Auxly released their Q2 F2020 earnings today.

Molly has been covering Auxly for a while in his “Structure & Current State” (from Q1 F2020). 

This will be my first pass on Auxly for a Quarter in Pictures.  I have waited until they had two full quarters of 2.0 in order to get the start of a trend.  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

Sales:

On a recent Inside the Ropes Podcast I mentioned that this upcoming Q would show if Auxly continues to grow their sales or if, like OGI and CGC at the start of adult rec, they simply had more finished goods inventory than the other companies did on the bare 2.0 shelves in the first Q of 2.0.

They are not off to a good start…  Sales retreated 14% overall to $8.6 million from $9.9 million QoQ.  Revenue from cannabis took a 21% decrease to $8.3 million, while revenue from research increased to $1.8 million or +96%.

Given the 2.0 market grew QoQ this represents a decrease in market share as well as a decrease in sales.  More competitors on the shelf and their product was not sticky in $ terms or share terms.  There was a decrease in load in by the provinces in the June 2020 Q versus the surge in Retail sales.  We will see if this persists next Q.

They indicate that vapes are 60% of 2.0 revenue.

Income Statement Drivers – Peer

They are 6^th in terms of sales in the above peer group.

Gross Margin: Trend and Peer

Overall GM remined stable at 30% and was $2.6 million for the Q, down from $3.0 million last Q.  However, the composition of GM changed in that

• cannabis GM decreased to $1.1 million and was 16% of sales versus last Q $2.6 million and 29%
• whereas research GM increased to 84% at $1.5 million versus 39% and $0.4 million last Q

Cannabis GM was impacted by an impairment in each of the last two Q’s of $0.7 million this past Q and $1.3 million the previous Q.  Without the impairment GM would have been 26% or $1.8 million versus 43% or $3.9 million last Q. GM is quite low either way.

IFRS impact is negligible.

Gross Margin- Canadian Tier 2 Trend and Peer Group

On a larger peer basis, Auxly’s 30% GM ranks fourth overall. Given almost half the peer group is negative, the 4^th place is not great.

Operating Expenses:

Selling, General and Administrative Expenses as % of Sales: Trend

NOTE: I moved interest expense to other expenses to maintain peer comparability.

Selling expenses were $1.2 million or 14% of sales versus $1.3 million and 13% last Q.  if you looked at selling expense as a percentage of cannabis sales the % per $ sold increased.

G&A expenses came in at $11.2 million or 131% of sales versus $11.3 million and 127% of sales last Q.  Wages increased $1 million to $7.5 million, while Prof Fees decreased $0.9 million to $0.5 million as did Business development expenses by $0.6 million to $0.2 million.

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.

Depreciation of $2.4 million 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 520% increase in quarterly sales to cover Opex and return a +NOP.

• $3.4 million interest expense an increase from $2.2 last Q.  Increase in convertible debt by $10 million to $103 million was the reason.
• Fair value loss from MDA: Fair value changes on financial instruments included in this section arise on changes in value of promissory notes and level two securities held. For the quarter ended June 30, 2020, the Company reported a $4.5 million fair value loss, as compared to a $1.8 million dollar loss in the previous year. The current period loss is primarily the result of an assessment of prevailing market conditions over our investments held.
• $4.5 million impairment on long term asset (none the previous Q) on LATAM assets
• $2.4 million loss on settlement of assets and liabilities and other expenses… This seems to be over a dispute on a lease. There was a gain in this line of $1.8 million last Q.
• $1.0 million loss on JV investment which would be Sunens.  Last Q it was -$0.8 million
• FX loss on translation rounds out other expenses at -$1.1 million
• Taxes were a recovery of $0.6 million versus $0 last Q.

NOP was -$13.3 million this Q versus -$13.6 million last Q.   

Other Expenses:

Other expenses aggregated negative $16 million versus income of $0.4 million last Q.  Of note:

Net Income was -$29 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 301% increase in quarterly sales to cover Opex and return a +NOP.

Adjusted EBITDA: Trend and Peer

Auxly did improve their EBITDA QoQ by $0.3 million to negative $7.8 million.  But with interest expense of $3.4 million they have quite a way to go to cover that expense.

Opex Burn for the Q was $13 million versus $4.6 million last Q.

Balance Sheet items of Note:

• Going concern note
• Cash was $21 million stable versus last Q.
• Inventory has increased to $32 million an increase of $3.7 million QoQ. $4.5 million of the increase was in WIP and FG for 2.0 derivative products.
• A/P are $17 million versus cash of $20 million, but they have the ability to draw on unused convertible debt which they have drawn $9.3 million of $25 million.

In conclusion:

Despite the availability of more debt to draw, Auxly is looking like they need more cash.  Interest expense to GM of 129% leaves little room for new debt,

Their sales slide is not comforting given the market growth.  The GM, especially for a company focused on high value 2.0 is weak.  But their biggest issue is their SGA.  They need to take a chain saw to it, like yesterday.

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