AYURCANN Research Report - Michelle

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December 3, 2021 Ayurcann Holdings Corp. BUY (CSE: AYUR / OTCQB: CDCLF / FSE: 3ZQ0) Current Price: C$0.17 Fair Value: C$0.55 Expecting a Stronger Q2 Despite Lower Product Pricing Risk*: 4 Sector/Industry: Cannabis Click here for more research on the company and to share your views Highlights • In Q1-FY2022 (quarter ended September 30, 2021), AYUR reported $1.9M Sid Rajeev, B.Tech, CFA, MBA Head of Research in revenue, up 137% YoY, but down 30% QoQ, missing our expectations. We were expecting stronger bulk oil sales, which fell 46% QoQ, due to a Dushan Ratkovic, HBCom sector-wide decline in product pricing amid excess supply/inventory. Equity Analyst • However, we were pleased to see revenue from white-label services increase 11% QoQ driven by growth in white-label partnerships. • As price compression is likely to continue through 2022, we are lowering AYUR Price and Volume (1-year) our FY2022 revenue forecast for bulk oil sales, but raising our estimate for white-label services as the company has been adding white-label clients. • Our discussions with management indicated they are expecting a significant ramp-up in revenue in the coming quarters. • In November, AYUR launched their THC and CBD infused topical creams and vapes in New Brunswick and Saskatchewan. Management is expecting increased orders from Manitoba, Ontario, and Alberta in the coming quarters. • AYUR was awarded “Extraction Facility of the Year” and “Toll Processing YTD 12M Facility of the Year” at the GrowUp Awards Gala, which we believe is a AYUR N/A N/A vote of confidence on AYUR’s management. Such recognitions will also CSE -22% -10% attract new white-label clients. Company Data • We are maintaining our FY2023+ revenue projections, and believe that AYUR is well positioned for growth. The recreational cannabis market in 52-Week Range $0.12 - $0.75 Canada is expected to grow from $2.6B in 2020, to $8.62B by 2026 Shares O/S 121M Market Cap. $20M (Statista). Current Yield N/A • The cannabis sector has been out of favor this year. Share prices of P/E (forward) N/A AYUR and most cannabis companies have been on a downward trend. We P/B 4.1x believe the market is overlooking fundamentally strong companies, such as AYUR. • AYUR is trading at 1.5x revenue vs the comparables’ average of 3.9x, implying a 61% discount. Key Financial Data (C$) 2021 2022E 2023E YE June 30 Cash 725,016 3,548,020 5,288,075 Working Capital 3,859,132 7,285,763 11,689,437 Total Assets 6,677,006 10,868,328 16,367,678 Total Debt 73,359 73,359 73,359 Revenue 7,633,656 12,075,000 18,750,000 Net Income (278,360) 2,385,417 4,542,763 EPS (basic) (0.00) 0.03 0.04 *See last page for important disclosures, rating, and risk definitions. All figures in C$ unless otherwise specified. ©2021 Fundamental Research Corp. “18+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com Equity Research Page 2 of 7 Market Canadian Retail Dried Cannabis Flower Pricing Declining dried flower pricing due to oversupply and competition We believe price compression is likely to continue through 2022 Source: Online Provincial Cannabis Stores, FRC Despite lower prices, cannabis sales in Canada hit a record high of $357M in August ($339M in July). According to Statista, the legal recreational cannabis market will grow to $8.6B by 2026, from $2.6B in 2020. Q1 Financials Statements of Operations ($) Q3-2021 Q4-2021 Q1-2021 Q1-2022 YoY QoQ Trade sales - (bulk oil sales) 2,202,484 1,916,862 386,350 1,040,186 169% -46% Processing fees - (white-label sales) 424,032 742,225 401,630 825,692 106% 11% Revenue down 30% Revenue 2,626,516 2,659,087 787,980 1,865,878 137% -30% QoQ due to a 46% Gross Profit 1,842,161 2,302,569 168,526 930,994 452% -60% decline in bulk oil EBITDA 1,011,031 1,206,864 (45,837) 168,126 -467% -86% sales Net Income (Net Loss) (974,617) 1,040,101 (214,349) 124,703 -158% -88% EPS (0.009) 0.012 (0.003) 0.001 Margins Analysis Q3-2021 Q4-2021 Q1-2021 Q1-2022 Margins