million Canadian dollars. Its revenue beat analysts’ estimate by 0.34 million Canadian dollars. In this year’s first nine months, CBWTF’s net revenue rose 535.21% to 5.20 million Canadian dollars.
In the third quarter, CBWTF earned 1.5 million Canadian dollars in revenue from its wholly-owned CRO (contract research organization), KGK Science. The company’s revenue associated with research contracts was 4.34 million Canadian dollars in this year’s first nine months. Cannabis sales contributed 115,000 Canadian dollars and 851,000 Canadian dollars of its revenue in 2019’s third quarter and first nine months, respectively. In the third quarter, CBWTF’s loss per share grew 50% YoY to 0.03 Canadian dollars.
Addressable market size
According to Auxly’s MDA (management discussion and analysis) from November 21, it is an international cannabis company focusing on the medical, recreational, and wellness markets. The company has acquired CRO KGK Science and state-of-the-art processing facility Dosecann in its bid to dominate the cannabis derivative market.
According to the company’s investor presentation, its presence spans the cannabis value chain, covering cultivation, extraction, product development, manufacturing, and retail. Founded in August 2017, the company first targeted the dried flower and cannabis extract categories, which were legalized in Canada in October 2018. Ernst & Young LLP estimates Canada’s legal cannabis market post-Cannabis 2.0 legalization will grow to $6.5 billion. This forecast assumes the commercial entry of cannabis derivative products such as vapes, chocolates, chewables, oils, sprays, capsules, and tablets in Canada by mid-December 2019, and advanced cannabis derivatives such as lozenges and topicals post 2020. After the new product formats’ introduction, Ernst & Young expects Canada’s legal cannabis market to expand to $11 billion by 2025.
Outlook for 2020
In its MDA, Auxly highlighted its readiness to enter the Cannabis 2.0 market. It aims to start on the first day of permitted sales in Canada. The company also expects to start selling its derivative products in all Canadian provinces except Québec from December 16. Subsequently, the company anticipates its associated revenue to rise from December and increase throughout 2020. The company expects to benefit from higher orders from provinces, an expanding consumer pool, customers switching from dried cannabis to derivative products, and better retail infrastructure.
Auxly Cannabis’s cultivation capabilities
According to its investor presentation, Auxly expects 100,000 kilograms in annual output from its portfolio of cultivation assets. The large supply will be from recently acquired Inverell, its ongoing Sunens Farms project, and PEI (Prince Edward Island) hemp farmers. Auxly is also developing cannabis flower brands through its wholly-owned subsidiary, Kolab Project, and its ongoing Robinson’s Outdoor Grow project. The company has diversified its cannabis supply sources across ten projects through partnerships and targeted investments. This diversification has helped reduce the operational risk associated with having a single major cannabis source.
According to Auxly’s MDA, Inverell is a leading cultivator in Latin America. In this year’s growing season, the company cultivated 18 tons of hemp biomass from 190 hectares of planted hemp.
Auxly has also faced some delays in the ongoing Sunens project, a 1.1 million-square-foot greenhouse facility in Leamington, Ontario. The company expects to complete licensing the facility in 2020 and to start commercial operations by next year’s fourth quarter. Auxly also became the financial sponsor of a PEI hemp farming cooperative in August. The company can now purchase up to 100,000 kilograms of hemp biomass at a better price than wholesale market rates. This hemp was cultivated from 300 acres of land.
Auxly Cannabis’s capital position
At the end of the third quarter, Auxly had 349,000 Canadian dollars in cash and cash equivalents. It had 187,443 Canadian dollars in debt. Despite its low cash balance, the company is well positioned to pursue future growth opportunities. First of all, in September, Auxly announced the closing of $84 million in syndicated credit facilities with BMO (Bank of Montreal) by its joint venture partner, Sunens Farms. In September, Imperial Brands also completed its investment transaction of 123 million Canadian dollars as debentures in Auxly. These debentures are convertible into a 19.9% ownership stake in CBWTF.
Analysts’ recommendations and target price
Currently, the two analysts covering Auxly stock on the CVE both suggest “buy.” Their target price for the stock of 0.93 Canadian dollars implies a 32.86% upside from the stock’s last closing price. In October, the analysts’ average target price for Auxly was 1.63 Canadian dollars.