Aurora Rundown Q1 F2019 Sept 30, 2018

Open the financial statements and MDA and follow along.

 

I said this last rundown for ACB….

 

  • “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.”

 

Yup. That played out pretty much as expected.

 

I think it is time to lay this out so those that do not read the entire rundown will get the point.

 

Since I have been admonishing the Financial Press for not educating investors… I thought I would start with this…  There is a BIG, HUGE, SIGNIFICANT difference between being profitable on an Operating basis and being profitable on a Net Income basis. Net Operating Profit is what you earn from conducting the business you have constructed: Cannabis cultivation and sales of the products is the large majority of Acb’s business. Profitable [Net Income] includes items that fall outside the OPERATION of your business [like investments decisions].

 

ACB had an Operating Profit [stripped of IFRS Vooddo] of negative $100 million.  They had Net Income Positive of $104.  The difference is largely gain on investments and investment vehicles. 

 

With that out of the way… let’s run it down shall we??

 

Sales increased by $10.5 million to $29.7 million an increase of 55% QoQ.

 

  • +$6.2 million medical cannabis an increase of 62% QoQ… 
    • Cdn Cannabis up 83%…Leaf is the large reason
    • Cdn Extracts up 59%…Leaf is the large reason
    • Not Canada up 6%
  • +$0.6 million Adult Use
  • -$0.3 million Patient counselling to $1.2 million
  • +$0.3 million Design engineering to $1.5 million
  • +$0.4 million Anandia labs acquisition mid quarter
  • +$0.4 Other to $1.9 million [Seems the bulk of this is Agropro and Borela acquisitions in hemp side]

Grams sold increased by 65% to 2,676 kgs from 1,617 kgs last Q.

Cannabis flower revenue per gram increased to $8.39 from $8.02/gram, while extracts decreased to $12.12/gram from $13.52. Most of these swings are due to Leaf acquisition.  Leaf had rev per gram of $8.19/gram nudging up that figure, while their extracts sold for less than ACB per gram … dragging down that number.

MY all in number is $8.98/gram down from $9.20 last Q.

We won’t get much info from Adult Sales until the next Q with full run for the Q.

Cost of Sales:

30-Sep-17 31-Dec-17 31-Mar-18 30-Jun-18 30-Sep-18
Gross Margin without IFRS 62.8% 58.7% 57.6% 74.6% 67.8%
Gross Margin Cannabis 58% 63% 59% 74% 70%

 

Both all in Gross Margin and Cannabis Gross Margin decreased QoQ. The reduction is attributed to Leaf’s higher packaging costs and Leaf’s slightly lower extract selling price. 

 

But on the bright side… Acb is currently the leader in the clubhouse with the best current Quarterly all in gross margin, with APHA at 64%, TRST at 51%, Tilray and CGC at 43%.  But I note there is $6.3 million in PPE depreciation NOT included in the GM figure.

 

With Sky’s sales license now in hand, it’ll be interesting to see if ACB can maintain Gross Margin in the higher 70% range.

 

Cash cost per gram was $1.90 up $0.03 and Cash Cost to Produce was $1.45/gram down $0.25.  The former is a result of Leaf packaging.  The later a result of finding efficiencies at Cmed.

 

Absolute Gross Margin before IFRS voodoo was $20.1 million versus $14 million last Q.

 

FVI add back Plus Cannabis Production Costs was $22 million versus cannabis sales of $24.5 million, meaning they left some profit for at sale versus at harvest.

 

Operating Expenses:

Trend Analysis

acb trend sga

Peer Analysis

acb sga peer

 

The costs of combining of all the acquisitions starts showing up here. 

 

G&A increased 60% QoQ and represents 121% of sales at $36 million.  Headcount is the likely culprit. Cmed and Leaf accounted for 24% of the increase in G&A. Should drop in upcoming Q but $ wise should keep growing along with international expansion.

Selling and marketing increased 98% and now represents 99% of sales at $29 million.  Guidance was provided on this figure and it’s expected to reduce with post Oct 17 marketing restrictions. 49% of increases is reported to be non-reoccurring. Cmed and Leaf accounted for 20% of the increase in S&M in the Q.

 

R&D increased to 12% of sales an increase from 5% last Q.  Likely a result of bringing in Leaf and Anandia in last Q.

 

Acquisition and evaluation costs surged to $15 million from $8 million as Acb added Leaf, Anandia and the European hemp acquisitions. If there are no further acquisitions, this drops off.

