Time to look at Aurora Cannabis quarterly earnings release for September 30, 2021.

Earnings Release

What we said last Q:

Last Q I went off in the preamble… So instead of providing the full narrative I will link to last Q and just address Pluses and Minuses of the prior Q.

Pluses:

• Adult use sales up 8% QoQ.
• Gross Margin is positive (I know, I know… low bar)
• They paid out their bank loans.

Minuses:

• Overall sales decrease 0.6% QoQ.
• Medical sales decreased 4%, led by international sales dropping 16%.
• Adult derivative products sales are the lowest since 2.0 launched.
• Adult Use Gross Margin (you know, where their growth needs to come from) was 4%
• Gross Margin $18 million and Finance costs $16 million
• SGA increased $5 million in the Q
• Inventory increased $16 million and is twice quarterly sales and they have harvested more than they sold AND they are sleeving third party (which is included in the sales figures)

This Q:

They have really truncated their presser.  No Balance Sheet. A summary of the Income Statement versus the whole statement.  Some ludicrous Adjusted Gross Margin figures that back out impairments and depreciation.

This Q:

They have really truncated their presser.  No Balance Sheet. A summary of the Income Statement versus the whole statement.  Some ludicrous Adjusted Gross Margin figures that back out impairments and depreciation.

Pluses:

• Revenue increase QoQ +10% or +$5.3 million to $60 million, entirety of increase is international sales +$7.1 million.
• Gross Margin is 45% of sales +14% QoQ.
• Improvement in Adult GM to 19% or 31% net of impairment of $2.4 million.
• Improvement in Medical GM to 57% or 59% net of impairment of $1.2 million.
• SGA decreases $1.1 million to $46 million

Minuses:

• Adult sales stagnant -2% QoQ and Cdn Medical sales slide $1.3 million or -5%.
• Adult derivative products sales are the lowest since 2.0 launched at $5.8 million.
• Gross Margin $26 million versus Finance costs $15 million or 57% of GM.
• SGA is 176% of Gross Margin
• Inventory increased $20 million and they have harvested more than they sold AND they are sleeving third party (which is included in the sales figures).

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.

Sales increased 10% +$5.3 million to $60 million wholly on a $7.1 million increase in International sales from a supply agreement in Israel.

Adult use decreases -2% or by -$0.4 to $19.1 million.    

Medical sales increased +17% or +$6.0 million to $41 million and accounts for 68% of sales mix.

Wholesale was $0.0 million after $0.3 million last Q.

Table 2: Segmented Revenue

Canadian Recreational Sales: Trend and Peer:

Adult Use decreased by $0.4 million 2% to $19.1 million, the second lowest Adult Use sales since legalization commenced.  Lowest was $18 million in March 2021.  Deltas are as follows:

• consumer dried cannabis revenue was stable at $14 million. As Cdn rec sales increased this means ACB market share fell. 
• a $0.4 million decrease in consumer cannabis derivatives net revenue to $5.8 million, the lowest full Q of 2.0 sales since 2.0 launch. Third QoQ decrease in 2.0 sales.
• Provisions remains constant at $0.7 million

Medical Sales: Trend and Peer

All in Medical increased $6.0 million to $41 million.

Cdn Medical sales were the lowest in the last six quarters at $25.1 million and represent a sixth consecutive decrease QoQ.  They note KG sold remained constant but average selling price reduced 2%.

International medical increased posting a +$7.3 million to $15.9 million +84% QoQ. $7.9 million is attributable to Israel supply agreement. 

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 (not including wholesale) increased 42% to $5.11/gram.

Gross Margin Peer and Trend

Gross Margin increased sharply to $27 million +$9 million QoQ to 44.5% of sales from 33% last Q.

Table 3 Gross Margin by Segment

Medical GM increased to 59% of sales net of impairment versus last quarter 53%, attributable to a 66% margin on the Israel shipment.

Consumer GM increased to 31% of sales net of impairment versus last quarter 14%. In absolute terms, net of impairment, GM on consumer increase by $3.2 million to $5.9 million. This is supposed to be their engine of growth, but sales have stalled. They may be replacing higher margin products for lower margin, but they need sales to pick up.

