Canada's recreational marijuana market is expected to send sales soaring at Aurora Cannabis (ACB -1.15%), and on Monday, investors got their first glimpse at how this cannabis company is executing on its strategy to capture this massive opportunity. The company's fiscal second-quarter financials include the first results since Canada's adult-use market went live in mid-October. There were some bright spots, including surging sales, but also some worrisome trends, such as lower selling prices. Here are eight must-know facts following Aurora Cannabis' quarterly financial report.
No. 1: Sales are skyrocketing
The company's net marijuana revenue was 54 million Canadian dollars in the quarter ending Dec. 31, and that was a huge year-over-year and sequential jump in sales. In the same quarter the year prior, revenue was only CA$11.7 million, and in the quarter prior, revenue was only CA$35 million, including acquisitions. Recreational market sales were the biggest driver of that growth, totaling CA$21.6 million.
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No. 2: Production is growing
Aurora Cannabis has one of the most aggressive plans for increasing annual marijuana production, and last quarter, it made big progress on boosting its annual capacity. The company's marijuana production increased 57% quarter over quarter to 7,822 kilograms due to expansion projects at its Aurora Sky greenhouse and acquisitions.
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No. 3: Prices are falling
Lower wholesale prices for dried flower have been a problem for growers in U.S. states operating mature recreational-use markets, and they could prove problematic for Canadian growers, too. The average selling price for dried marijuana and marijuana extracts in the quarter tumbled $2.16 per gram and $2.12 per gram, respectively, from the previous quarter.
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No. 4: Medical marijuana remains key
The recreational market opportunity in Canada is huge, but the medical marijuana market is no slouch, either. The company's active patient count climbed to 73,000 from 67,000 patients previously, and medical marijuana revenue accounted for about 48% of total net revenue in the quarter. Aurora Cannabis says it remains committed to the medical business, and new production capacity will be used to meet medical demand before it's used to meet recreational demand. Why? Because medical selling prices and margins are higher.
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No. 5: It's not just Canada
Unquestionably, Canada represents a big opportunity, but marijuana is still illegal in most countries, and as that changes, the opportunity globally is huge. The worldwide marijuana market is worth $150 billion, according to the United Nations.
If global pot prohibition is reversed, then Aurora Cannabis could benefit tremendously. The company's already tapping into an emerging medical marijuana market in Germany, which has a population that's double that of Canada, and management pegs the size of the broader European Union at CA$98 billion. For comparison, it expects Canada's market to grow to roughly CA$12 billion over time.
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No. 6: Bottlenecks proved costly
Ramping up production capacity and effectively distributing marijuana to the adult-use market proved challenging last quarter. The company had to use an "all hands on deck" approach to getting product out the door, and that took a toll on its margins.
Gross margin dropped to 54% from 70% the prior quarter; cash costs per gram produced increased to $1.92 from $1.45; and cash cost per gram sold increased to $2.60 from $1.90.
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No. 7: Capacity is key
If the company hopes to wrangle costs lower, it will need its spending on expansions to translate into economies of scale. Fortunately, there's reason for optimism. The company says it's currently operating at an annualized marijuana production capacity of 120,000 kilograms, and it should reach an annualized 150,000-kilogram pace next month. That should translate into 25,000 kilograms of marijuana available for sale exiting June.
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No. 8: Losses continue
Aurora Cannabis' net loss last quarter was a staggering CA$238 million. But before you panic, that loss comes with a big asterisk. The company must report unrealized gains or losses on its investments every quarter, and losses on its investments accounted for a whopping $120 million of the net loss in the period. For comparison, its prior quarter benefited from a CA$87 unrealized gain.
If we back out the unrealized, fair-value loss, we get a clearer picture of Aurora's operating performance. Its selling and general and administrative expenses only grew 2% quarter over quarter to CA$66.4 million, and its total operating expense of CA$112 million in the quarter was a sequential decline from CA$120 million in the prior quarter.
Nevertheless, the operating expenses still dwarf revenue, so it will be a while before investors can cheer profitability.
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