Auxly Cannabis Group Inc. (TSX: XLY) (OTCQX: CBWTF) dipped by nearly 2% in early Monday trading after it posted troubling earnings, exacerbated by a cash crunch and worsening economic conditions. The Canadian company released its financial results for the third quarter ending Sept. 30.
Total net revenues, after C$9.3 million worth of excise taxes, was C$19.8 million, a 19% dip from the same period last year. Net losses were C$60.1 million, versus $13.5 million in the same quarter last year, representing an earnings net loss of seven cents per share.
CEO Hugo Alves said that implementing pricing reductions as necessary adjustments, “along with disruptions at some of our wholesale customers and hurricane Fiona’s temporary impact on our Auxly Charlottetown facility led to lower than expected revenue for the quarter.”
Hurricane Fiona closed the Charlottetown facility for a week. The company said that revenues for the third quarter also were negatively impacted by reduced orders from “two of our largest customers” due to the data breach in Ontario and the labor strike in British Columbia over the quarter.
“We have been working hard on an updated and expanded dried flower portfolio utilizing Auxly Leamington’s competitive advantage of high-quality, large-scale, and low-cost cultivation,” Alves said in a statement. SG&A improved 11% over the quarter, as the company continued to focus its efforts on reducing costs.
The CEO also noted, “We will continue to focus on cost control and margin enhancement through continued process improvements and investments in automation to further support our key objective of adjusted EBITDA profitability in 2022.”
The company’s adjusted EBITDA was a loss of C$5.8 million, an improvement of C$300,000 versus the same period last year.
“In addition, revenues were impacted by lower vape orders following price reduction notifications delivered during the quarter and fewer dried flower reorders while lower potency dried flower sold during the end of the second quarter was being depleted,” the company said.
Year-to-date revenues are higher than the same period last year, “due to further product expansion and distribution, partially offset by price compression and changes in share of market.”
Auxly saw a gross profit of C$2.2 million, resulting in a 11% margin, versus C$4.7 million (19%) in the prior year’s third quarter.
Auxly had total cash and cash equivalents of C$16 million at the end of the quarter, with working capital of C$12.8 million.
The company said that it currently does not have enough cash to fund its operations for the next twelve months if the company’s sales materially decline, or if the Auxly Leamington credit facility matures on Sept. 23, 2023, without extension or refinancing.
“Whether, and when, the company can attain profitability and positive cash flows from operations is subject to material uncertainty that may cast significant doubt upon the company’s ability to continue as a going concern,” it said in regulatory filings.
The company said that it would look for funds through debt and equity financings, as well as selling off its noncore assets. Auxly also added that it would try to improve its sales and cash flows by prioritizing certain products and projects with a greater expected return and lowering its operating costs by streamlining its operations and support functions.
Auxly said that its key priority in 2022 is to achieve adjusted EBITDA profitability by continuing to grow top-line revenue while bettering margins through leveraging the rising flower output from its Auxly Leamington facility.
In addition to price reductions the company opted for during the quarter, Auxly noted that it would look to grow the market share of its vape SKUs by increasing potencies and intensifying flavors across all brands. It said that it would also launch six new vape flavors over the next two quarters and expand its infused pre-roll portfolio.
“The Canadian cannabis industry continues to evolve at an extraordinary pace,” Auxly said. “The challenges posed by increasing competition and fragmentation, oversupply of cannabis, high taxation, a robust illicit market, and severe price compression have been further exacerbated by inflation, global supply chain disruptions and constrained capital markets.”