SmallCap Discoveries 2025 Recap Top Picks Part 2: Aluula Composites TSX:AUUA

Fabrics changing the game

Disclosure: We are long AUUA including recent purchases around $3.

The SmallCap Discoveries 2025 conference was an excellent event. It is not very often that you get to spend a few days in a room filled with great management teams and investors.

But the important question is, were there companies worth investing in?

There were many interesting companies, but we are focusing on a few that we spent time with and think are at a particularly interesting juncture. The list this year is long enough that we are breaking it up into three groups:

• Cannabis Corner

• The Scalers

• Fallen Darlings

Here is part 2.

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Part 2: The Scaler

We originally planned to write about a few of the companies we call Scalers, those who potentially have very long runways, but decided to focus down on the one we have the highest conviction of: Aluula Composites Inc. TSX:AUUA, which we profiled as part of our SmallCap Discoveries 2025 overview.

We note that ALUULA is also presenting at Planet MicroCap this coming week in Toronto. See our full coverage of that conference here -

Planet MicroCap Toronto 2025 Cheatsheet

ALUULA

The Company develops and manufactures advanced soft composite materials made out of Ultra-High Molecular Weight Polyethylene (UHMWPE). We have been watching this one closely since earlier this year and had a chance to sit down in person with management at the conference. What do you get when you combine a novel fabric technology with a new hard charging yet humble CEO? It might be something quite special.

To be clear, this is quite different than most of our other investments, though if you look at our post history you will quickly come to the conclusion that our portfolio is an eclectic group (things like canned vegetables, gold storage, real estate, valves, and fancy moving movie theatre chairs). Normally we focus on mispriced high free cash flow companies; ALUULA is just about at breakeven. However, we view them at an inflection point driven by their new CEO combined with runway that could be much longer than anything else we own. As part of our portfolio, we view this opportunity as a reasonable bet.

Its proprietary fabrics with names like Aeris™, Gold™, and Durlyte™ are used in high-performance applications. They were first used in windsports, then outdoor gear (think ultra-light backpacks), and now there is a growing list of pilot and commercial tests across aerospace, defense, and industrial markets.

Key points

• The materials are composite 100% Ultra-High Molecular Weight Polyethylene (UHMWPE). This has a significant advantage over other fabrics given no adhesives or stitching required. The initial use was in kite sails, where it is lighter, stronger, and more resistant to UV than the alternatives (see North Orbit example below).

• A new CEO, Sage Berryman, replaced the founding entrepreneurial management team (they are still involved and have significant ownership). She has been doing the right things.

• The strategy is to build branded product (GORE-TEX) and multiple uses like consumer goods and also industrial/defense. Customers are already required to label products with the ALUULA brand. (see new product use strategy).

• They are professionalizing while expanding into commercial channels. They have successfully piloted making standard 1.5m fabric widths used in many commercial settings, vs their initial ~1m width.

• Quarterly sales just reached the highest level ever despite having a marketing budget near zero. Their initial facility is now effectively at capacity with backlog now greater than the latest quarter sales. They are potentially at an inflection point with significant product pilots ongoing as we get into.

Aluula - A brief history

ALUULA was a start up in Victoria, BC. In 2017 the founders pushed to replace Dacron, a DuPont polyester product, with a lighter, stiffer textile, and they developed a glue-free fusion process that bonds UHMWPE fibers and films into a mono-material laminate. The company formally launched in July 2019 with its first product, ALUULA Gold.

For those wondering, alula is the latin word for little wing and refers to the free moving “thumb” modern birds have that helps maintain lift at low speeds. They added a U. The name seems quite fitting for where they started.

Material background

Technical explanation: It is a composite 100% Ultra-High Molecular Weight Polyethylene (UHMWPE) material and takes a woven UHMWPE fabric (warp/weft) that is fusion-bonded (no adhesive) to biaxially-oriented polymer films on one or both faces.

Simple explanation: They take a polyethylene fabric sheet and bond it to a polyethylene film through a combination of heat, pressure, and time without any adhesives. The benefits being:

• This process makes the product very strong and waterproof, with a significant advantage over other fabrics given no adhesives or stitching required.

• It has high tear resistance and very lightweight, with excellent strength/weight.

• It does not require additional chemicals/processing, making it PFAS free.

• Recycle-ready given it is a mono-fabric with an absence of adhesives. We note we are skeptical of the practical ability to recycle smaller consumer products like backpacks given they are not mono-fabric products (zippers, etc) and are small/hard to gather to process, but we view recyclability as a significant advantage for large-scale industrial uses.

• Importantly, they have a number of patents, with most going to the late 2030s. An example of one of their earlier patents. https://patents.google.com/patent/US11590729B2/en They also continue to file, such as this one from January https://worldwide.espacenet.com/publicationDetails/biblio?II=0&ND=3&adjacent=true&FT=D&date=20250130&CC=US&NR=2025034801A1&KC=A1#

Example use: North Orbit Ultra vs Orbit Pro

To give you a tangible example of what this all means, we have put together a comparison of North Action Sports’ ALUULA product versus a cheaper, lower performance option, but still premium. ALUULA does not manufacture products, only the material. Note the ALUULA branding on the Ultra, a requirement of the Company similar to what GORE-Tex does. For context, ALUULA gold (GC-82 specifically) is less than half the weight of a typical cotton t-shirt on a grams per square meter (GSM) basis.

https://northactionsports.com/products/orbit-ultra-kite

https://northactionsports.com/products/orbit-pro-kite-2025

https://aluula.com/gold/

The original ALUULA material. Engineered to be light and stiff.

We designed a high modulus outer film and fused it to our ultra-strong ALUULA Core™ to make ALUULA Gold™ the strongest and lightest fabric on the market. Designed specifically for watersports, this was the fabric that started it all.

At a premium price, it will not takeover the market but is filling a gap at the ultra-premium end of the spectrum. Another example is backpacks for those that put a premium on lightness.

“Meet the Arcteryx Alpha SL 30, the brand’s lightest technical alpine pack to date, tipping the scales at just 428g (or 316g stripped down). Designed for climbers but ideal for minimalists, this featherweight 30L pack is built with ALUULA Graflyte, a next-gen material stronger than steel by weight and completely waterproof.

https://www.blessthisstuff.com/stuff/wear/bags-luggage/arcteryx-alpha-sl-30-backpack/

The Reset

From our perspective, it appears that the entrepreneurial founding team really did create a good product. However, it was a start up and their focus was on wind sports, and this flowed through their decision-making process in target products, sales strategy, and the design of their plant. The key for us is the reset.

Sage Berryman was hired as CEO in February 2024. She then began resetting the management team and is ~90% new under Sage; new chief commercial officer, new science officer, new director of manufacturing. Wind sports remains key, but now other uses are being tested and progress is being made.

Operations – growing up

ALUULA is targeting a 40-45% gross margin and has been able to achieve that even at this small scale. However, the real question is all in cost including all facility overhead, general overhead, capex, and ability to scale.