Time to look at Aurora Cannabis quarterly earnings release for March 31, 2021.

Earnings Release

What we said last Q:

We know why no bank asked the EBITDA covenant question last time… It was obvious they would not make the covenant.  They did not.  But they did amend their bank deal and agree to pledge to their bank lenders restricted cash and a minimum cash covenant (that fully cash secures the banks) to backstop their bank debt.

Pluses:

• Medical revenue increased +16% on the backs of new International shipments to Israel.
• Adult Oil, which includes 2.0, increased $1.8 million +18%
• SGA continued a downward trajectory
• They have lots of cash at Q end $384 million and raised after Q an additional $175 million

Minuses:

• Overall sales stalled. Cannabis sales in last three Q’s has been in $67-68 million range.
• Rec revenue went in reverse -17% -$5.8 million
• Gross Margin continues to take a hit and will for the foreseeable future with unabsorbed overhead due to Sky being throttled to 25% capacity.
• Adj EBITDA backslid (NOTE: I removed the UFC Contract cancellation from last Q) to -$20 million from -$10 million.

This Q:

This is a sequel to a slasher flick that very much resembles the previous sequel, but with a new cast.

Aurora is stuck in no mans land: No one would want their shares in an acquisition, they do not have enough unrestricted cash (once debt is considered) to buy something of any meaningful value, and they have so much excess capacity at Sky that they actually need to buy sales to absorb some of it.

I expect them to keep raising through ATMs for the balance of the calendar year.

Pluses:

Minuses:

Now let’s get to the Q at hand.  Open the Fins and MDA and follow along.

Overview: Income Statement Drivers and Breakeven Sales: Trend

Table 1 Sales, Delta and Mix

Above is a summary and below are the various components after Excise Tax.

The previous Q they were able to holds sales flat QoQ.  This Q… not so much.  Sales decreased for the Q to $55 million: -$13 million and -19% QoQ.

Adult use dropped 37% or $11 to $18 million.    

Medical sales decreased 6% or $2.5 million to $36.4 million.  

Wholesale was $0.8 million after $0.1 million last Q.

Table 2: Segmented Revenue

Canadian Recreational Sales: Trend and Peer:

Adult Use decreased by $11 million -37% to $18 million, the lowest Adult Use sales since legalization commenced.   Delta’s are as follows

• a $15 million decrease in consumer dried cannabis revenue to $14 million driven primarily by a decrease in sales as the Company lost market share,
• a $0.7 million increase in provisions to -$3.2 million;
• a $5.0 million decrease in consumer cannabis derivatives net revenue to $6.5 million, the lowest full Q of 2.0 sales since 2.0 launch.

Medical Sales: Trend and Peer

All in Medical decreased $2.6 million to $36 million. Cdn Medical sales were flat QoQoQ at $27 million. International medical decreased posting a $2.5 million to $9 million.

Medical platform is the strength of this company. Assuming ACB survives in one piece, this will be a strong platform, albeit not likely a huge growth platform in Canada, to support other areas of the business.

Average net selling price per gram decreased 10% to $3.59/gram largely a result fewer international sales.

Gross Margin Peer and Trend

Well, the last two Q’s of positive gross margin with this Q’s impairment of $88 million mean the previous two Q’s GM aggregating $42 million were FAKE!!!!

Table 3 Gross Margin by Segment

Impairments of $88 million resulted in a negative GM or -131% or -$72 million.

Medical GM 2021 to 2020 Q was impacted by “(i) a $2.4 million increase in cost of sales due to under-utilization of Aurora Sky overhead costs as described above; offset by (ii) a 24% increase in medical sales mix mainly attributed to our international sales, which yield higher margins, from 42% in Q3 2020 to 66% in Q3 2021..”

Consumer GM 2021 to 2020 Q was impacted by “(i) $1.8 million increase in cost of sales due to under-utilization of overhead costs at Aurora Sky as described above; (ii) a decrease in our overall average net selling price per gram of consumer cannabis from $4.33 per gram in Q3 2020 to $3.05 per gram in Q3 2021 as a result of pricing compression in the consumer market; offset by (iii) a $0.3 million increase in actual net returns, price adjustments and net revenue provisions.”

ACB had $4.2 million in unabsorbed overhead in the Q from the throttling of Sky.  Expect this to persist until sales volumes materially improve. 

Fair Value Increment on inventory sold in the Q was $30 million an increase from $6 million last Q, as they also impaired FV along with aforementioned costs.  

Unrealized gain on bios increased to $17 million versus $6 million last Q, while projected yield decreased by 5% to 14,484 KGs as the harvest was finally throttled and is inline with sales. 

As we said last Q, Projected yield for next Q is in line with this Q’s sales of 15,253 KGs. Despite these lining up better Unabsorbed Overhead will be an anchor.

Gross Margin: larger Cdn Peer Base

Aurora moves into last place.

Gross Margin: North American Peer

The larger North American Peer base for GM% is dominated by the vertically integrated US MSO’s with them occupying the top 11 spots.  Hexo is highest Cdn player in the peer group.

Operating Expenses:

SGA & SBC as % of Sales: Trend

What we said last Q…. A nice trend line is developing.

This Q: Not so much. Sales decrease with no significant decrease in expenses.

Selling expense decreased by $1.0 million to $13 million as savings are becoming harder to squeeze out. If they are going to reinvigorate premium brands, I would expect this to start to increase. 

G&A increased by $0.7 million to $28.5 million. Last Q there were $2.1 million in restructuring and severance costs in G&A which should help next Q. Hey guess what??? $3.2 million in restructuring costs again this Q.