 

Amortization and Depreciation increased to $15 million from $10 million last Q. Adding Leaf is the main contributor. [Note: Depreciation is not included in Gross Margin].

SBC increased by $9 million to $21 million.  Leaf related and headcount.

All in Operating Expenses were 404% of Sales up from 355% of sales last Q. We should see an inflection point next Q… will it trend??

 

Net Operation Profit was negative $112 and if you back out IFRS voodoo it is negative $100 million. Both decreases from last Q of negative $47 million and negative $54 million, respectively.

 

Other Income and Expenses

 

The big impacts were

 

  • TGOD being transferred to Marketable Securities de-recognized from Investments in Associates due to board resignation and other qualitative factors. That resulted in a $144 million positive.
  • $86 million is unrealized gain on derivatives with Australis spinout accounting for $69 million

 

Net Income was $104 million or $116 million without IFRS Voodoo versus $78 million and $71 million, respectively for last Q.

 

Breakeven Sales and EBITDA

Trend Analysis

acb be trend

Peer Analysis

acb be peer

Adjusted EBITDA [I also back out the Acquisition related costs] backslid significantly to negative $49 million versus negative $24 million last Q, as the improvement in absolute gross margin was eroded by increases in SGA expenses.

 

Breakeven sales at current gross margin % and Operating Expense $’s has increased to $177 million [highest amongst peers] in sales required in a Q to show a positive Operating Profit. So, sales gap to B/E sales is $147 million.

 

Breakeven Adj EBITDA at current gross margin % and cash related SGA is $101 million per Q [second highest amongst peers] to show positive Adj EBITDA. So, sales gap to B/E EBITDA is $72 million.

 

Balance Sheet Items of Note:

Assets

  • Cash is up $58 million
  • Accounts Receivable is up $25 million. $13 million of increase was Trade Receivables [Odd given that only $0.6 million in adult rec was sold] and $12 million was GST recoverable. [I have an ask into CFO about this]
  • Marketable Securities increased by $287 million as TGOD was reclassified and investments in JV fell $133 million.
  • Inventory is up $45 million and Bio assets fell $3 million. Finished Goods Inventory across flower, extracts and soft gels increased indicating they are processing product faster than they can sell it.  [Keep an eye on this once Rec is in for the full Q.  This is a good barometer of the ability to fuel sales growth.]
  • They produced 4,996 kgs of product versus 2,212 kgs last Q. 126% increase. Leaf and Vie for full Q.
  • The delta between Produced and sold 2,320 kgs versus 595 kgs last Q. That is a delta they need to keep improving on.
  • Yield from bio assets was projected to be 2,336 kgs a 37% reduction from 3,795 kgs last Q.[I have an ask into CFO about this]
  • Goodwill and intangibles saw a $2.5 billion increase as Leaf purchase price far outstripped Leaf assets acquired.

 

Liabilities

  • $36 million increase in Accounts Payable and Accrued Liabilities
  • $81 million increase in loans as BMO funded
  • $92 million increase in deferred tax liability… I assume this is Leaf related

 

Equity:

  • $2.7 billion in share capital as Leaf acquisition was share facilitated.

 

Next Quarter starts to get interesting.

 

That’s all I got.

 

GoBlue

 

 

This Post Has 4 Comments

  1. Moving forward, would you say that the 2-year forecast is mostly positive? At just under 5000kg produced last Q, are we not looking at that increasing over 700% to match the 150,000kg annual production forecast for early 2019? Or am I missing something? I’m sure that 150,000kg was mentioned in the report, along with a 500,000kg number that caught me off guard. Any thoughts on how this kind of huge production will affect their share price? If their cost per gram is $1.90 and their sales price per gram is roughly $9, surely producing 500 million grams has to put them at the top of the food chain, doesn’t it?

  2. The sale price is going to drop considerably with rec. they said they are at approx. $5.50/gram for rec. Rec will tilt the average.

    And 500,000 kg is a tad misleading as they have Exter at 105,000 kg with no timeline.

    It’s all about execution. Can they get gross margin up? While tamping down on OPEX?

    Earning Per Share will come into play eventually.

    I am hunting for inflection points to show the reversals are occurring then (hopefully) trending.

  3. Right. They are at $5.50/g on rec. Even if they “only” achieve their capacity of 150,000kg in early 2019, that should translate into roughly $130M in income after growing costs quarterly. Hopefully at that high volume, the OPEX problem gets controlled. Looking forward to the coming years.

  4. That 150,000 kgsxat $5.00/gram would nudge them over the current break even in sales of $177 million IIRC

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