There are many very large players in the cannabis world in Canada earning large revenues and garnering big headlines. And, there are many smallish players that can easily be overlooked if not hard to find in the first place. Vivo Cannabis (OTCQB:VVCIF) would be one of the latter. Vivo Cannabis has an annual revenue run rate of ~$20M with a market capitalization of ~$32M. They are just on the verge of profitability in an industry that is increasingly growing. While they have had their share of cost issues, Vivo Cannabis has addressed its SG&A costs as well as restructured a large sum of its debt at very favorable rates. With forward guidance that has EBITDA profitability within the next 9 months, the real eye-opener for the company is the book value that places the stock about 4x its current value. Given these parameters, I am heavily bullish on this stock and outline the case here.

Cannabis in Canada

The environment in Canada is quite favorable except for one thing: It is not favorable at all.

(Data Source: StatCan – Author’s Chart)

Cannabis companies have built up a tremendous amount of capability to produce cannabis since legalization in October 2018. But, dispensaries are mostly government-run and controlled. There are not many incentives within bureaucracies to move at any pace whatsoever except that of a bureaucracy.

In the initial months of cannabis’ legalization, there were shortages of cannabis simply because of distribution issues and getting products to dispensaries; if there were dispensaries available at all.

As the chart above shows, retail sales levels are finally progressing upwards. In fact, there are 22 months shown above (The data available ends in July of this year with recent data still not yet posted). I counted five months where the numbers went down MoM; the rest went up.

Even more impressive is the fact that in March of 2020 when the world was shutting down from COVID, cannabis retail sales dropped. Then, the three months that proceeded after the March retail sales have increased some 90%. That bears repeating so I shall: Retail sales of cannabis are up 90% in Canada in just three months’ time during a global pandemic.

Unfortunately, with so many companies that rushed to build grow facilities in Canada, there simply is still not enough volume in sales to balance the potential supply. We are now seeing how companies are performing in this environment versus the initial euphoria of cannabis legalization where some companies over-extended themselves and others took a more pragmatic approach.

It would appear that Vivo Cannabis both extended themselves with debt but also took a pragmatic approach to growth; there seems to have been a balance there. They are now poised to become profitable very soon.

Vivo Cannabis Revenues

Given the backdrop of Canadian cannabis shown above, I wanted to show how Vivo Cannabis is doing in the revenue department first. Here is a look at the quarterly revenue since 2018:

(Data Source: Company info – Author’s Chart)

This is the quarterly revenue for Vivo Cannabis. Keep in mind, the chart above for Canadian Retail Sales of Cannabis is monthly. Still, the two charts line up fairly nicely as both charts show progressively higher revenues. Given the upwards ascent of Canadian retail sales and the coincidental upward moves in Vivo Cannabis’ revenues, they are in line with the general industry.

The latest release for the quarter – Q3 2020, of course, has been affected by COVID and its subsequent shut down of Canada. Nonetheless, the company states two things that are important.

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First, the company predicts EBITDA profitability in H1 2021. The second thing that CEO Barry Fishman stated in the latest earnings conference call was that Vivo had harvested some 10,000 plants from their Kimmets facility.

This is interesting to me and I immediately grabbed my calculator to do some math.

On average, a plant can generate some 1.5 – 2.5 pounds of flower. 10K plants were harvested and so that would mean an average of about 20K pounds of flower. The wholesale value of a pound of cannabis is about $1,250.00. That means the company now has some $25M in potential revenue (From just one of their facilities). Two things should be noted, first that the Kimmets facility focuses on lower-grade cannabis; I’ve adjusted my numbers accordingly, but, this still is reasonable and second, there are other facilities producing higher grades of cannabis.

I do not believe the company has plans on selling 100% of this cannabis in one quarter but will spread that out over at least 2 – 3 quarters. It takes about 4 – 6 months seed-to-weed. So, a company can get 2 – 3 yields per year. Since this is lower quality, it may be that there is less time needed and it may be that there are more yields. I look forward to seeing how this massive yield that they just hauled in will play out in their revenues in the upcoming quarters (Keep in mind the stated goal of EBITDA profitability in H1 2021).

Another key element that was stated during the conference was the focus on value brands and Cannabis 2.0, as it is being dubbed in Canada (The federal government passed additional legislation legalizing edibles/consumables and other forms of cannabis not originally legalized in 2018).

The value branding is where the margins appear to be higher. But, the problem is that every company up in Canada is struggling with margins. Vivo Cannabis is no different.

Here is a look at gross margins for Vivo Cannabis:

(Data Source: Company data – Author’s chart)

As you can see in the chart above, there was an almost complete collapse in margins over the past year. This is due mainly to the price drops in cannabis across the industry in Canada primarily because of so many companies that had so much capacity to produce but were unable to make requisite in-kind sales. I’m finding this same pattern throughout in the cannabis companies that I follow.

There have been some companies that are reporting their margins are improving in the value brands. This has been a continuous focus by these companies. Basically, they are selling small amounts of high-quality cannabis and seeing their margins improve in these sales, whereas, the lower quality flower that is being sold for oils and other less-branded products are printing very low margins.

