A lot of shareholders and former shareholders have soured on Auxly Cannabis Group (CBWTF) because of low performance, a weak stable of companies, and questions about its ability to survive long enough to deliver on its streaming business model.
The company recently received a reprieve from some of this concerns after it was announced the British-based tobacco firm Imperial Brands was investing C$123 million ($93.4 million) into Auxly.
Terms of the deal
The C$123 million investment came by means of a convertible debenture. The conversion price was set at C$0.81 per share. At the time of the announcement it presented an 11 percent premium over the closing price of the prior trading session. Per terms of the deal Imperial Brands included an option to exercise the note at any time during the three-year term. If Imperial chooses not to convert, the debenture is required to be repaid in full.
On the part of Imperial, that’s a very safe bet. It’s getting just under 20 percent of Auxly Cannabis for what is essentially kicking the tires, i.e., a trial run.
Benefit to Auxly
Even though Auxly predictably got a quick boost to its share price when the cash infusion was announced, it hasn’t been able to hold, and the share price has dropped back to trading between 60 cents and 70 cents. This, as mentioned earlier, is because of the negative sentiment associated from the company on past under performance and growing discontent from many retail shareholders in particular.
That said, it has to be admitted that the C$123 million definitely changes the possibilities and flexibility of the company, as it should be able to complete construction on its wholly-owned farm construction, along with a joint venture it has been working on.
In the near term, the additional capital will help it build out a portfolio of derivative products that will be allowed to be sold in Canada in the latter part of 2019.
Of those, vapes are projected and expected to be one of the top-selling derivatives, which will strengthened by Auxly’s access to Nerudia products, which competes in the vaping market. Vapes and other derivatives command higher prices, which will generate wider margins and earnings.
Last, the distribution network of Imperial Brands extends to global markets, and that should provide Auxly with fast access to those markets. Imperial’s experience in marketing to those disparate markets should allow Auxly to leverage it to accelerated growth.
Conclusion
It can’t be overstated how much Auxly Cannabis Group needed this type of deal. The company had been floundering and many questions have been raised by disgruntled shareholders and former investors as to the viability of the business model of the company, and its ability to execute it profitably.
With the company’s name now being associated with Imperial Brands and its C$123 million investment, it has definitely given it a chance to change that negative sentiment around and make believers of shareholders once again.
In the near term the vapes business will provide the immediate impact on the performance of the company, although that won’t start to happen meaningfully in the first quarter of calendar year 2020. The earnings report for that time period will give a glimpse into what expectations for investors will be.
At the same time, expectations need to be tempered because it’s uncertain at what pace products will be distributed and how long it’ll take to fully serve the Canadian market. It could take longer than some think at this time, which is probably part of the reason the temporary boost in the share price of the company didn’t hold.
Auxly will definitely need to use some of that capital to land more streaming deals as well, as it needs to show some ability to generate a predictable stream of income, which is one of the attractions a streaming company of any type has for investors.
For now, Auxly Cannabis remains a high risk stock in my opinion, even with the cash infusion from Imperial. It’ll take time for it to turn itself around, but if it can, and the vape business takes off relatively soon after Canada allows derivatives to be sold, it could start to change the narrative to a more positive one for the company.
I think, with the company as it is today, most investors are going to maintain a wait-and-see attitude until after the first earnings report of 2020, to get more visibility on the viability of the company and how long it’ll take for it to generate some sustainable revenue.
The good news is the capital should allow it to enter into more deals that may provide it with more revenue in the short term. If that happens, the share price could take off before 2020.
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