Auxly Sees Revenues Drop 8% in Second Quarter

If things don't improve, the company will run out of cash.

Auxly Cannabis Group Inc. (TSX: XLY) (OTCQB: CBWTF) released its financial results for the three months ending June 30, 2023, in Canadian dollars. Auxly reported total net revenues dropped by 8% sequentially to $21.9 million and declined 20% versus last year’s second-quarter revenue of $27.3 million.

The company said the results were negatively impacted by price compression in the adult-use recreational market as the customer and product mix evolved to focus more on value offerings. In addition to that Auxly said that there was increased competition in the value price segment, particularly in the 28-gram dried flower format.

Auxly also reported a net loss of $12.8 million, which was an improvement of 10% over last year’s net loss of $14.2 million. The company attributed the improvement to changes in total expenses and reduced gross profits. SG&A expenses were $8.8 million during the second quarter of 2023, $4.1 million lower than the second quarter of 2022 primarily due to lower wages and benefits and selling expenses.

CEO Hugo Alves said, “The results for the second quarter of 2023 reflect our focus on simplifying and streamlining the business to improve operating efficiency and reduce costs. We have successfully consolidated our dried flower and pre-roll cannabis product manufacturing, processing, and distribution activities, which was a key strategic goal for this year. While the transition had a temporary impact on the sales and financial performance during the quarter, we have already observed a positive impact of increased product throughput and improved product quality as a result of this consolidation.”

Auxly also told investors that it had inventory impairments during the quarter of $1.5 million. These were associated with certain slower-moving SKUs and certain products not meeting quality specifications. It resulted in a reduction of $0.3 million from the same time last year.

Alves added, “This is a part of a broader strategy to ensure Auxly can remain competitive against a backdrop of continued price compression and disproportionate taxation in the adult-use recreational market. We believe that Auxly is well-positioned to compete in the current value-price driven environment given our brand portfolio, Auxly Leamington’s cost structure, and the automation investments we have made to our manufacturing processes.

Like other cannabis companies, Auxly has made an effort to push out debt payments that are due in the near term. Last month the company said it agreed with its strategic partner Imperial Brands to extend the maturity date of the Imperial Brands convertible debenture by two years from September 25, 2024, to September 25, 2026.

Cash Burn

The company’s cash has plunged to $8.5 million in just six months from $14 million at the end of 2022. In the company’s filing, it stated that it was a going concern and that it had negative working capital of $16 million and cash flow used in operating activities of $2 million for the six months ending June 30, 2023. The company said it won’t have enough money to fund its operations for the next 12 months if sales do not improve or if they decline.

In addition to that, if the company’s margins do not improve or if they decline; if the company’s selling, general and administrative expenses increase or do not decrease; and/or the Auxly Leamington credit facility of $46 million matures on September 30, 2023, without extension or refinancing it could cast doubt on its ability to continue.

Legal Issues

The company also noted that it is facing litigation from Kindred Partners. In January 2023, Kindred filed for arbitration with a claim of $3.4 million, which Auxly said it is fighting. Auxly said it has recorded a provision of $1.2 million associated with the claim.

Also in July 2023, the company said in its filing that it reached a settlement, in principle, of the class action begun against it in the Ontario Superior Court of Justice on March 28, 2019, whereby $4 million will be paid entirely by the company’s insurance providers to settle all claims in the action.

Looking Ahead

For the remainder of 2023, Auxly said it plans to increase net revenues by 15%, with a focus on key product categories. The company plans to strategically expand its product portfolio while supporting strong retail distribution through its internal sales team. The company also said it plans to keep its expenses below 40% of the net revenues.

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.

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