At Equity Insight, we have been following the cannabis space for a very long time. In fact, some of the team members at Equity Insight have been around the space so long that they were buying Pharmacann which became Cronos (NASDAQ: CRON) at $0.40 and remember buying Canopy Growth (NASDAQ: CGC) back when it was called Tweed and traded below $3.00.
Since 2014 we have seen a few boom/bust cycles and various investment themes be hot while the industry was finding its footing from a regulatory point-of-view; supply chain management and distribution; legislation reform across the globe and of course money in the capital markets flowing to the stronger companies and stronger segments of the industry – the efficient market theory at work.
Since the sector peak in 2019, a majority of the Canadian licensed producers and cannabis companies have tumbled in price as they struggle to backfill lofty valuations and now struggle to pay their debts due to lack of execution. Most companies continue to raise capital in order to “keep the lights on” so to speak. As always, there are “inefficiencies” in the market, pockets of value to capitalize on, and it is our passion to bring our readers under the radar stocks which we believe provide great opportunity for shareholder growth.
We believe that the newly listed Canadian cannabis company on the CSE provides a great opportunity today. Ayurcann Holdings Corp. (CSE: AYUR) which listed its shares in early April, and in our opinion, offers a tremendous opportunity to investors for both the short-term and long-term with limited risk at these levels.
We think that Ayurcann (CSE: AYUR) is at a great growth stage that is de-risked as the company has no debt and whose share price is ready to appreciate rapidly through solid execution of its business plan. The strategy at Ayurcann (AYUR) is to focus on being a leading post-harvest solution provider for licensed producers in Canada through toll processing and white label manufacturing solutions. In parallel, Ayurcann (AYUR) is also building up their own brand profile and representation of leading IP from around the world.
Ayurcann (AYUR) reported blistering growth number for Q3 2021including:
- Net revenues of $2.6 million for the 3 months ending March 31, 2021, compared to $1.56 million for the 3 months ending December 31, 2020.
- Gross margins of $1.84 million for the 3 months ending March 31, 2021, compared to $302,000 for the 3 months ending December 31, 2020.
- Adjusted EBITDA of $1.086 million for the third quarter, representing gross margins of approximately 70%.
At less than $20 million in market cap, a debt-free balance sheet, over 20 clients and being EBITDA and cash flow positive, Ayurcann (AYUR) is entering its third year of operation and we believe (AYUR) is poised to be one of the best performing names in the sector.
Setting The Stage
The founding team of Igal Sudman and Roman Buzaker have backgrounds in early stage and growth environments with expertise in business development, growing and scaling enterprises across various industries. When they founded Ayurcann (AYUR) in late 2018, their vision was not to start-up another cultivation facility, there were enough of those out there in a race to the bottom of becoming the lowest cost producer trying to operate million square foot plus facilities. Rather Igal and Roman wanted to solve the imminent forthcoming supply glut from all the massive cultivation facilities getting financed in the 2017-18 bull market. A lot of the companies out there thought that they knew how to grow at scale, but few really knew what to do with the biomass they were about to harvest and are unable to sell.
Ayurcann (AYUR) assembled an All-Star marketing and compliance team including industry heavyweights Alison Gordon and Trina Fraser. The goal was to offer cultivators a best in class, turn-key solution of post-cultivation services so that they could really focus on growing superior flower. Clients who partner up with Ayurcann (AYUR) are contracting out the needs for the transformation of raw biomass into oils, distillates and a variety of finished products including vapes, tinctures, and topicals to a service provider that has been founded in the principles of making sure the client products are top-tier at all times.
In November 2018 they secured a location in Pickering Ontario where they quickly began to build the operating facilities. By August 23, 2019, the Company was issued a cannabis research and development license by Health Canada. This license allowed the Company to conduct extensive investigatory work in both THC and CBD delivery, using proprietary, optimized formulations and extraction techniques.
In January 2020, the Company received its standard processing license. Under Health Canada’s new Cannabis Act regulations, the standard processing license is required for any facility that is processing more than the equivalent of 600 kilograms of dried flower per year. This license meant that, in addition to the Company’s research & development license, it was now able to extract, manufacture and test next-generation cannabis products.
Today Ayurcann (AYUR) boasts a research lab for testing and developing proprietary formulations and access to an extensive library of proprietary formulations and terpenes. With the capacity to process up to 200,000 kilograms of dry cannabis annually, Ayurcann (AYUR) is capable of processing two times (2X) more capacity than Neptune Wellness (TSX: NEPT) which has an annual capacity of 100,000kg and half of Valens (TSX: VLNS) which has a capacity of 425,000kg. This is the heart of the value proposition but more about that below.
The Growth Story
How many times in this segment have we all heard that the growth is going to be insane when prohibition is over and that the market opportunity was too good to pass up? Well, it happened, and those narratives paid out to the 2017-18 investors when the massive bull market happened through to much of 2019. Many of the companies that were selling those narratives to The Street have long been extinguished as many became debt ridden and unable to meet their obligations.
However, the consumer never went away. In fact, cannabis has become more mainstream with a market size due to grow 300% in Canada from $3 billion to $10 billion. The consumer base has not only grown stronger for dried flower, but also has more refined tastes and habits geared towards Cannabis 2.0 products such vapes, tinctures, capsules and edibles which are on track to grow 228% as a segment from 2019 to 2022.
Companies like Ayurcann (AYUR) are ready to grow shareholder value with positive financial results being reported and new expanded growth through new partnerships, an expanding client base and a good old execution from management.
In 2020 alone, Ayurcann (AYUR) processed over 16,000kgs of biomass and has established itself as ethanol extraction specialists in the Canadian industry. With low cost, high margins and high-volume production capabilities coupled with fast and flexible production, the extraction segment of the business is very robust, and planned extraction capacity is set to increase 200%. AYUR is set to take on the larger extraction companies head on!
Ayurcann (AYUR) has also been extremely successful at securing supply for its own in-house inventory and brands. The Company has secured over 10,000 kg of biomass below market price, maintains monthly inventory of over 300kg of distillate and enough inventory to supply leading license producers to support their needs for edibles, topicals and vapes representing one of the largest available inventories in Canada.
Competitive Landscape
We believe that Ayurcann (AYUR) is probably one of the most undervalued names in the sector today and offers the most potential to current and future shareholders. As stated in their Q3 ’21 financials, topline growth is currently 50% Quarter over Quarter (!) with gross margins of over 70%. With no signs of business slowing down, the runway for Ayurcann (AYUR) is cleared to catch up to the peer group - and there is a lot of catching up to do as evidenced by the table below.
If all the above wasn’t enough of a value proposition, we can also add that Ayurcann (AYUR) is a relatively newly listed company that is currently under the radar to the entire investment community. Although it had a rough few days to the start of its trading life, CSE: AYUR has now had the chance to digest it’s RTO transaction and has consolidated out very nicely since mid-April and is creating a solid entry price for investors.
Forward Looking Statements: This article may contain "forward-looking information" (as defined in applicable Canadian securities legislation) that is based on expectations, estimates and projections as of the date of the content is published on this website. Wherever possible, words such as "anticipate", "believe", "expects", "intend" and similar expressions have been used to identify these forward- looking statements. Information in this article has been furnished for your information only, is accurate at the time of posting, and may be superseded by more current information. Except as required by law, we do not undertake any obligation to update the information, whether as a result of new information, future events or otherwise. This article should not be considered as personal financial advice. Full Disclosure: Ayurcann Holdings is a client of the parent company of EquityInsight.ca. Directors of the parent company of Equity Insight may buy, hold or sell the securities before during or after this publication.