Raymond James analyst Rahul Sarugaser issued an update to clients on Avicanna (Avicanna Stock Quote, Chart, News TSX:AVCN) Friday, saying while a recent equity raise turned out to be highly dilutive to the company’s share count, it’ll nonetheless help the cannabis company reach breakeven cash flow by 2022.
Headquartered in Toronto, Avicanna is an internationally-focused cannabinoid platform company which has a partnership with organic agricultural giant El Grupo Daabon to grow high quality, low cost hemp and cannabis in northern Colombia. The company has processing and extraction capabilities allowing it to develop its proprietary lines of pharmaceutical-standard, quality-assured, efficacy-evaluated products, sold under the Aureus, Rho Phyto and Pura Earth brands. Avicanna also has a pipeline of clinical assets, the first of which will be evaluated for dystrophic epidermolysis bullosa (dEB).
Avicanna on December 8 announced closing on a previously announced public offering equity raise involving about six million units at $0.85 per unit for gross proceeds of about $5.1 million, with each unit being comprised of one common share and one-half a common share purchase warrant exercisable at $1.20 per each full warrant.
The company said it plans to use the proceeds for product development, working capital and general corporate purposes.
“The completion of our first prospectus offering and substantial capital raise since our IPO is a confirmation of the on-going support from our existing and new shareholders during a difficult time in the market,” said CEO Aras Azadian in a press release.
“This also coincides with further cost reductions and with the launch of our medical products and several other commercial initiatives across several markets where we intend to use the use the proceeds of this raise to pave the way to sustainability and profitability,” Azadian said.
On the public offering, Sarugaser wrote that in addition to the $1.1-million convertible debt instrument the company adopted three weeks ago, Avicanna is now adding 13.3 million shares, altogether highly dilutive, said the analyst, where the company’s total fully diluted share count now sits at 39.8 million versus 26.6 million beforehand.
“While almost double the 6.7 million shares of dilution we had previously estimated, we calculate that with this $6.2 million in additional liquidity, AVCN should — assuming management can control potential inventory costs — get to cash flow break-even in 2022 without the need for additional dilutive capital,” Sarugaser wrote.
On December 10 Avicanna also announced the Colombian launch of its advanced medical cannabis products, which are the same RHO Phyto line the company is marketing through its Shoppers Drug Mart partnership in Canada. Avicanna said the physician-required cannabinoid program will be commercialized through direct sales to patients, delivery to national pharmacies and delivery to third-party medical institutions.
Avicanna said its program is the first of its kind in Colombia involving education and training of healthcare practitioners on the efficacy of cannabinoid-based therapeutics, with the target areas including neurological disorders such as epilepsy, Parkinson’s disease, multiple sclerosis, chronic pain and psychiatric indications like PTSD, anxiety and depression.
“After two years of preparation, we are proud to be launching this complete program in a market that is very significant to us and to be doing so with a medical community that we have been working closely with for close to 3 years,” said Azadian in a press release. “We believe that this medical program will set the gold standard for advanced cannabinoid-based medicine in Colombia and will act as a proof of concept for planned expansions into other Latin American markets.”
With the new program in Colombia and what he described as the strong launch of its product line with Shoppers, Sarugaser has updated his estimates and is now calling for 2020 revenue and EBITDA of $3 million and negative $11 million, respectively (was $3 million and negative $12 million, respectively), and for 2021 revenue and EBITDA of $14 million and negative $2 million, respectively (was $10 million and negative $8 million, respectively).
“AVCN’s formal launch into the Colombian medical cannabis market comes as the culmination of years of preparation and collaboration with Colombia’s regulators and medical community. Coinciding with the introduction of medical cannabis products in the Colombian market, AVCN is launching robust education and training programs for the medical community, along with patient support programs, which we expect should drive adoption and market share capture in Colombia,” Sarugaser wrote.
“With AVCN’s anticipated turn toward cash-flow positivity in 2022 — without the need for additional dilutive capital — we maintain our rating Outperform,” Sarugaser said.
The analyst values AVCN as the sum of two parts, a discounted cash flow of the company’s cannabis biomass, CBD, and THC product revenues and risk-adjusted NPV of the company’s dEB clinical asset.
With his “Outperform” rating reiterated, Sarugaser maintained his $2.50 target price, which at the time of publication represented a projected 12-month return of 204.9 per cent. Year-to-date, Avicanna is down 68.5 per cent.