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Aurora Cannabis Inc. (NYSE: ACB) (TSX: ACB) Caught in the Dilemma of Legal Weed Sales

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"How can Aurora achieve long-term profits and continue to grow despite unappealing earnings results and ever-changing cannabis market?"
Aurora Cannabis Inc

Highlights

  • Aurora reported Q2 fiscal 2020 results last week, which shows a 26% decrease in net revenue to $56 million from $75 million in Q1 2020;
  • $22.8 million gross profit accounted for 40.7% of net revenue, while net loss soared to $1.3 billion.
  • SG&A expenses increased by 23% to $99.9 million, accounting for 178.3% of net revenue.
  • Aurora decided to transform its operations strategically and provide financial amendments to cope with inadequate market conditions.

Introduction

Aurora Cannabis Inc. (Aurora) (NYSE: ACB) (TSX: ACB) is one of the leading companies in the cannabis industry serving both the medical and consumer markets. Headquartered in Edmonton, Canada, Aurora establishes its presence in 25 countries through its portfolio of brands including Aurora, Aurora Drift, San Rafael ’71, Daily Special, AltaVie, MedReleaf, CanniMed, Whistler, and ROAR Sports. Aurora’s brands provide a variety of cannabis and hemp products spanning from vapes, concentrates, edibles, soft gel capsules, oral sprays to THC and CDB oils. As it continues to develop innovative products, Aurora strengthens its competitive advantages to lead the cannabis industry in the Canadian and European markets.

Fiscal Q2 2020 Results

On February 13, 2020, Aurora announced its financial and operational results for the second quarter of fiscal 2020 ended December 31, 2019. Net revenue declined 26%, from $75 million in the prior quarter to $56 million, as well as gross profit slid 46% from $42.5 million to $22.8 million. Cannabis net revenue accounted for a total of 52.7 million Canadian dollars, consisting of $27.4 million in medical cannabis and $22.9 million in consumer cannabis, respectively. Net loss was unprecedentedly high, ascending from $10.4 million net income in the prior quarter to $1.3 billion. Likewise, adjusted EBITDA loss climbed to $80.2 million, resulting in an enormous loss of 143.1% of total net revenue.

Ulteriorly, declines in net revenue and gross profit resulted from a short-term permit issue in Germany. The leading causes of net loss and adjusted EBITDA loss were an increase in selling, general and administration (SG&A) expenses and tremendous loss from impairment of non-current assets. Aurora’s SG&A expenses increased by 23% to $99.9 million, accounting for 178.3% of net revenue.

Profitability and Expenses Ratios of Aurora Cannabis Inc
Source: Aurora Cannabis Inc. Public Filings

Financial Analysis

Based on its disappointing earnings result, Aurora suffered enormous losses from heavy expenditure on SG&A and impairment of acquired non-current assets. How can Aurora achieve long-term profits and continue to grow despite unappealing earnings results and everchanging cannabis market? Aurora decided to transform its operations strategically and provide financial amendments to cope with inadequate market conditions.

Profitability

In order to establish a strong leading position through its growth strategy, Aurora focuses on operations in three rapidly growing markets, which are medical cannabis, consumer cannabis, and wholesale.

Medical Cannabis Sales

Aurora has more than 85,000 medical patients in Canada and has developed a strong presence in Europe and an emerging presence in Latin America. With a patient-first philosophy, Aurora dedicated itself to providing patients worldwide with consistent and effective medical cannabis products, provided by its diverse medical cannabis brands————Aurora, Medreleaf, CanniMed, and Whistler brands.

Regardless of the overall decline in cannabis sales, Aurora’s medical cannabis sales in Canada and the EU remained strong in Q2 2020. There was a slight decrease in Aurora’s medical cannabis net revenue from $30 million in Q1 2020 to $27 million. However, during Q2 2020, its international medical cannabis sales slid by 64% to $1.8 million due to a temporary sales suspension on certain products in Germany, which was recently approved to resume according to Aurora. Moreover, its Canadian medical cannabis sales and gross margins were impacted by excise taxes on medical cannabis sales in Canada. However, Aurora claimed that its medical patients are not responsible for the cost of excise taxes based on its medical commitment.

