Auxly Cannabis is making smart deals, this investor says

Looking for exposure in the pot sector that goes beyond the big names like Canopy Growth and Aurora? You might want to try cannabis streaming company and cultivator Auxly Cannabis (Auxly Cannabis Stock Quote, Chart, News TSXV:XLY), says portfolio manager Bruce Campbell, who commends the company’s business savvy.

“Obviously, the big thing with them is that their model is based on the [Cannabis Wheaton] model of streaming where they’re getting a royalty off of the cannabis companies that they produce,” says Campbell, president and portfolio manager at StoneCastle Investment, to BNN Bloomberg last Friday.

“We don’t own the company but from what we’ve looked into it looks like they’ve done some smart deals and they’ve been able to really put pressure on the producers who needed money, and so from a smart business perspective that’s the way to go,” Campbell says.

Depressed like the rest of the sector over the past few months, Auxly Cannabis started jumping at the end of July on the company’s announcement that British tobacco company Imperial Brands would be investing $123 million in Auxly for a 19.9-per-cent ownership stake. The stock, which was down almost 20 per cent year-to-date at the time the deal was announced on July 25, climbed from $0.73 to as high as $1.08 per share on high volume before pulling back late in the day on Friday to $0.83 per share.

The Imperial deal will see Auxly gain global licenses to Imperial’s vaping technology, with Auxly becoming Imperial’s exclusive partner on cannabis-related ventures.

“Following its extensive evaluation of the Canadian cannabis market, we’re thrilled that Imperial Brands selected Auxly as its partner of choice due to the high calibre of our assets, people and capabilities,” said Chuck Rifici, then-Chairman and CEO of Auxly, in a press release. “We are particularly excited to partner with Imperial Brands on current and future intellectual property and product development, starting with immediate access to its portfolio of vaping technologies and research and development capabilities.”

Auxly on Monday announced that Rifici, co-founder of industry leader Canopy Growth, would be replaced at the CEO position by current president Hugo Alves but will retain his role as chairman of Auxly’s board of directors. CEO for the last two years, Rifici said that the move brings forth the next chapter for Auxly, as the company moves towards commercialization of its cannabis-derivative products.

Auxly Cannabis last reported its quarterly financials in late May where its fiscal first quarter featured a larger-than-expected net loss. The Toronto-based company reported revenue of $817,000 and a net loss of $13.8 million, with the loss coming in higher than analysts had expected.

Delays in getting its extraction technology up and running were to blame, according to Mackie Research analyst Greg McLeish, who was calling for revenue of $225,000 and a net loss of $9.4 million.

“In light of Canada’s upcoming legalization of cannabis derivative products, the company has been focused on developing innovative derivative branded products,” said McLeish in an update to clients on May 27.

“Auxly is also looking to leverage strategic distribution channels amongst proprietary medical channels and retail outlets, and is focused on additional opportunities for growth internationally,” said McLeish.