I suggest investors be cautious with the GM figures, as in the past Aurora has impaired inventory and have a questionable Biomass Boomerang transactions with RTI and the same CFO remains in the seat.

Fair Value Increment on inventory sold in the Q was $13 million a decrease from $20 million last Q. I note that Cost of cannabis inventory as a function of booked value (cost plus IFRS markup) has been held steady at 80-81% for the past four quarters.  Looks like they are using this formula for booking gains on biologicals that have transferred to inventory.

Unrealized gain on bios reduced to $11.3 million versus $15.5 million last Q, while projected yield increased by 22% to 22,739 KGs.  This is the highest projected yield since Sept 2020 Q of 36,310 KGs.  They sold only 12,484 KGs this Q and had 4,736 KGS from harvest transferred to inventory.  They are also sleeving third party inventory. So, they might be under disclosing the delta by the purchases versus sold sleeved.

Gross Margin: larger Cdn Peer Base

Aurora is now the top GM% generator in the above peer group.  Note: Tilray, VFF and CGC have non cannabis touching assets that bring down their overall GM%’s.

Operating Expenses:

SGA & SBC as % of Sales: Trend

Trend line is not favorable, although on this Q’s increase in sales it turns favorably. 

Selling expense increased by $2.6 million to $15.5 million with the first increase in six Qs. The problem is that it did not move sales in adult rec or Canadian medical.  What we said last Q: “If they are going to reinvigorate premium brands, I would expect this to start to increase.” And there is the increase.  No results in increased sales, but GM in adult use has improved.

From MDA:  During the three months ended September 30, 2021, S&M expenses increased by $2.6 million as compared to the prior quarter. Included in S&M is $0.6 million in prior year bonus accruals (three months ended June 30, 2020 – $0.2 million). Excluding these impacts, S&M for the three months ended September 30, 2021 and June 30, 2020 would have been $14.8 million and $13.1 million, respectively. The $1.7 million increase from the prior quarter was primarily due to the $3.0 million fiscal year 2021 reclassification from S&M to G&A recognized in Q4 2021 identified as part of our period end reconciliations.

G&A decreased by $3.7 million to $33 million QoQ.

This Q from MDA: During the three months ended September 30, 2021, G&A expenses decreased by $3.7 million as compared to the prior quarter. Included in G&A is $4.8 million in restructuring, severance and prior year bonus accruals (three months ended June 30, 2020 – $4.3 million). Excluding these impacts, G&A for the three months ended September 30, 2021 and June 30, 2020 would have been $25.5 million and $29.7 million, respectively, a decrease of $4.2 million from the prior quarter. The decrease was primarily due to a $3.0 million fiscal year 2021 reclassification from sales and marketing to G&A recognized in Q4 2021 identified as part of our period end reconciliations.

R&D was $3.7 million versus $3.0 million last Q.   

Depreciation on non-production assets was $12.4 million versus $14.1 million the prior Q’s. As they are moth balling facilities the depreciation for the mothballed facility drops from CoGS to Opex depreciation. 

Share Based Compensation increased QoQ from $2.2 million to $2.8 million.    

They also recorded $0.2 million in acquisition costs versus $4.7 million last Q. 

All in Opex came in at $65 million versus $71 million.  That is second highest Opex of the in the past four Qs.

SGA & SBC as % of Sales: Peer

ACB is a third to SNDL & CGC for highest in peer.

Net Operating Income before IFRS voodoo was negative $38 million an improvement from the -$53 million last Q.   Improvement in GM $9 million and a lowering or Opex $6 million is the reason.

+Net Operating Profit: Cdn Peer

With current GM% and Opex $’s ACB requires incremental sales of 142% to reach +NOP.

Rounding out the income statement in Other Income and Expenses was Income of $27 million versus expenses of $86 million last quarter.   

• Finance costs $15 million this Q versus $16 million last Q.   
• Last Q $96 million in impairments to PPE, deposits and goodwill and intangibles this Q $1.3 million
• Income/gains from: Government Grant income (covid subsidy) $14 million vs $4 million last Q
• Gains on financial instruments of $27 million this Q versus gains of $13 million last Q. This is the convertible debentures and warrants.  The decrease in ACB stock price leads to the gains.