R&D was $3.4 million versus $2.4 million last Q.  As per MDA: “The increase was primarily due to payroll costs related to testing and cultivation research performed at the Aurora Sky and Nordic facilities.”

Depreciation on non-production assets was $7 million versus $14 million each of prior Q’s. Likely a result of impairing assets of $221 million last Q.

Share Based Compensation decreased QoQ from $6.0 million to $5.2 million.    

All in Opex came in at $57 million versus $64 million last Q a $7 million improvement all from depreciation decreases resulting from asset impairment.

SGA & SBC as % of Sales: Peer

ACB is a second to SNDL for highest in peer.

Net Operating Income before IFRS voodoo was negative $130 million a slide from negative $47 million last Q. the inventory impairment being the biggest factor.

+Net Operating Profit: Cdn Peer

As GM is negative, breakeven calculations cannot be completed.

Rounding out the income statement:

Last Q Other Losses aggregated $243 million versus this Q $22 million.  Other expenses from MDA:

• For the three months ended March 31, 2021, other expense was $21.8 million and consisted of (i) $22.5 million fair value loss on our derivative liabilities related to the January and November Offering Warrants and the US$345 million convertible senior notes due 2024; (ii) $17.0 million finance and other costs; (iii) $7.0 million foreign exchange loss; (iv) $4.5 million impairment on property, plant and equipment; (v) $2.2 million legal settlement and contract termination fees; offset by (vi) $26.0 million unrealized fair value gain on our derivative investments; (vii) $4.7 million government grant income; and (viii) $1.6 million gain on disposal of property, plant and equipment and assets held for sale.

$17 million in finance costs, that is 100% of the previous Q’s FAKE Gross Margin.

Net Income loss was $165 million after $301 million last Q and $110 million in Q1F21.  The lack of inventory impairments and much reduced impairments on PPE and goodwill and intangible are the driving factors.

+Net Operating Profit: North America Peer

I cannot calculate any breakeven as GM is negative.

EBITDA Peer – Large Cap

I have them at negative $21 million in Adj EBITDA versus -$20 million last Q. They have themselves at -$24 million. I cannot be bothered to spend the hour it will take tracking back the difference.

They have $17 million in finance expenses this Q and +$70 million in leases and debt due in the next 12 months. 

+EBITDA: Cdn Larger Peer Group

I cannot calculate any breakeven as GM is negative.

+EBITDA: North American Peer Group

CashFlow Statement:

Cashflow from Operations – Trend

In the Q:

• Cash Used in Operating activities $57 million (the aggregate figure above)
• Cash used in investing activities $21 million
• Cash provided by financing activities $164 million as shareholders were diluted and should brace for more.

Cashflow from Operations – Peer

Balance Sheet Items of Note:

• Cash vs Debt
• Cash increased $85 million to $520 million plus $50 million in restricted cash (restricted cash is a covenant against the BMO term debt).  They raised equity in the Q and are at it again after the Q.
• Accounts receivable are $73 million a decrease of $3 million
  • Looks like they may have finally written off the RTI Biomass Boomerang A/R as bad debt expense increased by $2.0 million to $8.6 million YTD.
• Bio Assets increased from $17 million to $22 million
  • Projected yield is down 5% to 14,484 KGs.
• Inventory decreased $82 million to $101 million or 1.8x sales as both costs and FV were slashed via impairments
  • WIP is down $78 million to $46 million
    • Flower is $24 million down $60 million
    • Oil is $23 million down $8 million. 
  • FG decreased by $7 million to $30 million.   
    • Flower $21 million up $3 million. 
    • Oil is $8 million down $11 million

Gas in Tank: Trend

What I said last Q: This could get bad if they do not sell it.

This Q:

Impairment of $88 million in costs alone.  Inventories decrease $82 million QoQ after escalating the previous two Qs. 

Gas in Tank: Peer

Aurora has the fourth most inventory and FG inventory of the peer set, but CGC and Tilray are US GAAP versus IFRS.

Waterfall Trend

• Harvest decreased 18,125 KGs to 15,560 KGs
• Sales decreased 1,733 KGS to 13,520 KGs
• 2,040 KGs went into inventory  

Those big deltas in Q4F20 though Q3F21 are what lead to the impairments.

Waterfall Peer

Deltas of Harvest to Sales across the board.  Not a good sign in a slowing sales growth environment.

Sold vs Harvest & Sales vs Inventory:

What I said last Q: Inventory is ramping for two straight Q’s despite the sales stall.  This is what leads to impairments.

This Q:  Yup.

Inventory to Sales:

• The inventory to sales ratio with ACB 1.83:1 after the impairment.
• PPE dropped $35 million to $677 million.

• Loans and Borrowings and leases $474 million million of which $72 million are due in 12 months.

• Derivative liability increased $54 million to $114 million with the “sweeteners” attached to the raises.

What I said last Q:

Shareholders and equity raises are bailing out operations.  The throttling of Sky is a harbinger that things will be ugly for quite a while.  The slide in GM in $ and % is likely going to persist.

This dog won’t hunt.  We will see if the cash cushion keeps them in business until a turn around.

This Q:

I expect them to continue to whack the ATM pinata.  Cash looks good … until you look at debt. 

They are over a year from any major improvement.  Sales increases could solve a lot of problems, the problem is they are at their lowest Adult Use flower and 2.0 sales since each respectively launched.

This is for traders not investors for the foreseeable future.

That’s all I got.

GoBlue

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 ACB and will not start one in the next five days.