Auxly released their Q4 F2020 earnings today.
This will be my third pass on Auxly for a Quarter in Pictures
Outlook for 2021 from MDA:
“Our overall objectives for 2021, which may be impacted by the COVID-19 pandemic (see further discussion in this MD&A under “COVID-19 Pandemic”), are as follows:
- Continued leadership and strength in the Cannabis 2.0 Products market;
- Focused expansion of Cannabis 1.0 Products;
- Continue to take measures to improve cash flows and finance the business;
- Leverage the Sunens facility to establish a secure supply of cannabis and reduce reliance on open market purchasing; and
- Explore possible cannabis market entry strategies in regulated international markets, on an asset light basis.”
Much like last year’s objectives, 2021 objectives offer little in the way of “meat on the bone” targets and objectives are all “soft”.
Of Note: Sunens is in default of the bank debt with BMO, as they missed Q1 revenue target of $3.45 million. They are working on amending or forbearance. I have heard rumors of a rift developing between Quiring and Auxly for quite some time. Could explain why the supply deal has been amended and interest on Auxly provided debt waived. As both parties are on the hook with BMO, I imagine a solution will surface. They have already had to kick in more equity of $2 million.
Back when they released Q1F20, Molly noticed a hole in their inventory bucket as it looked like they may have returned inventory. They admit to it in the presser:
- 2); a reversal of a gain on non‐monetary inventory transfers with another licensed producer which was recorded in the first quarter of 2020. The inventory was returned during the quarter resulting in the recognition of a liability of approximately $5.8 million in accounts payable and other liabilities and an asset held in inventory. Replacement product has since been shipped to the licensed producer in March 2021 to settle this obligation.
Open up the financials and MDA and follow along.
Income Statement Drivers – Trend
In Q3, Sales increased 57% QoQ to $13.4 million. In Q4 they increased another 40% +$5.5 million to $19 million. Research revenue dropped $0.6 million and cannabis revenue increased 45% or +$5.7 million to $18.3 million. 2.0 products accounted for $4.0 million in growth (same growth as last Q) while 1.0 products tallied the balance of increase.
Vapes were 65% of 2.0 revenue.
Income Statement Drivers – Peer
They are the new leader of the tier 2 group.
Gross Margin: Trend and Peer
Overall GM decreased substantially to 8% a decline from 28% last Q. GM was $1.5 million versus $3.7 million last Q. An impairment of $1.8 million was recorded for the Q which still would not have gotten them to Q3 results. Cannabis 1.0 carry a lesser GM. CoGS increased from 71% to 75% in the Q.
- cannabis GM decreased to $2.3 million, 13% of sales, versus last Q $3.4 million
- whereas research GM decreased to -$0.8 from $0.4 million last Q
GM really needs to ramp as % of sales to leverage the sales increase.
IFRS impact is negligible.
Gross Margin- Canadian Tier 2 Trend and Peer Group
On a larger peer basis, Auxly’s 8% GM ranks seventh overall.
Selling, General and Administrative Expenses as % of Sales: Trend
NOTE: I moved interest expense to other expenses to maintain peer comparability.
Selling expenses were $1.7 million or 9% of sales versus $1.4 million and 10% last Q.
G&A expenses came in at $7.6 million or 40% of sales versus $8.8 million and 66% of sales last Q. Wages decreased $2.0 million to $3.3 million, while the remainder of G&A fees had negligible changes. Wages have decreased $4.2 million over two Q’s.
What I said last Q:
A good start at reducing SGA, BUT SGA is $8.8 million versus GM of $3.7 million
I have been harping on their SGA for quite some time. SGA is $9.4 million versus GM of $1.5 million or $3.3 million without the inventory impairment.
Depreciation of $2.3 million, versus $2.3 million last Q, rounds off Opex. I note that a portion of this depreciation really should be in CoGS as it pertains to the production assets.
Selling, General and Administrative Expenses as % of Sales: Peer
Breakeven Sales Required to post +Net Operating Profit: Canadian peer Group
At current GM% and OPEX$’s Auxly needs an incremental 703% increase in quarterly sales to cover Opex and return a +NOP.
NOP without IFRS was -$11 million this Q versus -$10 million last Q. The decrease in GM offset the improvement in wages.
Other expenses aggregated negative $16 million versus expenses of $8 million last Q. Of note:
- $3.8 million interest expense an increase from $3.7 million last Q. When GM is half of interest expense, that is not good.
- $6.2 million loss on settlement of assets and liabilities and other expenses versus $3.3 million last Q… I cannot track this into notes or MDA
- $4.4 million loss on JV investment which would be Sunens. Last Q it was -$1.2 million
- Impairment on Long Term asset of $1.8 million versus a gain of $0.1 million last Q.
Net Income was -$27 million versus -$18 million last Q.
Adjusted EBITDA: Trend and Peer
Auxly did improve their EBITDA QoQ by $0.8 million to negative $5.9 million. But with interest expense of $3.8 million they have quite a way to go to cover that expense.
Opex Burn for the Q was $6.4 million versus $11 million last Q.
Breakeven Sales Required to post +Adj EBITDA: Canadian peer Group
At current GM% and cash OPEX$’s Auxly needs an incremental 391% increase in quarterly sales to cover Opex and return a +NOP.
Balance Sheet items of Note:
- Going concern note
- Cash was $21 million an increase of $7.6 million QoQ from bought deal. They have an open $30 million At The Market offering as well. They also completed an offering post Q for $20 million. Cash is in good shape.
- Investment in Joint Venture takes a $10.6 million haircut as the losses and amendment to JV are rolled in.
- PPE and has some shuffling within it. +$28 million in leaseholds versus -$24 million in construction in progress. Leases increase $8.2 million QoQ. Expect interest expense to increase next Q.
The meaningful increase in sales is good to see. However, it did not translate into greater GM even when inventory impairment is reversed. Given the interest expense they are carrying, they need to put the spurs to GM.
It is good to see SGA continue to decrease. Hopefully they have more room to cut.
They have enough cash for multiple quarters. But they need to get Sunens onside with bank group and delivering lower cost biomass to improve operations. If Sunens does not improve GM by Q3, I would be concerned.
That’s all I got.
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 Auxly and will not start one in the next five days.