Auxly Cannabis CBWTF stock has hit my radar on a few occasions. It is a cannabis stock to watch. There are a few metrics that stand out. Cannabis 2.0 in Canada accounts for about 20% of total cannabis sales. And, from the Investor Presentation, Auxly states they are selling about 14% of total cannabis 2.0. Seems a bit much, but the numbers mostly jive (I’ll dig in to that). Auxly is in partnership with Inner Spirit (Amongst others) to distribute its products through the Spiritleaf dispensaries. There will be about 100 dispensaries throughout Canada. If Auxly really is accounting for that much of total 2.0 product sales, there should be sizable revenue gains in the coming quarters.
In the meantime, Auxly has printed solid revenue growth and has a few other metrics that are lining up. There is still some heavy lifting to do. But, that heavy lifting will likely fall into line once revenues increase. This will be driven by economies of scale and margin revenue increases. If Auxly can continue to increase its revenues as they are then, its metrics will improve.
Auxly CBWTF Stock Chart
Here is a look at the latest on CBWTF chart:
Auxly CBWTF stock has mostly stuck within a range over the past few months whereas other cannabis stocks saw more increased movements upwards. This may have to do with the lack of people knowing more about this company.
What about those percentages?
Before we get into the financials, let’s look at the numbers that were quoted in the Investor Presentation. I took some screenshots to make this easier:
The first metric is the 19% that states Cannabis 2.0 is hitting a good chunk of the business. For those not sure, Cannabis 2.0 is the legalization of all things cannabis beyond the ability to smoke it. In Canada, when legalization first occurred, edibles and other things cannabis were not legalized. The Canadian government expanded cannabis legalization about 2 years after the first legalization levels. Already, as the number shows, this was successful.
Edibles (and other 2.0 type products) are slightly more fringe. Mainstream cannabis users are likely to smoke their product. But, users that just want to do one thing every once in a while may not be interested in smoking a whole blunt. Edibles are a healthier option and offer portioning that makes for easier consumption.
Cannabis 2.0 Market Share
According to the same Investor Presentation, Auxly claims about 14% of total 2.0 sales nationwide. I was a bit stunned by that and wanted to see if mathematically this checked out:
So, over the past few quarters, Canadian total retail sales of cannabis were some $750M at about $250M per month:
Let’s do some simple math.
- Total Canadian retail sales of cannabis: $750M
- Cannabis 2.0 is 20% of total sales: $150M
- Auxly accounted for 14% of total sales: $22M
Auxly stated that about 80% of their sales were in fact cannabis 2.0. The latest revenues were $14M USD which is about $17M CAD. That number seems a bit shy of the $22M. At 80% of the $17M, that would only be about $14M.
This is entirely within the wheelhouse of possibilities. The reason why I say this is simple: Dispensaries pay a wholesale price and the above total statistic is the retail price.
Auxly CBWTF Stock Financial Data
Revenue
Revenues increased significantly over from the previous quarter by nearly 50%:
I believe that revenues are going to be a major eyebrow-raiser for the foreseeable future. And, here is why: Auxly is partnered with Inner Spirit Holdings INSHF stock to sell its product. Inner Spirit is slated to have over 100 stores in Canada by year’s end. Each of these stores should be selling about $650k annually (My estimation). 20% of those sales will be cannabis 2.0. Auxly will grab a big chunk of that. And, this is only in the Spiritleaf stores; Auxly has other distribution deals:
Given this potential, I can see significant revenue increases.
Gross Profits
Auxly’s gross margins amount to all of about 25% at this time. Here is a look at gross profits; the amount left over after subtracting cost of goods from revenues:
Economies of scale are going to push gross margins upward. As the business gains production efficiencies, better purchasing power, and marginal increases in cost cuts, gross margins will push upwards.
To me, it is all about the distribution and market share that Auxly currently has. I am simultaneously looking for increased revenues and continued upward movements in revenues. Then, on the gross margin side, you will see improved metrics. I doubt this will take more than just a couple of quarters before gross margins become ultra-competitive.
