Aurora Cannabis Q1 Results: Light at the End of the Tunnel?

Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB), one of the Canadian marijuana stocks, reported Q1/20 financial results on November 14, 2019

SmallCapPower | November 19, 2019: Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB), one of the Canadian cannabis stocks, reported Q1/20 financial results on November 14, 2019, after markets closed. Results were highlighted by an adjusted EBITDA loss of $39.7M on revenue of $75.3M, both of which missed analyst’s estimates of an adj. EBITDA loss of ~$22M and revenue of ~$91M.

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Figure 1: Aurora Cannabis Quarterly Revenue

Source: Company Reports, Ubika

Revenue growth down 21% sequentially over the previous quarter. Lower revenue was due primarily to lower Canadian recreational revenues, which dropped by 33% and lower wholesale revenues, which slipped 49%. Revenue missed even the lowest of analyst estimates at ~$90M for the quarter. Management attributed the revenue miss to poor retail store roll-out, particularly in Ontario, and changes in customer preferences. Management reiterated on the earnings call that these are just short-term issues that will be resolved. During the quarter, production volumes increased to 41,436 kg (was 29,034 kg, during Q4/19), an increase of 43%. Additionally, the Company sold 12,463 kg of cannabis at an average selling price of $5.68/gram, which is a 7% increase over the prior quarter.

Figure 2: Aurora Cannabis Gross Margins

Source: Company Reports, Ubika

Cost leader with industry-leading gross margins. For the third quarter in a row, Aurora Cannabis has maintained some of the best gross margins in the industry, with only Supreme Cannabis (62%, Q1/20) having better gross margins. Aurora Cannabis also reported cash cost per gram of $0.85, down 25%, with cash cost to sell of $1.15, which also improved by 22% during the quarter. Adjusted EBITDA loss of $39.7M missed consensus estimates of a $22M loss, which was due primarily to lower-than-expected revenue and higher operating expenses.

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Avoiding near-term liquidity crisis and reducing cash burn. Aurora Cannabis has restructured its $230M convertible note coming due on March 6, 2020, that carries a conversion price of $13.05/share and an auto-convert of $17.00/share. The Company announced that investors owning $155M of the $230M in convertibles have voluntarily agreed to convert their share at a 6% discount to the 5-day VWAP. The converted shares are not subject to share lock-up agreements. Aurora has also announced that it has temporarily ceased construction at its Aurora Sky (1.2M sq. ft) facility in Alberta, as well as the Aurora Nordic 2 (1.0M sq. ft) facility in Denmark. Both closures are expected to save the Company ~$200M in capital expenditures over the next 12-18 months. Aurora Cannabis also announced a $400M at-the-market (ATM) equity financing program with plans to raise US$125M during F2020. Since the beginning of F2020, Aurora has raised $29.1M through ATM equity financing.

Key Takeaways. Third-quarter financial results for cannabis companies continue to disappoint. While it is good that Aurora now has the liquidity and cash position to survive the next 12 to 18 months, this has come at the cost of dilution of current investors. Aurora Cannabis currently has about ~1B shares outstanding and it looks like they will issue ~50M shares to clear the convertible debt. These shares have no lock-up and if sold on the open market could cause downward pressure on Aurora’s stock price. Additionally, Aurora Cannabis is expected to issue about ~55M shares (at current market prices) this year with its ATM equity financing program, causing further dilution. Investors will be looking towards Cannabis 2.0 products to see a boost in revenue. However, sales from these products are not expected to start hitting financial results until first quarter CY2020, which is expected to be reported in April 2020.

Shares of Aurora Cannabis ended Monday’s trading session 16% lower at C$3. Aurora stock trades at a market cap of C$3.1B and a F2020 EV/sales multiple of 11.6x, which is a premium compared to its large-cap peers, which trade at a consensus median multiple of 7.1x.

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