Aurora Cannabis third quarter report is train wreck


After much anticipation, the most popular cannabis stock on the planet, Aurora Cannabis (NYSE: ACB), lifted the hood on its third quarter fiscal operating results on Thursday, May 14.

Aurora successfully reported net sales of C $ 75.5 million for the quarter, an increase of 35% over the second consecutive quarterly C $ 56 million turnover. . This 35% growth included a 24% increase in adult weed sales in the Canadian market and a 6% increase in revenues from medical pots.

Having previously forecast only modest sales growth in the sequential quarter, the 35% increase in net sales (and 32% in net cannabis income) far exceeded expectations.

A close-up of a flowering cannabis plant on an indoor commercial farm.

Image source: Getty Images.

However, that doesn’t tell the whole story. A closer look at Aurora’s regulatory file with SEDAR in Canada, and a deep reading of its operating results press release, shows that this quarter was more of a train wreck than a turnaround. Here are seven reasons why Aurora shareholders should be very concerned for the future of the business.

1. Aurora did not include its operating loss in its press release

First of all, I just find it a little strange that nowhere in the operating version of Aurora has the company really discussed its results. The company hedged adjusted EBITDA in its main financial and operating parameters, but did not provide any real net result.

To obtain this figure, investors had to read the company’s SEDAR file. In total, Aurora generated C $ 31.9 million in gross profit before fair value adjustments, but had to cope with C $ 111 million in operating expenses, which increased its operating loss (including fair value adjustments) at C $ 83.6 million. After accounting for other charges, Aurora’s net loss totaled C $ 137.4 million, or C $ 1.37 per share. Even with a 32% increase in net cannabis sales, it’s still ugly.

A cannabis leaf on top of a hundred dollar bill, with Ben Franklin's head peering between the leaves.

Image source: Getty Images.

2. Selling, administrative and other overhead costs are still far too high

Another source of frustration for shareholders is the company’s selling, general and administrative (selling, administrative and other general) costs. In February, the company announced plans to reduce its ACG costs to between C $ 40 million and $ 45 million per quarter in order to generate positive adjusted EBITDA by the first fiscal quarter of 2021 (ended September 30, 2020). This positive adjusted EBITDA is necessary by Q1 2021 to comply with the new restrictive covenants.

However, even though Aurora halted the construction of a number of key projects and laid off more than 10% of its workforce, selling, administrative and other overhead costs remained much higher than I expected. waited. Aurora lists selling, administrative and other general expenses for the third quarter of 2020 at C $ 75.1 million, although this excludes the one-time termination costs associated with its business transformation plan. This is down from approximately C $ 99.9 million in Q2 2020. However, selling, administrative and other general expenses are still increasing year over year, and Aurora has paid more than CA $ 9 million in stock-based compensation in the third quarter of 2020 despite its inventory crater.

3. Inventories continue to increase

Also note that Aurora’s inventory continues to grow. Although some level of unfilled product is good, Aurora’s inventory level has more than doubled in the past nine months to reach $ 251.2 million CAD. With the cannabis supply chain in Canada having all kinds of problems and Aurora Cannabis not selling any weeds wholesale or in bulk during the third fiscal quarter, the potential for depreciation or even destruction of some of the stocks of society increases with each passing day.

A cannabis bud and a vial of cannabinoid-rich liquid next to a Canadian flag.

Image source: Getty Images.

4. A sudden focus on market share rather than sales growth

To build on the previous point, note the language that Aurora uses in its press release to explain how its handling of uncertainty related to 2019 coronavirus disease (COVID-19). Here is an excerpt from the company’s third quarter press release:

Variables associated with the COVID-19 pandemic and the still developing Canadian consumer market, including consumer buying behavior and the deployment of new stores, led Aurora to focus on short-term market share , rather than on revenue targets, to run the business.

Aurora adamantly tells Wall Street and its shareholders that the short-term growth of Canadian pot businesses is going to be difficult to achieve and that, among other factors, COVID-19 is to blame. Aurora may have dazzled with C $ 75.5 million in net sales in the third quarter, but rapid sales growth is unlikely to be in the foreseeable future.

5. The shareholders drown in the offers on the market

A big reason why Aurora’s third quarter report should not be applauded is because of the company’s liquidity rate and current market offers to raise capital.

Although Aurora Cannabis ended the quarter with C $ 230 million in cash and cash equivalents, as well as C $ 11.8 million in marketable securities, it would increase to C $ 154.6 million in cash in the third quarter of 2020 and C $ 273 million in cash in the second quarter of 2020. is after the company sold C $ 262.4 million in shares in the second quarter of 2020 and C $ 206.5 million in the third quarter of 2020.

In addition, Aurora recently authorized a market offer of $ 350 million (i.e., the United States) that will allow this breathtaking amount of dilution to continue.

A person holding cannabis leaves in front of a terrestrial globe.

Image source: Getty Images.

6. International sales remain poor

On the one hand, it is positive to see that Aurora’s international medical cannabis sales increased 125% from the second sequential quarter to reach C $ 4 million. Again, let’s remember that the previous quarter prevented Aurora from selling products in Germany for a few months, so this increase in revenues is simply a function of the resumption of sales.

What really characterizes international sales is that they do not really increase, despite the fact that Aurora has the largest overseas presence of all authorized Canadian producers. In fact, international revenues were higher in the fourth quarter of 2019 (C $ 4.5 million) and the first quarter of 2020 (C $ 4.6 million) than they were in the last quarter. Foreign sales remain a huge disappointment for Aurora and its shareholders.

7. Goodwill has not been addressed

Finally, Aurora’s goodwill continues to be an eyesore at C $ 2.42 billion. This represents approximately 51% of the company’s total assets.

For those who will remember, Aurora depreciated CA $ 762 million of goodwill in the second fiscal quarter. However, this impairment was almost entirely linked to its Danish and South American assets. Either way, management still seems confident that it will recover approximately C $ 2 billion in value from its acquisition of MedReleaf, despite the fact that the 1 million square foot Exeter greenhouse has been put on sale. I think a very large depreciation of at least $ 1 billion (US) awaits Aurora in the future.

There was some progress in the third quarter in the cost reduction department, but Aurora’s quarterly report is another in a long line of train wreckage.


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