Aurora released their earnings yesterday after a guidance presser on Sept 8, 2020.

The full Rundown will come out after Aurora posts their June 30, 2020 year end audited exhibits on Sedar.

Sales Table:

Sales decreased 4.5% or $3.4 million to $72 million QoQ.  Adult use dropped 8.5% to $35.3 million.  Value brands now account for 62% of revenue.  2.0 sales were down $1.5 million QoQ, which would put them roughly at $7.0 million.  Medical sales increased by $1.1 million with half of the increase from international which, after a 14% QoQ increase, would put them at $4.6 million. Other sales decreased $1.2million to $5.9 million and segmentation is not defined, but I would imagine they include a month of Relieva.

Most worrisome is the September 2020 sales guidance suggesting a further decline in cannabis sales in that Q, with decreases ranging from $3.5 million to $7.5 million.

Gross Margin:

These GM figures do not include any writedowns, and there were cost writedowns, and any IFRS voodoo.

Adjusted GM for Aurora was 46% or $33 million versus 42% and $32 million the previous Q.  Isn’t this cute… they are adding depreciation back into adj GM.  So, adj GM figure they provide excludes depreciation.  I guess their adj GM is now “cash cost” basis. 

Cannabis GM was 50% up from 43% last Q.  Not sure if there were Provisions as last Q had $3 million which when backed out would have improve that 43% last Q.

Medical GM was a strong 67% versus 60% last Q (I have it at 58% whereas presser has 60%). The small uptick in medical international sales would not account of the uptick. 

Adult rec GM was 35% versus 29% previous Q (I have it at 35% last Q, this could be adjusted for provisions). 

Medical GM would be $22 million and Adult rec would be $12 million, versus $18 million and $13 million the previous Q, respectively.

Increasing reliance on value brands for revenue generation on adult rec side (62% of revenue this Q versus 35% last Q) is the likely culprit.

With the shuttering of several smaller facilities we could see an uptick on GM IF COST cuts can outweigh the margin compression from the sales line.

I do note they ramped yield to 44,406 KGs from 36,207 KGs QoQ an increase of 23%.  This is without trim valued in the harvest KGs (it is still reportedly in $ inventory).  They sold 4,019 KGs more this Q at 16,748 KGs than last Q.  They banked 27,658 KGs in inventory.

They rejigged their Cash Cost to produce a gram of dried cannabis this Q.  This Q results are $0.89/gra after restating last Q to $1.22/gram (it was $0.85/gram last Q).

Operating Expenses:

They indicate that SGA for the Q was $67.7 million including R&D versus $85.8 million last Q. They are running at low $40 million range for SGA for September 2020 Q.

But they are re allocating expenses as per presser:

• Effective April 1, 2020, the Company elected to change its accounting policy for inventory costing of by-products. The process of growing and harvesting dried cannabis produces trim, which is now considered to be a by-product. Inventories of harvested cannabis, which now excludes trim, are transferred from biological assets to inventory at fair value less costs to sell at the point of harvest, which becomes the deemed cost. Historically, the Company pro-rated this deemed cost of inventory based on the total grams harvested. The Company now measures by-products at their net realizable value at point of harvest and deducts this value from the total deemed cost to derive a net cost for the main product. Additionally, the Company has elected to change its accounting policy with respect to the allocation of production management staff salaries, previously charged to general administrative expense, and now charged to inventory and cost of sales. The Company now allocates and capitalizes a portion of these salaries to inventory as opposed to expensing them directly in sales and marketing, and general and administrative expenses. The Company believes that the revised policies and presentation provides more accurate and relevant financial information to users of the consolidated financial statements. See Note 9 for the Company’s revised accounting policy on inventory costing.

SBC for the Q was $6.0 million versus $9.2 million in the previous Q.

Depreciation was $23 million versus $15 million last Q.

Interest expense was $29 million for the Q versus $6.7 million last Q as convertible debentures are service biannually.  Interest for the year was $77.5 million or $19.4 million a Q.  That remains a good chunk of GM.

Impairments are $1.8 billion from inventory, investments, PPE and goodwill and intangibles.

Net loss was $1,860 million versus $136 million last Q.

EBITDA:

They report adj EBITDA of negative $35 million for the Q.  I had last Q adj EBITDA at -$41 million versus their -$51 million last Q.

The improvements stem from reduction in SGA. 

But here is the problem.  They just amended their bank covenants to hit +$4 million EBITDA by December 31, 2020. Their sales in September 2020 are guided down.  With adult use revenue the engine of growth, at a 35% GM, assuming they hit their -$11 million adj EBITDA covenant for September 30, 2020, they will need +$43 million in sales at 35% GM to reach the December/2020 covenant.  At 40% GM they need $38 million.  This Q adult rec sales were $35 million. 

If I had to guess they will either use ATM proceeds to paydown Bank lenders in order to get another amendment to the covenant, or they sell Medical business.  But with medical pulling down 64% of GM$’s they would need to see a bunch of SGA moved out with the medical business for Adult Rec to float all of ACB on its own.

Balance Sheet Items of Note:

Cash is $162 million a decrease of $68 million QoQ.  Between their Sept 8, 2020 guidance and the release of the presser they drew down USD 37 million on their ATM.  They have USD 183 million remaining on ATM. 

I am expecting Aurora to make a payment against Senior Bank Debt in order to get the covenants changed from >$4 million EBITDA at December 31, 2020.

Inventory is now at $122 million a $129 million decrease QoQ, despite adding +27,000 KGs to inventory during the Q. Inventory is now 1.69:1 Q sales down from 3.33:1 last Q.

The inventory writedown was $105 million on a cost basis and $135 million overall.

The Current and Long Term Portion of Loans and Borrowings went down $64 million.  I will need the published financials to track it but it looks like Jamaica (USD 3.4 million), Enwave ($4.1 million) and Alcanna ($28 million) proceeds flowed to pay down debt.  Loans and Borrowings aggregate $204 million.

Conclusion:

I am really shaking my head as to why the bank group looked to put in place a new set of EBITDA covenants that will likely be breached by Dec. 31, 2020 reporting. 

Their new CEO wants to re-establish market share in premium (San Rafael) and Super Premium (Whistler) to right the ship.  Given these are not growth segments or are now facing incoming craft producers, converting retailers that stopped buying your brands to buying your brands in one quarter seems a little farfetched.

Expect continued whacking of the ATM pinata going forward. 

September 30, 2020 will not look this ugly, but the stark reality of declaring +EBITDA flag plant 4.0 is likely on the near term horizon.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in Aurora and will not start one in the next five days.