The cannabis sector has both a sad, and somewhat funny history with me.
I have mentioned many times that I was introduced to investing by my father when I was 14 years old. Despite me today being considered a “high risk microcap investor” I believe my father was an even higher-risk investor than myself.
When my father passed away in Feb 2019 nobody was very surprised to find he owned a significant amount of shares in an extremely volatile and high risk stock Aurora Cannabis - that he had also quietly made serious amounts of money on.
After some time passed my mother decided she didn’t want the stress or risk of owning individual stocks, and by around April 2019 she sold 100% of those shares of Aurora Cannabis.
My mother missed the “top” by a couple dollars.
The cannabis craze ended, and in the next 12 months share price of Aurora Cannabis crashed 92% and today they are down 99.5% from where my mother sold.
Since then we joke around that despite my father making those gains, he probably would have held through the crash and eventually maybe even lost money - and that my mother might unknowingly be the best investor in the family.
Selling at the right time is an important skill of microcap investors 🤣
Since 2019 I have been hesitant to invest in cannabis stocks, and with reasons that have nothing to do with my father. The industry as a whole has been a shareholder bloodbath of cash burning dilution machines and bankruptcies. Until now!
The cannabis sector seems to have hit “rock bottom” and after years of AA meetings, rehab centres, and atoning for their sins - a few cannabis stocks are recovering stronger and healthier than anyone expected.
There are still many headwinds for cannabis companies. I’m not going to list them all here - you either know them already or a quick ChatGPT search can list you off 15 industry challenges in 1 second without using much GPU.
However for a microcap investor like myself, challenges can present opportunity. If cannabis stocks are recovering off rock bottom and the headwinds facing the industry start to slow down - then I don’t want to miss that opportunity.
A rising tide floats all boats.
I still prefer to own the best boats!
Instead of “stock picking” a couple cannabis stocks with large/ risky positions in my portfolio - I have decided to indulge in some risk-reduction through diversification. I am building a small index of cannabis stocks within my microcap portfolio.
If the cannabis sector is going to spend the next 10 years getting some good news I would like to catch that rising tide. I want the best 6-7 stocks to hold a 10-12% cost-basis position in my portfolio. I’m hoping to only rebalance annually.
I currently own:
TSXV: HASH
CSE: GLOW
(Surprise) US Cannabis Stock
And recently I added a really strong cash producing Canadian cannabis grower …
Auxly Cannabis Group Inc. (TSX: XLY):
Thesis in one line: Auxly is no longer a “maybe someday” story. It’s profitable, growing, and has started cleaning up their once ugly balance sheet. At today’s price, you’re paying ~6x EBITDA for a top-3 Canadian LP with real brands and improving unit economics. With the cannabis sector spending years setting money on fire - I am very attracted to Auxly’s strong positive cash flow.
Why Auxly, why now
Auxly just printed a record quarter (Q2-2025):
Net revenue up 33% to $38.8M,
Gross margin on finished goods at 52% (up from 42%),
Adjusted EBITDA of $11.6M (30% margin),
Net income of $8.3M.
Still has some debt that can’t be ignored (roughly $48.9M listed debt) but they settled the lingering Imperial Brands debenture, extended and simplified their BMO credit facility, and signaled the removal of “going concern” language (pretty huge freaking deal for a company that could have gone bankrupt a few years ago).
$17M cash however more impressively $3.6M cash flow from operations.
$14.4M annualized operating cash flow for a cannabis stock ?
CEO of Auxly August 14th - We expect to allocate $1.5 million to $2.5 million of cash flow from operations towards capital projects at Auxly Leamington and Auxly Charlottetown in 2025, part of which has already been invested. Excess cash flow after these expenditures will be allocated towards strengthening our balance sheet and/or pursuing accretive strategic initiatives.
Operations are working and the balance sheet stopped being the main antagonist character in the story.
Operationally, Auxly exited Q2 as #3 LP in Canada with 6.2% market share. Their flagship brand Back Forty finished the quarter as the #1 cannabis brand in the country, with leadership in AIO vapes (12 of the top 15 SKUs) and the #1 non-infused pre-roll brand in Ontario. That is good shelf space and velocity.