Operating Costs
Operating costs and operating efficiencies are still lofty relative to total revenues:
Auxly has recently pushed down total operating costs on a whole. If they can maintain this same vigilance moving forward then this will improve operating profits and EBTIDA, then it will trickle through to net earnings.
Operating Efficiencies
The percentage versus total revenues is still very high, but improving:
If Auxly can see another 50% increase in revenues in the next 1-2 quarters this metric improves significantly, assuming management keeps a tight lid on costs. At $9M in total operating costs, and a $21M revenue, this is about 42% operating efficiency.
However, operating costs typically move upwards with revenues. Not all costs associated with running the business are linear such as paying the CEO’s salary or rent on a facility. But, from an operational basis, as more sales are made more hands get involved in the process and costs move upwards.
Given that, I think the best-case scenario for the next move in operating costs would be downward, but minimal. It may take a couple of quarters until total operating costs are at metrics that are competitive versus other peers.
Earnings
EBITDA is getting closer. If revenues were to increase to over $20M with improved margins, and maintained costs, I could see this hitting break-even:
Auxly will see significant increases in revenues over the next 2-3 quarters. Having such a large market share tells me their product quality is tops. This will drive revenues as more Spiritleaf stores open and other distribution networks continue to sell Auxly’s products.
I can see continuously improving metrics and EBITDA, I can see, will flip to positive.
Net Earnings
Income was affected by charges outside of the normal run of the business:
Unusual charges were quite large for the quarter (Numbers in sheet below). This was the driver for the poor numbers in net earnings.
Balance Sheet
Assets and liabilities had moved modestly lower. Lately, there has been an uptick in both:
At 50%, Auxly has done a solid job of maintaining its asset base over liabilities; not all companies can say that. This weekend, I am going to do a TOP 10 analysis on all stocks showing the best difference between assets and liabilities for each company. Auxly is likely to have done well in this department.
Per Share Book Value
The stock price is about $0.30 per share. Book value per share is just slightly lower than that giving a potential investment a floor of sorts… albeit, no panacea.
While per-share book value may have the ability to offer some backstop for an investor, the market for cannabis stocks may not have adhered to the best practices for this. I have seen stocks all over the place with regards to book value and total assets versus valuations and stock prices.
Is Auxly Cannabis CBWTF stock a good buy?
The short answer to that is: Most likely, but we need a bit more information. Generally, I try and project what I think a stock could be worth going forward. Unfortunately, we do not have enough information at this point to move forward with any kinds of analysis that might show what the stock could be worth.
Revenues
For instance, without proper guidance, we do not know what the upside potential is for revenue. They printed some 50% QoQ increase in revenues. When does that rate of growth start to moderate and at what price level? I have not been able to find that information right now.
But, I do expect significant revenue increases with Auxly. They have the #1 selling cannabis 2.0 product in all of Canada with a 14% market share. That market share is 20% of the entire cannabis retail market which is printing about +$250M in revenue every month. Auxly will be posting a lot of revenue gains.
Margins
Gross margins and total operating costs are likely to improve. However, at what pace will it be that we see competitive gross margins where we can judge the numbers? I would expect that with the increased revenues, economies of scale and productivity gains will push gross margins upwards. But, for now, Auxly just printed 25% and it is too low of a number to determine what gross profits could be with future revenue gains.
Finally, total operating costs will more than likely move upwards with increased revenues. For now, total operating costs have been minimized. However, they are still printing 65% in total operating costs versus revenues. The pace of revenue gains will far outrun that of total operating costs. And, I expect that there will be sizeable gains very soon in this metric.
Downside risks
Auxly CBWTF stock is trading at $0.30 here in the states. Your downside is very limited. This is especially true when you consider the book value. Should Auxly get picked up it will very likely see a premium over the current price.
I just keep looking at the potential revenue gains from a company that controls so much of a segment of an entire country’s market share. Plus, their products are being sold in Spiritleaf, a chain that will have some 100 stores throughout Canada (And growing). This is a win-win for both the dispensary and Auxly. And, that is not their only distribution partnership.
I just see a lot of upside potential cemented with concrete data. What I don’t see is what price the stock could hit. Nonetheless, CBWTF needs to be on your watchlist.
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