Avicanna $AVCNF Turns EBITDA Positive After Ottawa’s Cut

Every small-cap story needs a villain. For Avicanna $AVCN, the villain showed up on April 1 wearing a government lanyard.

That’s the day Veterans Affairs Canada cut its medical cannabis rate from $8.50 a gram to $6.00. A 29% haircut, signed in Ottawa. It landed right on MyMedi.ca, the company’s medical cannabis care platform, which runs specialty services for veterans. For a company doing about $6 million a quarter, that’s no pebble in a pond. That’s a cannonball.

So we walked into this morning with one question. Did Ottawa break this business or just bruise it?

The answer hit the wire at 7:30 a.m. ET. Avicanna reported third-quarter results & adjusted EBITDA came in positive at $0.22 million. Founder & CEO Aras Azadian says they hit it as projected. They called the shot. Then they made it. All figures here are in Canadian dollars.

How we got here

We won’t sugarcoat the top line, because the bears won’t either. Revenue was $5.73 million, down 10% from a year ago. Nine-month revenue is $18.05 million, down 4%. That’s what a 29% rate cut does.

And MyMedi.ca took the hit on purpose. The platform told veterans it would absorb the cost above the new $6.00 rate on its products. It didn’t hand them the bill. Think about that for a second. Ottawa pulls $2.50 a gram off the table, you eat it to keep the patient, and two quarters later you print positive adjusted EBITDA anyway.

How? They took a chainsaw to the cost base. Operating expenses fell 30% year over year to $3.19 million. Gross margin went the other way, up to 51% from 49%. Put those together & the operating loss shrank 80% to $0.27 million.

A year ago adjusted EBITDA was a $0.79 million loss. Last quarter it was a $0.36 million loss. Now it’s green. That’s a $1.01 million swing in twelve months on a smaller revenue base. Anybody can look good when the tide’s coming in. These guys did it with the tide going out.

Revenue quietly turned too. It’s up 2% from Q2. Small number, sure. But it’s the first sequential gain since the cut, and to us that reads like a floor.

Circle the 31%

Avicanna’s own products made up 31% of MyMedi.ca sales at quarter-end. A year ago it was 19%.

Why do we care so much? MyMedi.ca carries a wide range of products, and most of them aren’t Avicanna’s. Every time a patient picks an Avicanna product, more of that sale’s margin stays in the building. That’s our read on how gross margin climbs while a government cuts your price.

The trend has legs. Proprietary sales on the platform grew another 16% from Q2. Proprietary units in Canada hit 176,694 through nine months, up 16% on the year. The company says patient retention on MyMedi.ca is at a record.

Then there’s QUIX, the rapid-onset line built on the company’s own nano-emulsion technology. Ten SKUs out of the gate, capsules & soft chews, with 37 commercial listings by quarter-end. The Canadian portfolio now sits at 68 SKUs & 178 active listings. So the product engine kept running while the costs came out. That’s usually the first thing that gets cut.

MyMedi.ca is also pushing into hospitals, specialty clinics & healthcare networks through its new Integrated Healthcare Program. That’s a bigger front door than the one it had.

A balance sheet that got less scary

Working capital flipped to a $0.11 million surplus at Sept. 30. It was a $1.28 million deficit at year-end. Then on Oct. 29 the company closed a $2.0 million debenture financing. Non-convertible. We like that word. This one doesn’t turn into stock & lean on the bid.

The deal came with 4 million warrants struck at $0.20, good for three years. The stock has been trading around a dime. So whoever wrote that check took an equity kicker at double the tape. They only get paid on that piece if the stock doubles first.

What the bears will say

Plenty, and they’re not wrong. That debenture costs 13% & matures in a year, so there’s a clock. Adjusted EBITDA is a non-IFRS number & $0.22 million isn’t a big cushion. Revenue is still below last year. One green quarter doesn’t make a trend. And this is a thinly traded dime stock on the TSX, with a U.S. listing on the OTCQB as $AVCNF.

Why retail could be bullish anyway

Look at what the market is paying. At recent prices the whole company is valued around $14 million. Trailing revenue is close to $25 million by our math, at a 51% gross margin. That’s under 0.6 times sales for a business that just turned adjusted EBITDA positive after taking a 29% rate cut on the chin.

The market priced $AVCN like Ottawa killed it. This print says Ottawa missed.

What we’re watching

Q4 revenue has to grow again. A second sequential gain confirms the floor. We want the proprietary mix pushing past 31%, since that’s what drags margin higher. And adjusted EBITDA needs to stay positive next quarter, because two in a row is when the market starts to believe.

New to the story? Start with our piece on who Avicanna is, then read our cap table breakdown.

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