Ceapro Inc. (TSXV: CZO) is a Canadian biotechnology company involved in the development of proprietary extraction technology and the application of this technology to the production of extracts and “active ingredients” from oats and other renewable plant resources. Ceapro adds further value to its extracts by supporting their use in cosmeceutical, nutraceutical, and therapeutics products for humans and animals. The Company has a broad range of expertise in natural product chemistry, microbiology, biochemistry, immunology and process engineering. Ceapro Inc has a production facility in Leduc, Alberta, Canada and research laboratories in Edmonton and Charlottetown, Prince Edward Island, Canada.

Revenue Mix

Source: Annual Report

Investment Rationale

• Two Value Driving Lead Products: The company has established base business with multiple growth opportunities and leveraging two value-driving products and enabling technologies, which supports near-term and future growth.

Source: Company Presentation

• Strong Balance Sheet: The group has a strong balance sheet with a net cash positive position. At the end of 3QFY20, the group has a net cash position of CAD 3 million. Net cash positive position reflects negligible balance sheet risk. 

• Current Ratio of 7.22x Implies Strong Liquidity Profile: The company has a gigantically higher liquidity position, with the current ratio of 7.22x as compared to the industry median of 2.11x at the end of 3Q20. This implies sufficient liquidity to cover short-term obligations. The company has cash and cash equivalents in the amount of CAD 6.1 million on September 30, 2020, vs CAD 1.9 million as of December 31, 2019. The company mitigates its exposure to credit risk on its cash balances by maintaining a bank account with Canadian Chartered Banks and investing in low risk, high liquidity investments. 

• Strong Financial Improvement: During 9M20, the company reported solid improvement in financial performance, with revenue nudged by 36% to CAD 12.41 million against CAD 9.16 million reported in the same period of the previous financial year. The growth was primarily supported by a significant increase in sales of avenanthramides in the USA compared to the same period in 2019. Further, the bottom line bolstered by CAD 3.69 million over the past nine months, driven by higher top-line growth. This also shows the company’s ability to transfer a higher portion of revenue into the bottom line. 

• Generated Significantly Higher Cash Flow from Operation: During the last nine months, the company generated cash flow from operation at CAD 4.77 million against CAD 1.32 million in the same period of the previous financial year. The significant improvement in the Cash flow from operations was mainly on account of solid growth in net profit during the last 9-months to CAD 2.39 million against net loss reported by the company in the same period of the previous financial year. 

• Gross Margin Improved Significantly: In the 9MFY20, revenue increased by 36%, but the cost of goods sold only increased by 9%. The increase in the cost of goods sold was significantly lower than the increase in revenue, which has contributed to an overall increase in the gross margin percentage from 42% to 53%. The gross margin was also positively impacted by a higher sales margin product mix and a stronger U.S. dollar in the same period. 

• Achieved the First Milestone in Product Pipeline Development: During the third quarter of FY20, the company achieved the first milestones in the successful development of PGX-processed yeast beta glucan product as a potential inhalable therapeutic for COVID-19 and other fibrotic endpoint diseases of the lung. Further, the company conducted the in-vitro study with human cell lines demonstrating that PGX-YBG obtained from different sources exhibited a significant stimulatory effect on human immune response through activation of beta glucan specific Dectin 1 receptors. 

• Significant Technical Upgrades to PGX Plant: The company made significant technical upgrades to the PGX demo plant to allow the production of yeast beta glucan for a potential human clinical trial with COVID-19. Also, the company acquired pieces of equipment suitable for the assembling of a commercial scale PGX unit. Further, it pursued research collaboration projects with the University of Alberta and McMaster University for the impregnation of various bioactive using PGX-processed biopolymers as potential delivery systems for multiple applications in healthcare.

• Risk Associated with Investment: The company is exposed to a varied range of risks ranging from regulatory risks, uncertainty in product development and related clinical trials and validation studies. Further, the company is exposed to forex risks, and investor are exposed to liquidity risk given the penny-cap market categorization of the company.