Taxes was a $0.2 million recovery.

Net Income loss was $12 million after -$134 million last Q.  This ends a streak of seven Qs with a loss exceeding $100 million.

EBITDA Peer – Large Cap

I have them at negative -$9.9 million in Adj EBITDA versus -$25 million last Q. They have themselves at -$12 million. I have added back $3.1 million in SBC (as per the cash flow statement and notes) they added back only $1.3 million.

At current GM of 45% they would need incremental sales of $22 million to get to breakeven.

CEO Martin is calling for + EBITDA in back half of F2023.  So, Dec 2022-March 2023 timeframe or 6-7 Qs for those who want to wait it out. 

+EBITDA: Cdn Peer Group

Using current GM% and cash Opex$’s, ACB needs sales increase of 37% to get to +EBITDA.

Cashflow from Operations – Trend

Quarterly

• Cash used in operating activities $23 million (net of above figures)
• Cash Used (Source) in investing activities ($0.4 million).
• Cash Used (Source) in financing activities $33 million
• Net increase (decrease) in cash and equivalents -$49 million.   

Balance Sheet Items of Note:

• Cash vs Debt

• Unrestricted Cash decreased $48 million to $373 million plus an increase in restricted cash by $32 million to $51 million. The restricted cash is being used for a self-insurance product (like Hexo). They have a US$ 300 million ATM pinata should it be required. They have enough cash to buy something but not anything sizeable (Supreme went for $400 million), but as to someone taking their shares as well… well, that might be a stretch.

Gas in Tank: Trend

• Bio Assets decreased from $20 million to $18 million
  • Projected yield is up 22% to 22,739 KGs.

• Inventory increased $20 million to $137 million or 2.3x sales as harvest exceeded sales
  • WIP is up $6 million to $68 million
    • Flower is $44 million up from $41 million
    • Oil is $24 million up from $18 million. 
  • FG increased by $15 million to $50 million.  
    • Flower $30 million up $8 million. 
    • Oil is $27 million up $7 million

They have plenty of Finished Goods on hand.  No excuses next Q.

Waterfall Trend

• Harvest increased 2,186 KGs to 17,022 KGs
• Sales increased 1,138 KGS to 12,484 KGs
• 4,736 KGs went into inventory  

Those big deltas in Q4F20 though Q2F21 are what lead to the impairments. They have added about 4,000 KGs per quarter to the inventory pile over the past two Qs. Not in any danger presently of large impairment.

Sold vs Harvest & Sales vs Inventory:

Inventory ticking up again.  They need sales growth, or they are going to run into issues.

Inventory to Sales:

• The inventory to sales ratio with ACB 2.29:1.  4.00:1 is the danger zone.

• PPE dropped $16 million to $590 million. Small impairments and sale of facilities.  They have $77 million in construction in progress after prior Q impairment.

• Their derivative assets dropped $17 million to $42 million. Disposal of Choom was the full amount.

• Current Portion of leases and debt aggregates $43 million for payment in next 12 months.

• Convertible debenture of $302 million looms large over Aurora’s head like an executioner’s axe. February 28, 2024.  This will drop into current liabilities at March 31, 2022 Q reporting.

• Derivative liability decreased $40 million to $51 million with the “sweeteners” warrants attached to their raises. Stock price sliding is the reason.

What I said last Q:

The numbers do not lie.  Aurora continues to take on water and has a systemic issue with Opex well in excess of Gross Margin and other cash expenses.  The only way GM gets fixed is sales, and that truck is stuck in neutral and reverse.

Until Aurora can conjure SIGNIFICANT sales, this is a very speculative investment.

This Q:

Sales increase but Adult Use and Cdn Medical remain stagnant or slight reverse. 

The improved GM is good to see, but they need Adult sales to start moving.  SGA plus Finance costs are $60 million versus a GM of $27 million.  That is very troublesome. This will eat cash balance of $372 million quarterly.

The convertible debenture does not mature until February 2024 but downward pressure on stock price likely will not be alleviated without a restructuring.

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.