While 2021 was a mixed year for the cannabis sector from a performance standpoint, the year was marked by a wave of mergers and acquisitions (M&A).
We are positive about this trend and believe that companies that complete strategic and profitable acquisitions are better positioned to benefit from the emerging sectors of the cannabis industry. Compared to the last two years, the average transaction size will be smaller in 2021 and many of the transactions can be classified as bolt-on acquisitions.
Through complementary acquisitions, a company can acquire a business that complements existing operations. For example, if a cannabis company has a large manufacturing space but no processing facilities, it can purchase a processing-focused cannabis company rather than building its own.
In the fourth article in our series we would like an update on Auxly Cannabis Group Inc. (TSX: XLY) (OTC: CBWTF) that implements a multi-layered strategy geared towards completing inorganic and organic growth initiatives.
- A few weeks ago, Auxly acquired the remainder of the ownership interest in Sunens Farms through a share purchase agreement. The deal gives Auxly a large-scale grow facility as well as a proprietary genetic library of over 150 cannabis strains, and the transaction should increase its leverage on Canada’s 1.0 and 2.0 cannabis markets. The acquisition should reduce Auxly’s reliance on large-scale wholesale cannabis purchases and is expected to improve gross margins, adjusted EBITDA and net income immediately.
- Simultaneously with the completion of the acquisition, Auxly reported having modified and reformulated Sunens’ September 2019 credit facility with the Bank of Montreal (BMO). The initial maturity of the credit facility was extended by one year and Auxly repaid the existing credit facility by $ 15 million. From a financial perspective, Auxly has seen improvements in the resources it has access to and we believe this is an important aspect of its short and long term history.
- In mid-November, Auxly released its third quarter financial results and reported an increase in revenue of approximately 95% year over year (an increase of 17% compared to the previous quarter). During the reporting period, the Canadian cannabis company saw an improvement in Adjusted EBITDA (on a quarterly basis) due to the higher cost of sales associated with changes in the product mix and new product launches. According to data from Headset, Auxly had the largest Cannabis 2.0 sales with a market share of 15.6% and ranked sixth in Recreational Cannabis sales. Headset reported that Auxly had strong growth in October, becoming the fifth most popular cannabis sales with a market share of 7.3%.
- We consider Auxly’s relationship with Imperial Brands to be one of the most important aspects of the business. In 2019, Imperial Brands purchased $ 123 million in debt securities convertible into a 19.9% interest in Auxly. Under the agreement, Auxly was granted global licenses for Imperial steam technology and access to its steam innovation business. Under the agreement, Auxly will act as Imperial’s exclusive partner for the development, manufacture, marketing, sale and distribution of cannabis products around the world. Earlier this year, Imperial agreed to amend certain provisions of the Notes and Investor Rights Agreement. As part of the amended agreement, the term of the bonds was extended by two years. Auxly expects the changes to significantly improve its short-term liquidity needs and put the business well-positioned for long-term growth.
- As part of the strategic partnership agreement with Imperial Brands, Murray McGowan has been appointed to the Auxly Board of Directors. He is the Chief Strategy and Development Officer for Imperial, replacing Conrad Tate, previously Imperial nominated. Murray has a proven track record and Auxly expects his extensive strategy and development experience to be invaluable to the company. He has a strong background in strategy and has previously held various leadership positions for several high profile companies. Murray also worked with leading global consumer goods companies (CPG) and retailers while working for McKinsey, and we are optimistic about Imperial’s human capital for Auxly.
- In May, Auxly reported that it had worked with Myconic Capital Corp. (NEO: MEDI) to have a definitive agreement to sell 100% of KGK Science for up to $ 16.5 million. The sale invested additional capital in Auxly’s core business and accelerated the path to profitability. In the future, the company plans to use KGK’s clinical expertise to bring new innovative cannabis products to market. We expect the liquidity from the transaction will improve commercial operations as the management team continues to focus on expanding its product line in Canada and executing its business strategy. We believe the transaction will allow Auxly to refine and reinforce its focus on the cannabis industry and will watch how this story develops.
- In addition to capital from its partnership with Imperial Brands, Auxly has further strengthened its balance sheet with the completion of a number of private placements. So far this year, the Canadian cannabis producer has closed three private placements, raising $ 20 million, $ 8 million and $ 17 million, respectively. Combine these capital injections with the proceeds from the sale of KGK Science and Auxly’s liquidity position has improved. Going forward, we will watch how the management team uses the resources to keep the business moving and seize new opportunities.
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Michael Berger is a Managing Partner of StoneBridge Partners LLC. SBP continues to raise awareness among leading cannabis industry companies in the United States and abroad.