Financial Highlights: Q3FY20

Source: Company Filing

• During the third quarter under consideration, the company’s total revenue surged to approximately CAD 0.57 million from CAD 2.9 million in the third quarter of 2019 to CAD 3.5 million. The increase was primarily driven by a 77% increase in the sale of avenanthramides, which was partially offset by a 36% decrease in the sale of beta glucan quarter to quarter.
• Further, during the period under review, revenue increased by 20% but the cost of goods sold decreased by 4%. The decrease in the cost of goods sold despite the increase in revenue contributed to an overall increase in the gross margin from 35% to 48%.
• The gross margin for the quarter was also positively impacted by a higher sales margin product mix compared with the third quarter in the prior year. With gross margin in Q3FY20 stood at 48% vs 35% in the same period of the previous financial year.
• During the quarter ended September 30, 2020, research and development expenses increased by CAD 171,000 or 56%. The increase is primarily due to higher expenditures related to the pilot clinical study for the development of beta glucan as a cholesterol reducer and by higher regulatory and patent expense.
• More importantly, the group’s sales and marketing expense for the quarter ended September 30, 2020, decreased by CAD 74,000 or 85% from the comparative quarter.
• However, curses, conferences, and advertising expense were primarily lower in the current quarter and nine-month period as the company temporarily halted expenditures on some non-essential marketing and advertising activities.
• The expense is also partially lower as the company travelled to a couple of conferences and tradeshows in the prior nine-month period and did not in the current period. Due to COVID-19 travel and safety restrictions, all upcoming planned in-person conferences and trade shows have been deferred until it is determined to be safe to attend.
• Interest expenses decreased by 17% or CAD 9,000 in Q3FY20 from CAD 52,000 in Q3FY19 to CAD 43,000. The decrease in finance costs is partially attributable to lower interest on the long term debt and lower transactions costs, as the principal balance of the long-term debt was fully repaid in July 2020.
• Current assets increased by CAD 3.0 million, primarily due to an increase in cash from operations of CAD 4.3 million and an increase in inventories of CAD 0.5 million, offset by a decrease in trade and other receivables in the amount of CAD 1.7 million and a decrease in prepaid expenses and deposits of CAD 12,000.

Top 5 Shareholders

Top-5 Shareholders are holding 7.33% stake in the company, with Zupancic (John) and Gagnon (Gilles R) are among the major shareholders with outstanding position of 2.32% and 2.05%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Sales Based Valuation Metrics

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Ceapro Inc is an innovation-driven biotechnology company leveraging expertise in the extraction of active ingredients from natural renewable plant resources. Further, the company is leveraging two value-driving products and enabling technologies that support near-term and future growth and development of natural active ingredients & delivery platforms supported by clinical evidence.

Further, the company has reported solid quarterly performance, with total sales increased by approximately CAD 0.57 million from CAD 2.9 million in the third quarter of 2019 to CAD 3.5 million in the third quarter of 2020. The increase was primarily driven by a 77% increase in the sale of avenanthramides. Further, gross margin for the quarter was also positively impacted by a higher sales margin product mix compared with the third quarter in the prior year.

Moreover, the company has all key ingredients for success based on a solid foundation, a healthy balance sheet, and a strong technology and product portfolio with the potential of getting into very large markets and a highly competent team as well.

CZO shares are up approximately 200% in a year over the period, however, posing a negative price return over the past 1-month and 3-month, down 21% and 4.3%, respectively.

Given the strong product pipeline, consistently improving financials and healthy balance sheet, we believe that the recent price consolidation in the CZO stocks after a spectacular rally in the company’s shares had over the past one year should be utilized as an opportunity to accumulate shares.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 0.63 on March 16, 2021. We have considered peers like Novozymes A/S, Esperion Therapeutics Inc, GCP Applied Technologies Inc and others for comparison purpose.  

1-Year Price Chart (as on March 16, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 17, 2021 price as well.

Disclaimer

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