CEO of Auxly August 14th (Outlook) - Auxly remains focused on delivering sustainable, profitable growth by building on its leadership in the Canadian cannabis market. The Company continues to advance its strategy through focused innovation, operational excellence, and prudent financial management. With a strengthened balance sheet, the Company is well-positioned to drive long-term shareholder value.
What changed (and why it matters)
Margins & mix: Manufacturing efficiency (Leamington cultivation + Charlottetown processing) plus pricing/distribution gains drove finished-goods gross margin to 52% (vs 41% last year). SG&A is basically fixed, so incremental revenue is showing up by flowing into EBITDA.
Debt clean-up: In July, Auxly amended and restated its BMO-led facility (now a $36.2M term loan, $10M revolver, $4.5M equipment leases; two-year term, extendable) and settled all remaining amounts owing to Imperial Brands. Imperial converted principal/interest into shares and pre-funded warrants (nominal exercise price, exercisable only up to a 19.9% ownership cap until end-2028), and forgave ~$11.8M of accrued interest. Auxly says these moves eliminate ~$21M of debt and reduce annual debt service by ~$700k. The “going concern” was lifted on this news.
The CEO has a few interviews on social media, this is the most recent interview I could find from August 25th, 2025 and a good listen.
Valuation
Assumptions: share price $0.15, basic shares 1.342B, cash $17.0M, debt $49.0M.
These figures square with third-party dashboards showing approximately 1.67x EV/Sales or around ~5.9x EV/EBITDA at current prices.
You’re not stealing it, but you’re not overpaying for a profitable #3 LP either.
Where the upside could come from
Operating leverage: If they hold 50%+ finished-goods gross margins and keep SG&A tight, incremental revenue should flow to EBITDA.
Debt service relief: Lower interest + extended maturities = more cash to their already positive cash flow.
Brand leadership: Back Forty, strong pre-rolls, and AIO vape dominance aren’t accidents. If those SKUs keep ranking, share gains can continue even in a choppy category.
What can still go wrong (Risks)
Dilution supply overhang: Fully diluted, you’re looking at ~1.68B potential shares (basic + warrants + options + RSUs). Imperial’s pre-funded warrants are capped at 19.9% but still represent a future supply valve. This is the cost of the balance sheet cleanup but also if management wants larger investors and institutional buying they need to focus on the improvement of share structure and dilution in my opinion.
Excise taxes suck big time: Q2 excise was ~34% of gross. This is a huge catalyst if Canada reduces these taxes, however with a struggling Canadian economy reporting $69B in debt spending last year I am skeptical they want to reduce their tax collection revenue from cannabis anytime soon. Despite showing positive cash flow, cash is still tight and debt is still large.
Price compression & category knife fight: There is a growing number of profitable or close to profitable cannabis producers in Canada. Competition may become more fierce.
What I’m watching next
Two more quarters of positive FCF, not just EBITDA.
Maintaining 50%+ finished-goods margins while defending share.
Net debt drifting down even with modest capex ($1.5–$2.5M guided for 2025 across Leamington/Charlottetown).
Share based compensation discipline—RSU overhang is real; keep it in check.
How Auxly fits in my small cannabis index
Given the cleaned-up balance sheet, sustained profitability, cash production, and brand footprint, I’m comfortable adding Auxly (TSX:XLY) at a starter weight of ~12% of the index. If we get continued FCF and stable margins into year-end, I’ll consider scaling toward 15-20%.
Seriously, this is NOT financial advice.
I mean it. None of this is financial advice—I say it all the time, and I genuinely mean it. I don’t know you. I don’t know your experience level, risk tolerance, debt situation, or anything else about your financial position. So please, don’t buy, sell, or hold a stock just because of my opinion in this article.
I’ve been wrong plenty of times, and I strongly encourage everyone to invest within their own capabilities and consult a financial advisor if needed.
I started a position at 12% of my cannabis index or around ~1.5% of my microcap portfolio. I own no other assets of Auxly Cannabis and do not receive compensation (of any kind) from any company that I provide coverage for.
Thank you! 🙏
