Auxly released their Q3 F2020 earnings today.
Molly has been covering Auxly for a while in his “Structure & Current State” (from Q2 F2020). I expect Molly will update the Q3, Auxly has his interest.
This will be my second pass on Auxly for a Quarter in Pictures. Some readers might know Auxly better than myself, as I play catch up.
Open up the financials and MDA and follow along.
Income Statement Drivers – Trend
This is a breath of fresh air… Sales increased 57% QoQ to $13.4 million. Research revenue dropped $0.9 million and cannabis revenue increased 85% or +$5.8 million to $12.6 million. 2.0 products accounted for $3.9 million in growth while 1.0 products tallied a $1.8 million increase.
Alberta, BC and Ontario accounted for 85% of revenue or $3.9 million of the net growth or +97%. Other provinces accounted for $1.8 million of growth or +39%.
Income Statement Drivers – Peer
They are 3rd, up from 6th last Q, in terms of sales in the above peer group.
Gross Margin: Trend and Peer
Overall GM remained stable at 28% a slight decline of -2%. and was $3.7 million for the Q, an increase from $2.6 million last Q.
- cannabis GM increased to $3.4 million, 27% of sales, versus last Q $1.1 million
- whereas research GM decreased to $0.4 from $1.5 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 28% GM ranks third overall. Given almost half the peer group is negative, the 3rd place is not great.
Selling, General and Administrative Expenses as % of Sales: Trend
NOTE: I moved interest expense to other expenses to maintain peer comparability.
Selling expenses were $1.4 million or 10% of sales versus $1.3 million and 14% last Q. Good control.
G&A expenses came in at $8.8 million or 66% of sales versus $11.2 million and 131% of sales last Q. Wages decreased $2.2 million to $5.3 million, while the remainder of G&A fees had negligible changes.
What I said last Q:
Their SGA is much too high given their sales and it is 376% higher incrementally than GM. By comparison Organigram has SGA of $10.3 million on sales of $18 million versus Auxly at $12.4 million on sales less than half of OGI.
A good start at reducing SGA, BUT SGA is $8.8 million versus GM of $3.7 million.
Depreciation of $2.3 million, versus $2.4 million last Q, rounds off Opex. I note that a portion of this depreciation really should be in CoGS as it pertains to the production assets.
Selling, General and Administrative Expenses as % of Sales: Peer
Breakeven Sales Required to post +Net Operating Profit: Canadian peer Group
At current GM% and OPEX$’s Auxly needs an incremental 268% increase in quarterly sales to cover Opex and return a +NOP.
NOP without IFRS was -$10 million this Q versus -$13 million last Q. The improvement in GM of $1.1 million and wages of $2 million are the big drivers.
Other expenses aggregated negative $8 million versus expenses of $16 million last Q (reduction in impairments and FV changes were the big swing drivers). Of note:
Net Income was -$17 million versus -$29 million last Q.
Adjusted EBITDA: Trend and Peer
Auxly did improve their EBITDA QoQ by $1.1 million to negative $6.7 million. But with interest expense of $3.7 million they have quite a way to go to cover that expense.
Opex Burn for the Q was $11 million versus $13 million last Q.
Breakeven Sales Required to post +Adj EBITDA: Canadian peer Group
At current GM% and cash OPEX$’s Auxly needs an incremental 181% increase in quarterly sales to cover Opex and return a +NOP.
Balance Sheet items of Note:
- Going concern note
- Cash was $14 million a decrease of $7.2 million QoQ.
- From Presser: Increases cash position by $20 million with recently announced $12 million bought deal offering and $8 million non-dilutive financing.
- A/R and prepaids increased $6 million to $10 million which could mean sales were skewed to last month and half of the Q. (No breakdown on A/R versus prepaids). We will see if the momentum continues next Q.
- Inventory has increased to $41 million an increase of $8.9 million QoQ. $11 million of the increase was in WIP for cannabis oil. (Note: This is where I would go hunting for a biomass swap… but as excise tax increased relatively in line with sales it is less likely swap occurred)
- Packaging decreased by $5 million to $2.6 million. They might have loaded up last Q as covid concerns for hardware could have been a concern)
- PPE increased $6.5 million to $97 million. Equipment accounted for $4 million (likely Dosecann) and construction in progress $3.8 million to $40 million.
- A/P are +$12 million to $29 million. Could be construction related. This is high relative to cash on hand.
It certainly was nice to see a meaningful increase in sales of $5 million. The sales increased translated into a GM bump of $1.1 million.
SGA were trimmed. But they need to keep a foot on the throat of SGA until they can increase GM.
Cash plus post Q raises give them another 6 months of runway. But they need EBITDA to get to $5 million just to adequately cover interest.
A progress Q. Then need to string two more of these together.
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.