Auxly Cannabis Group Inc: Will This Spark a Rally in the $0.30 Pot Stock?

This Pot Stock Could Be an Opportunity

Most people hate market sell-offs. But if you are a bargain hunter who thought that pot stocks used to be too expensive, the recent pullback in the U.S. stock market could represent an opportunity.

Check out Auxly Cannabis Group Inc (OTCMKTS:CBWTF, CVE:XLY), a marijuana company that develops products for the medical, wellness, and recreational markets.

Headquartered in Toronto, Ontario, Canada, Auxly is listed on the Canadian Venture Exchange under the symbol “XLY.” American investors can find the stock trading over the counter under the symbol “CBWTF.”

One thing that makes Auxly stand out is its diverse supply platform. Instead of growing cannabis at one facility, the company’s supply platform is made up of a combination of wholly owned subsidiaries, offtake agreements, joint ventures, and streaming partners.

Added up, these diverse sources are expected to supply over 100,000 kilograms (220,462 pounds) of raw cannabis annually. (Source: “Investor Presentation September 2019,” Auxly Cannabis Group Inc, last accessed February 27, 2020.)

Also, even though Canada has a much smaller population than the U.S., it still has a vibrant market for pot. In fact, it’s the first G7 country to legalize recreational pot.

According to Ernst & Young LLP, the legal medical and recreational cannabis market in Canada was estimated to be CA$6.0 billion in 2019, and is expected to grow to a whopping CA$11.0 billion by 2025.

Auxly Cannabis Group has been capitalizing on this growing market. According to the company’s latest earnings report, it generated CA$1.6 million of total revenue in the third quarter of 2019. The amount nearly doubled the total revenue it earned in the year-ago quarter. (Source: “Auxly Reports Q3 2019 Financial Results,” Auxly Cannabis Group Inc, November 22, 2019.)

Auxly Cannabis Group Inc Revenue Chart
(Canadian Dollars)

(Source: Ibid.)

Note that, among the company’s CA$1.6 million total revenue for the quarter, only CA$115,000 came from the sales of actual cannabis products. The rest (CA$1.5 million or so) came from research contracts. So if Auxly Cannabis can sell more marijuana products in the future, its top-line number could get a solid boost.

And that’s indeed what the company plans to do. Auxly has been preparing for the second wave of pot legalization in Canada, often referred to as “Cannabis 2.0.”

The nationwide legalization of recreational cannabis on October 17, 2018 was considered the first wave. The second wave, which came a year later, legalized cannabis-derivative products such as edibles, concentrates, and topicals.

In its latest earnings report, Auxly Cannabis Group Inc said, “Dry cannabis flower sales have been curtailed as a result of the Company’s decision to allocate the bulk of its dried flower to the development and manufacture of derivative cannabis products in anticipation of Cannabis 2.0 sales mid-December 2019.” (Source: Ibid.)

I should point out that, in Canada, pot-derivative products didn’t really hit store shelves until December 2019. So to see how much Cannabis 2.0 has helped pot companies’ financials, we’ll probably have to wait for their first-quarter 2020 results to be released.

But there’s a reason for investors to take a look at Auxly Cannabis stock right now: a new supply agreement.

On February 25, Auxly announced that it had reached a supply agreement with Delta 9 Cannabis Inc (OTCMKTS:VRNDF, TSE:DN), a vertically integrated marijuana company based in Winnipeg, Manitoba, Canada. Under the agreement, Auxly will supply marijuana products to Delta 9’s multiple retail locations. (Source: “Auxly Announces Continued Strategic Partnership and Supply Agreement With Delta 9,” Auxly Cannabis Group Inc, February 25, 2020.)

Just like Auxly, Delta 9 is not a big ticker by any means, but the company does operate one of the top performing retail platforms in Canada. In the first 12 months of legal cannabis sales in Canada, Delta 9’s stores recorded more than CA$14.0 million in retail revenue and over 250,000 customer transactions.

Having a supply agreement with Delta 9 could boost Auxly’s business.

“We are thrilled that consumers will be able to purchase our suite of cannabis products at Delta 9 retail locations including oils, chocolates, chewables and vape products under our Kolab Project, Foray and Dosecann brands,” said Auxly Cannabis Group’s chief executive officer Hugo Alves.

“Delta 9 was one of our first strategic partners, and we are so excited to reaffirm our partnership and joint commitment to developing a robust platform for the recreational cannabis market across Canada.” (Source: Ibid.)

Analyst Take

Trading around $0.30 apiece, CBWTF stock is one of the lower-priced pot stocks on the market.

Sure, Auxly Cannabis Group Inc’s business does not look that substantial at the moment. But with a slew of Cannabis 2.0 product offerings and a new supply agreement, the company just might have what it takes to get some renewed investor attention in 2020.