I expect a mix of high-value branding to increase in sales and overall improve the margins for many companies as Canadian companies are forced to focus on branding to increase earnings. And, equally, the focus of Vivo Cannabis in the premium branding will likely increase their own margins and improve their bottom line.

Vivo Cannabis Earnings Per Share

EBITDA profitability may in fact be just around the corner as the EPS outlook is very close to break-even and then profitability:

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(Data Source: Company data – Author’s chart)

Vivo Cannabis is just $0.01 per share away from break-even. There has been a general trend towards this break-even level. Keep a sharp eye peeled at the overall cannabis retail sales in Canada. The trend is clearly upwards. And, revenues at Vivo Cannabis mirror this overall. With the company’s focus on its branding of premium products, this is very likely to improve the earnings outlook.

But, I am really interested in how the 10,000 plants that were harvested plays out. That is a potential upwards move in revenue should the company be able to sell 100% in at least one year’s time. And, there are other products that Vivo Cannabis has in their offerings – they have about 6 different name brands.

But, this is not the one thing that really grabbed my attention and is pushing me to a very bullish stance with Vivo Cannabis. It is their book value that really grabbed my attention.

Vivo Cannabis Book Value

How much is a company worth? One indicator is the company’s book value. In the case of Vivo Cannabis, that book value is about $0.42 per share:

(Data Source: Company data – Author’s chart)

But, the stock is currently trading at ~$0.09 per share, significantly below value. There are a couple of reasons why Vivo Cannabis is trading at such a discount. First, they are unprofitable in an industry that has been hit hard to the downside due to an overabundance of supply. There was a substantial sell-off of cannabis stocks since 2019; you can see the drop in gross margins for Vivo Cannabis coinciding with the selling of stocks within the industry. Another reason this company’s stock is below book value is their need to raise cash; more on that below. The company announced they are raising $5M in capital and this has pressured the stock.

There are other reasons, of course, but it is my belief that because of lower liquidity in shares traded and other factors mentioned above, the book value will be addressed and the stock price is very likely to push much higher.

Once Vivo Cannabis becomes profitable or has any other kind of upward surprise, I believe the stock will jump upwards in response to this as players start raising an eyebrow to the company’s potential. The stock is only trading at ~$0.09 per share and has about 80k shares traded per day; this is very low liquidity and will have an effect on price should positive news be announced by the company. I am looking for this to happen in the next nine months as the company nears its goal of EBITDA profitability.

Vivo Cannabis Stock Price

The stock has seen some big moves over the past three years. Here is a look at the chart from inception to current:

(Data Source: Trading View)

Lately, Vivo Cannabis’ stock has been under a bit of pressure. The stock has been on a long, slow slide downwards; 2018 initial euphoria notwithstanding.

The company announced that they were going to offer $5M to raise capital. This has pressured the stock. But, they have since withdrawn that proposal in light of some very unusual trading activity that the company has since reported to authorities.

Vivo Cannabis Cash on Hand

Vivo Cannabis is in need of cash, as this chart of their cash on hand shows:

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(Data Source: Company data – Author’s chart)

With the ~$5M in cash-on-hand, the company has a burn rate of about ~$8.5M annually; they will run out of cash within 3 quarters’ time. The company will need to raise this cash sometime in the very near future.

From a strategic point, as mentioned in the conference call, the company has restructured debt of ~$17M at very favorable rates while simultaneously they have addressed SG&A costs decreasing them downward by about 9% from $4.7M to $4.3M.

As I mentioned before, Vivo Cannabis announced that they withdrew an offering of for $5M due to suspicious trade activity. They are going to need to redo this offer at a future point and that is very likely to happen soon; they are nearly out of cash. I expect continued pressure on the stock until the stock offering is done.

Conclusion

There are a couple of standouts that I like about this company. First, they are on the verge of profitability. The numbers that are presented show an upwards progression in revenue that coincide with retail sales numbers in Canada. At the same time, Vivo Cannabis has addressed their debt and SG&A costs positioning themselves for a more strategic standing moving forward. The company looks ready to print

Simultaneously, Vivo Cannabis needs to raise cash. This will pressure the stock. Despite having favorable debt refinancing terms, I don’t like the company raising cash at this time with their stock price so low. This appears counter-productive. But, they are effectively out of cash and have no real choice at this point. This is one of my biggest hesitations that the company is so close to profitability which is likely to push their stock upwards. Yet, they are in need of cash and will issue more shares, pressuring their stock.

But, it is the book value that jumped out at me the most. Vivo Cannabis is a company on the verge of profitability with a book value that is 4x the current stock price. It is my belief that when the news starts to come in that the company is profitable they will start making positive headlines drawing in a few investors trying to capitalize on a stock that is trading at such a discount to book.

Given these factors, I am very bullish on Vivo Cannabis. I expect the company’s next few quarters to report positive earnings. And, since there is not a lot of liquidity in a company such as Vivo Cannabis’ stock, there is likely to be a sharp increase upwards in the stock’s price. In the beginning of the year, the company’s stock was double what it is today trading at ~$0.20 per share. However, I believe that eventually, possibly by the end of next year, the company’s stock will trade above its book value. I am targeting $0.60 per share by the end of next year.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VVCIF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.



Via SeekingAlpha.com

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