Auxly auditor flags ‘going concern’ risk as cannabis firm reports smaller loss

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Auxly Cannabis Group’s record 2023 sales helped substantially improve its net loss, but an auditor flagged a “significant doubt” over the company’s ability to continue as a “going concern.”

In a note to shareholders attached to Auxly’s annual financial statement, accounting company Ernst & Young said the company had total cash and cash equivalents of 15.6 million Canadian dollars ($12 million) and negative working capital of CA$41 million as of Dec. 31, 2023.

That and other matters “indicate that a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern,” Ernst & Young said.

A similar warning appeared in Auxly’s 2022 annual financial statement.

In the financial year ended Dec. 31, 2023, Auxly’s net loss was CA$44.5 million, a substantial improvement compared with the company’s CA$130.3 million loss in 2022.

The Toronto-based business saw revenues jump 7% year-over-year to CA$101.1 million in 2023.

Gross revenue from sales of cannabis products amounted to CA$151.8 million, of which CA$50.7 million was sent to the government to pay federal excise tax.

Auxly achieved positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the first time in fiscal 2023, amounting to CA$2.3 million.

That’s a 393% improvement over the previous year’s negative EBITDA of CA$783,000.

The company also reported positive cash flow from operations of CA$8.2 million in 2023.

“For the first time in our corporate history, we achieved full year adjusted EBITDA profitability; broke one hundred million dollars in net revenue; and generated positive cash flow from operations,” CEO Hugo Alves said in a statement.

“We focused and optimized our business, resulting in meaningful cost savings and industry-leading margins, all done while delivering quality products and meeting the ongoing demands of our consumers.”

Auxly said it finished 2023 as the fifth-largest licensed producer in Canada, with 5% of the total market, citing figures from market data company Hifyre.

Subsequent to Auxly’s year-end, the company said it strengthened its financial position by entering into an agreement to extend the maturity date of Auxly Leamington’s credit facility to Dec. 31, 2025.

The company also said after finishing its fiscal year that it substantially improved its balance sheet and financial position by securing the support of its strategic partner, tobacco company Imperial Brands, through Imperial’s decision to convert CA$123.4 million of debt in exchange for 241,316,117 Auxly shares.

That increased Imperial’s holdings in Auxly to 19.8%.

“We are positioned to succeed in the current cannabis environment and to continue growing and thriving as the market matures,” Alves said.

“In 2024, we will remain focused on sustainable, profitable growth and passionately committed to our consumers.”

Auxly said the Canadian cannabis industry continues to face challenges, including:

  • Fierce competition and continued fragmentation.
  • Ongoing price compression.
  • Oppressive taxation.
  • A robust illicit market.
  • Restrictive regulations, which impede its ability to compete with the illicit market.

“Despite these challenges, the Company has seen improvements in its revenues, gross margins, and material improvements in Adjusted EBITDA resulting from significant reductions in its supporting cost structure,” Auxly said.

Cash and equivalents as of Dec. 31, 2023, were CA$15.6 million.

Auxly shares trade as XLY on the Toronto Stock Exchange.