Auxly Cannabis Group Has Done Nothing But Execute In 2021 Which Is Setting Them Up For Major Success In 2022

Although 2021 has been a mixed year for the cannabis sector from a performance standpoint, the year has been highlighted by a wave of mergers and acquisitions (M&A). 

We are favorable on this trend and believe that companies which are completing strategic and accretive acquisitions are better positioned to capitalize on burgeoning verticals of the cannabis industry. When compared to the last two years, the average size of the transaction will be smaller in 2021 and many of the transactions can be classified as bolt-on acquisitions.

Through bolt-on acquisitions, a company can acquire a business that would complement the existing operation. For example, if a cannabis company has a large production footprint but no processing assets, it can acquire a processing focused cannabis business instead of constructing its own.

In the fourth article of our series, we want to provide an update on Auxly Cannabis Group Inc. (TSX: XLY) (OTC: CBWTF) which has been executing on a multi-faceted strategy that is centered on completing inorganic and organic growth initiatives.

1. A few weeks ago, Auxly acquired the remaining ownership interest of Sunens Farms through a share purchase agreement. The deal provides Auxly with a large-scale cultivation facility as well as a proprietary genetic library of 150+ cannabis strains and the transaction should enhance its leverage to Canada’s 1.0 and 2.0 cannabis market. The acquisition should reduce Auxly’s reliance on large-scale wholesale cannabis purchases and is expected to immediately improve gross margins, adjusted EBITDA, and net income. 
2. Concurrent with the completion of the acquisition, Auxly reported to have amended and restated Sunens’ credit facility from September 2019 with the Bank of Montreal (BMO). The credit facility’s initial maturity date was extended by one year and Auxly paid down the existing credit facility by $15 million. From a balance sheet standpoint, Auxly has seen improvements in the resources it has access to and we find this to be an important aspect of the near and long-term story. 
3. In mid-November, Auxly released third quarter financial results and reported an approximately 95% increase in revenue on a year-over-year basis (increased 17% when compared to the prior quarter). During the period, the Canadian cannabis company reported an improvement in adjusted EBITDA (on a quarter-over-quarter basis) due to the higher cost of sales that are associated with changes in product mix and the launch of new products. According to data from Headset, Auxly had the largest amount of cannabis 2.0 sales with 15.6% market share and ranked sixth in the amount of recreational cannabis sales. Headset reported that Auxly saw strong growth in October and sold the fifth most recreational cannabis with a 7.3% market share.
4. We consider Auxly’s relationship with Imperial Brands to be one of the most important aspects of the business. In 2019, Imperial Brands purchased C$123 million of debentures which is convertible into a 19.9% ownership interest of Auxly. As part of the agreement, Auxly was granted global licenses for Imperial’s vaping technology as well as access to its vapor innovation business. According to the agreement, Auxly will serve as Imperial’s exclusive partner for the development, manufacturing, commercialization, sale and distribution of cannabis products all over the world. Earlier this year, Imperial agreed to amend certain provisions of the debenture and investor rights agreement. Under the amended agreement, the maturity date of the debentures was extended by two years. Auxly expects the changes to significantly improve its near-term cash requirements and leave the business well positioned for long-term growth.
5. As part of the strategic partnership agreement with Imperial Brands, Murray McGowan was appointed to be a member of Auxly’s Board of Directors. He serves as the Chief Strategy and Development Officer for Imperial and replaced Conrad Tate who was previously nominated by Imperial. Murray has a proven track record of success and Auxly expects his extensive strategy and development experience to prove to be invaluable to the business. He has a strong background in strategy and previously worked in various leadership roles for several high-profile businesses. Murray also worked with leading global consumer packaged goods (CPG) companies and retail businesses while working for McKinsey and we are bullish on the human capital that Imperial brings to Auxly.
6. In May, Auxly reported to have entered into a definitive agreement with Myconic Capital Corp. (NEO: MEDI) to sell 100% of KGK Science for up to $16.5 million. The sale resulted in the deployment of additional capital into Auxly’s core business and accelerated its path to profitability. Going forward, the company plans to leverage KGK’s clinical expertise as it works to launch new innovative cannabis products. We expect the liquidity from the transaction to enhance commercial operations as the management team continues to focus on expanding its product line in Canada and executing on its business strategy. We believe the transaction will allow Auxly to refine and enhance its focus on the cannabis industry and will monitor how the story advances as a result. 
7. On top of the capital infused from the partnership with Imperial Brands, Auxly has been able to further strengthen its balance sheet by completing a series of private placements. So far this year, the Canadian cannabis producer has completed three private placements and raised $20 million, $8 million and $17 million, respectively. When you combine these capital infusions with the proceeds from divesting KGK Science, Auxly’s cash position has improved. Going forward, we will monitor how the management team uses the resources to continue to advance the business and capitalize on new opportunities.  

If you are interested in learning more about how Auxly Cannabis Group is positioned for growth, please send an email to support@technical420.com with the subject “Auxly Cannabis Group” to be added to our distribution list. 

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Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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