Revenue Breakdown Aurora
Source: Aurora Cannabis Inc. Public Filings

Consumer Cannabis Sales

Aurora has captured a significant market share across the cannabis industry, through a diverse portfolio of consumer brands including Aurora, San Rafael ’71, Whistler Cannabis Co., AltaVie, and The Woodstock Cannabis Company. For the total cannabis sales in Q2 2020, consumer cannabis revenue accounted for 43% of Aurora’s total cannabis net revenue.

Overall, its consumer cannabis revenue decreased by 24%, from $30 million in Q1 2020 to $22.9 million in Q2 2020. Detailedly, less than anticipated consumer demand hindered the roll-out of retail stores across Canada, thus the growth of Aurora’s consumer cannabis sales was impacted adversely. To be more specific, Aurora commenced shipments of initial orders of cannabis 2.0 products to provincial distribution across Canada. However, because of the inadequate market conditions, these product sales didn’t boost Aurora’s quarterly cannabis revenues. Sales generated from cannabis 2.0 products only comprised $3.0 million of total consumer cannabis revenue.

To cope with the inadequate market conditions, Aurora expected to further develop and expand its consumer cannabis infrastructure throughout the calendar year 2020, along with its newly launched retail stores in Canada. On February 3, 2020, Aurora announced its Aurora River production facility received European Union Good Manufacturing Practice (EU GMP) certification, enabling its facility to allocate a greater quantity of products to international markets while growing and producing new products in the facility.

SAN RAFAEL 71 Aurora Brand
Source: Aurora Cannabis Inc.

Expenses

The net loss resulted mainly from impairment charges of non-current assets, which include property, plant & equipment, intangible assets, and goodwill acquired through recent acquisitions. Based on Aurora’s fiscal Q2 2020 financials, impairment charge to goodwill accounted for $762.2 million, impairment charge to intangible assets for $158.7 million, and impairment charge to property, plant, and equipment responsible for a $51.9 million expense. Impairment charges recognized in Q2 2020 were primarily due to former management’s projection of revenue ramp and growth in less than anticipated market demand.

As another cost driver, Aurora’s SG&A expenses increased by $18.8 million during Q2 2020, compared to the prior quarter. The increase in SG&A expenses resulted from an enlarged number of corporate headcount and a series of marketing activities, which involve cannabis 2.0 launch campaigns, consumer education, and the Aurora Drift brand.

As a result, Aurora’s management has undertaken certain strategic initiatives to amend its operations to meet market demand. In another word, Aurora has implemented changes to reset business operations and to reduce SG&A costs. Specifically, Aurora announced a comprehensive transformation plan to significantly reduce the company’s expense base, rationalize capital expenditures, and adapt to current market conditions. Meanwhile, secured credit facility amendments removed EBITDA ratio covenants by replacing them with additional financial flexibility.

Looking Forward

In brief, during Q2 2020, Aurora had discouraging financial results due to inadequate market conditions and suffered excessive loss from elevated expenses of SG&A and impairment charges of acquired non-current assets. But Aurora aimed to achieve long-term profits and continue to grow through the capital expenditure plan and financial amendments for net losses in order to cope with the inadequate market conditions.

Despite several short-term factors in the inadequate markets, Aurora targets the global cannabis opportunity for its long-term potential growth. Its growth strategy is built upon a foundation supported by Aurora’s unique competitive advantage in aspects of profitability and expenses. Therefore Aurora can distinguish itself as a leading supplier of premium cannabis products.

Read More about Aurora:

Source: Aurora Cannabis Inc.

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JayY@Vapebiz.net
Kentucky-based writer and editor focuses on business, finance, and investment in the cannabis industry. Jay made her first foray into the marijuana market through her friends in college, acknowledging medical cannabinoids in the psychotherapeutic area. Although she stayed active constantly during her college years in social activities including feminist movement and climate change, Jay did preserve with interest in marijuana. By exploring the volatility of weed, Jay intends to dig out innovation, technology, and culture in the cannabis landscape.

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