Auxly Cannabis Group. (TSXV: XLY)‘s annual report was filed this week, drawing great ridicule from observers for yet another top-line loss, both on the quarter and the year, and causing shareholders to ask, again, just what this company they’re buried in does, anyway?
The company’s current public-facing orientation as a consumer packaged goods growth story is so common among its peers – none of whom have been ale to use it to generate any success – that Auxly’s new direction can be read as an attempt to blend in and keep its head down. Having embarked on the same doomed trajectory as the rest of the industry, it won’t matter if Auxly comes up short or way short because, functionally, it will all be the same pile of wreckage.
Auxly had to do something in 2019, because the red hot pitch that built the company was sucking its oxygen from an imagined cannabis future that turned into the dismal cannabis present the company is trying to get lost in. If the former Cannabis Wheaton tried to sell its original vision today, it would be an anachronism; like a new office phone system that had the latest networking and sound tech, and rotary dialing wheels.
Cannabis Wheaton was given its original name as a branding exercise meant to sell its first and only product; its equity. Canadian investors were well familiar with the success enjoyed by metals streaming company Wheaton Precious Metals (TSX: WPM) (previously Silver Wheaton). The metals royalty pioneer backed developing gold and silver mines via the advanced purchase of the metals to be mined at a discount to their spot prices. It created market exposure to those metals’ prices in a vehicle with a predictable cost structure, and stands as one of the most successful securities innovations in recent memory.
Cannabis Wheaton’s streaming scheme was meant to securitize the margin of developing cannabis producers and, unfortunately, investors got what they paid for. Noted Lamborghini aficionado Chuck Rifici’s company spent 2017 and 2018 pushing a concept that didn’t copy the metals streaming model so much as it mimicked its concept, and mixed it around with other similar-sounding pieces of resource-industry jargon.
Auxly went on about “upstream” cultivation assets and “midstream” branding and manufacturing assets that would add value to the weed floating in from upstream before shipping it to the assets in the “downstream” distribution channel. While its competitors were all pitching the nebulous concept of “vertical integration,” Auxly differentiated themselves by selling meaningless, hyper-specific parts of an imagined ecosystem, using terms that made it all sound very real. It had taken down $358 million in equity investment and racked up $100 million in convertible debt before it put the “streaming” pitch out to pasture in the fourth quarter of 2018.
By then, Auxly had printed a cumbersome, expanding cap table that would need a lot of thrust to get airborne. It was able to manage enough lift to convert the $100M in debs right before the market’s natural tailwind died out, and has taken about a year to come to terms with the fact that it had built a collection of spare parts and commitments from stunted production ventures that were never going to be lived up to.
Whether management chooses to dress it up like a banking product or a pipeline company, a cannabis company has to sell things for more than their cost to credibly call itself a scalable, growth-stage business. Auxly hasn’t been able to manage that for three of the past four quarters.
The consumer packaged goods / cannabis 2.0 story started showing up in the Auxly literature right around July 2019 when XLY did a $123 million convertible debenture raise that came with top up rights that allowed sole subscriber Imperial Tobacco to maintain its 19.9% interest in perpetuity. The “strategic partnership” with the tobacco brand is a testament to the founders’ ability to leverage their relationships to find money. A final act of paper alchemy, before the vehicle was forced to pivot away from their core competency.
Pasha Brands (CSE:CRFT) alumni Hugo Alvez will take over from Rifici – who will hang around as Chairman – to lead Auxly into a sea of “consumer packaged goods” oriented cannabis co’s, blindly stumbling in the same general direction, hoping to copy each other until something that looks like a working modern model for a cannabis company emerges, at which point they’ll surely copy that.
Predictably, the $44 million that the company had at the end of December appears to be going quickly. XLY announced a complicated, tiered convertible raise with a ghastly 55% warrant coverage this past Tuesday. The initial $1.5 million tranche converts at $0.435 and includes a complicated indemnity clause that reads like the directors are putting up their own stock up as a guarantee against the investor’s losses, and the Auxly treasury is in turn guaranteeing the stock that the directors pledged. It’s confusing by design, but the investor clearly didn’t like the look of the down-side, and it isn’t like Chuck was going to seal the deal by throwing in the keys to his Lambo.
Information for this briefing was found via Sedar and Auxly Cannabis Group Inc. The author has no affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.