First off.. BIG thanks t Glen their CFO for having the courtesy to provide QoQ narrative on OPEX versus YoY comparisons. You have heard me grumble on how useless YoY comparisons are in a fast growing industry like this, so to provide colour is appreciated. Also… they let TheCannalysts ask a couple of Q’s. How about that!
So let’s dig in…
As a generalization…. If you take two firms with negative Adj EBITDA and you combine them the first Q will never look pretty [See Canopy-Mettrum]. You might get sales boost and other improvements, but to squeeze out synergies takes more than the first Q. You throw in a huge ramp of Selling expenses and G&A to Day 1 of rec… and these results shouldn’t be too shocking [Illumination series was a cost with future benefit derived later]. I’d expect a similar theme next Q as they absorb MedReleaf.
Sales increased 19% or just over $3 million to $19 million, but as ACB is very vertically integrated you are going to have some ups and downs in the mix:
· Cannabis sales were up 38% as Cmed and their oil business powered the growth of $4 million.
Patients did drop by 2,000. Is this a cause for concern?? Could have been a function of overlap and you don’t get to double count them. No colour was provided on the decrease.
Small bump in exports by $310 k… they indicate they are reigning export activities as they build for Rec.
· Construction was down $1.7 million to $1.2 million. MDA says it was a timing issue which happens in lumpy construction contracts.
· The “Other business” was up 0.9%… this includes counselling and other periphery offerings in the vertical sales chain
BY KG sales increased 264 KGS or 20%… With $ sales up 38% you can deduce they sold at higher dollar levels, which they did. Cannabis flower was up to $9.20/gram up 15% QoQ. Oil was up to $13.52/gram equiv or 5% by $, but its volume in the sales mix was up considerably. Overall sales mix across all revenue streams had flower consistent at 39%, but oil jumped 116% to $4.7 million or 25% of mix vs 14% last Q. Europe was up 13% but only 26 kgs.
CMED for a full Q added 423 kgs of flower [33% of total flower increase] and 221 kgs of oil [64% of oil increase.]
That gives Cmed 644 KGS of the sales versus the 264 KG QoQ increase… not sure the last Q’s KG CMED, so don’t just subtract the CMED 644-264 and figure ACB KGs decreased by 400. This could have been a function of low WIP [nil] flower to start the Q.
Gross Margin:
ACB had a very nice bump in QoQ all in GM before IFRS voodoo to 75% from 58% last Q. With a stated Cannabis GM at 74% up from 59% last Q. A large part of the improvement is the oil increase in sales mix. But it also appears that the sleeving of 3rd party cannabis is over. On CC Cam mentioned it was never a huge part of the mix [4-7% IIRC]… but it was a burden to GM.
ACB GM ranks only behind Aphria at 79% for last Q. [Also, Leaf last Q was 71% GM… so while that would be a drag to Q4 Leaf was second to Aphria last Q.]. Again, high GM allows you to hit breakeven faster than low gross margin.
Cannabis costs plus FVI equalled $11.7 million, less than cannabis sales of $15 million. So there is some profit left in the vault from this Q’s sales. It will be interesting to see how this number reacts to LEAF roll in next Q.
This is what I was talking about in my opening… G&A ballooned from $10 million to $23 million QoQ. CMED legal and accounting fees, Wages, Head Count, … CMED contributed $3.2 million of the $13 million increase. G&A was 117% of sales. Only Cronos from our peer group, at 124% last Q, was higher as a percentage of sales.
Sales and Marketing saw the Illumination concert series hit with an increase of $9 million QoQ. CMED also added $1.7 million to that increase. S&M expense is now at 77% of sales. No one was higher in their last Q.
Combined SGA is 195% of sales.
Share Based Compensation was down QoQ to $12 million but I like to use a TTM which is 68% of Sales, which only Canopy surpasses at 86%.
Depreciation and Amortization increased substantially to $10 million. More of Sky coming on line and Cmed are the contributors to that.
Acquisition and evaluation costs were $8 million vs $5.6 million the previous Q as Anandia and Leaf would weigh to some extent as well as CMED. Expect this to show up next Q with Anandia, Leaf, ICC acquisitions.
Net Inc from Operation not including IFRS voodoo was negative $54 million versus negative $29 million last Q. The $25 million is largely CMED related [much will not disappear except legal fees and the like] and rec ramp up which we are seeing throughout the industry. First few Q’s post Rec will be when we see if these cash based “investments” that are expensed pay off.
Breakeven sales using current GM and Opex has now climbed to $91 million from $68 million. The gap to current Q sales is $72 million, only surpassed by Canopy’s gap of $144 million
Adjusted EBITDA
They do not provide a number, but I always calculate myself in any event. I have it at negative $24 million from negative $7 million the previous Q, a slide of $17 million. I back out Acquisition and evaluation expenses when I adjust as well. So what this tells us is that the $5 million in absolute improvement in Gross Margin was offset by $23 million in increased cash expenses: $12.8 was increase in G&A and $9 in Selling will do that.
Sales gap to breakeven EBITDA is $21 million up from $13 million, this is lower than only Canopy gap of $54 million.
Note that Leaf acquisition will provide Sales but will it do to EBITDA? At march/18 Leaf was negative $5 million in EBITDA.
Other Income (expenses)
The big plus was unrealized gain on derivatives of $145 million for the Q which was the greatest part of the net $131 million gross from Other Income. I’ll leave this for u/mollytime to explain, but it seems to center around TGOD and reclassification to an investment in affiliate.
Net Income before IFRS voodoo would have landed at $64 million vs negative $28 million last Q
Balance Sheet
Cash is down $141 million QoQ. $55 million increase in PPE is part of that, inv and bio assets $10 million, prepaids $5 million. As they have access to BMO loan of $200 million this is not of great concern.
Inventory
Flower inv is up by $2.5 million to $22 million, however FG flower is down $6.1 million to $13.3. WIP [which for some reason didn’t show up last Q on listing] is up $8.8 million. With the acquisition of LEAF and their inventory and production this likely is not a concern.
I do note that KG produced was 2212 kgs versus sold 1617 for appositive delta of 595 kgs… again Leaf likely fixes this for rec [I have asked for the pro forma on KGS for Leaf from their CFO. If I get it ill update].
I have a bunch of work to get at and this has taken half a day… so that’s all I got.
GoBlue
Edit: From ACB CFO
For Aurora and CMED, we reported Q4 totals of 2,212 kgs produced and 1,617 kgs sold.
In the same period, LEAF had 3,369 kgs produced and 1,593 kgs sold.
So proforma in the April-June 2018 quarter, we have 5,581 kgs produced and 3,210 kgs sold.
As we noted on the call, post Q4 we have seen a strong uptick in our production with new facilities coming on line and continued improvement in yields at existing facilities. Keeping Dieter busy……
So the delta is + 2,371 kgs produced to sold
GoBlue
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