declined Gross 70% 87% 21% 50% QoQ due to lower EBITDA 38% 45% -6% 9% product prices; we EBIT 38% 45% -6% 9% are expecting QoQ Net -37% 39% -27% 7% fluctuations as the company offers a Summary of Cash Flows ($) wide-range of Q1-2021 Q4-2021 Q1-2022 YE June 30 services Cash Flows from Operations 48,238 1,328,068 364,794 EBITDA, EPS, and Cash Flows from Investing (20,190) 767,516 (70,624) FCF declined QoQ Cash Flows from Financing (26,544) (2,437,357) (42,992) due to lower Net Change 1,504 (341,773) 251,178 revenue FOREX Free Cash Flows 28,048 2,095,584 294,170 Source: Company Filings, FRC ©2021 Fundamental Research Corp. “18+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com Equity Research Page 3 of 7 Liquidity and Capital Structure ($) 2021 Q1-2022 YE June 30 Healthy balance Cash 725,016 976,194 sheet with $3.96M in Working Capital 3,859,132 3,963,116 working capital, and minimal debt Current Ratio 3.46 3.29 LT Debt 40,000 40,000 Subsequently raised Total Debt (incld. related party) 73,359 58,900 $1.39M through an Total Debt / Capital 0.02 0.01 equity financing LT Debt / Capital 0.01 0.01 Source: Company Filings, FRC Can raise up to Stock Options and Warrants $2.32M from in-the- 3.11M options (weighted average exercise price of $0.17), and 24.82M warrants money options and ($0.18) are outstanding. 2.41M options and 14.42M warrants are in-the-money, warrants implying a potential to raise up to $2.32M if exercised. FRC Projections FY2022E (Old) FY2022E (New) FY2023E - Maintaining Lowering our FY2022 revenue Revenue $13,125,000 $12,075,000 $18,750,000 and EBITDA EBITDA $3,313,805 $3,250,200 $6,232,740 projections due to weaker than Net Income $2,386,389 $2,385,417 $4,542,763 expected bulk oil EPS $0.03 $0.03 $0.04 sales in Q1 DCF valuation of $0.70 per share (previously $0.71) Source: FRC ©2021 Fundamental Research Corp. “18+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com Equity Research Page 4 of 7 AYUR is trading at 1.5x revenue (previously 1.6x) vs the comparables average of 3.9x (previously 4.2x) Source: FRC/Capital IQ We are reiterating our BUY rating, and adjusting our fair value estimate from $0.60 to $0.55 per share. We are expecting a stronger Q2, which will likely be the next major catalyst for AYUR. Risks We believe the company is exposed to the following risks (list is non-exhaustive): ➢ Operates in a highly regulated industry subject to government intervention. ➢ Highly competitive market Maintaining our risk rating of 4 ➢ No guarantee that the company’s products will continue to attract clients for tolling/white-label services. ➢ No guarantee that the company will be able to stay competitive in the markets it operates or plans to operate in ©2021 Fundamental Research Corp. “18+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com Equity Research Page 5 of 7 Appendix ©2021 Fundamental Research Corp. “18+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com Equity Research Page 6 of 7 ©2021 Fundamental Research Corp. “18+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com Equity Research Page 7 of 7 Fundamental Research Corp. Equity Rating Scale: Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues and may rely on external funding. These stocks are considered highly speculative. Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. A related party of FRC owns shares of the subject company, but does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. The Analyst does not own shares of the subject company. Fees were paid by AYUR to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, AYUR has agreed to a minimum coverage term including an initial report and three updates. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (69%), HOLD (5%), SELL / SUSPEND (24%). To subscribe for real-time access to research, visit https://www.researchfrc.com/website/subscribe/ for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward-looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. 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