The big day investors had been eagerly waiting for has come and gone. On Thursday, Feb. 13, before the opening bell, the most popular pot stock in the world, Aurora Cannabis (NYSE:ACB), lifted the hood on its fiscal second-quarter operating results.
It was no secret before the release of this report that it wasn't going to be great. Aurora wound up providing a corporate update on Feb. 6 that highlighted a number of strategy shifts, including a significant cost-cutting strategy, as well as provided a surface-scratching look at preliminary second-quarter sales. But no one could have imagined just how awful this quarterly report actually was.
Here, you'll find 10 reasons why I believe Aurora Cannabis' Q2 report is a complete dumpster fire.
1. Pricing provisions led to a sales decline
The headline number that Wall Street and investors were waiting for was Aurora's total sales for Q2 2020. Ultimately, the company's net sales of $56 million Canadian wound up declining by 26% from the sequential first quarter. What really stood out, though, was the CA$10.6 million in provisions tied to returns and price adjustments, which wound up knocking 16% off of the company's CA$66.6 million in gross sales. While this is a bit less than the significant adjustments Canopy Growth took in its fiscal second quarter, it nevertheless demonstrates the supply and pricing problems Aurora and its peers are contending with.
2. Value products are wrecking margins
An interesting, yet disappointing, trend mentioned in the press release is that Aurora saw a marked increase in value-based cannabis sales. While this isn't all that surprising considering that legal channels have struggled to compete with the black market on price, it's confirmation that lower-margin marijuana could wreck the margins of Canadian growers for the foreseeable future.
3. Cash costs per gram actually increased from Q1 2020
To build on this previous point, Aurora Cannabis also announced that it cash costs to produce per gram sold actually increased on sequential basis to CA$0.88 per gram from CA$0.85 per gram in Q1 2020. While this isn't exactly an eye-opening increase, it's nevertheless baffling. You see, Aurora's maturation should allow for economies of scale and improved yields to push growing costs lower. The company's realigned strategy to focus on high-value, lower-margin cannabis may be to blame.
4. International medical pot sales plummeted
Although it wasn't exactly a surprise, the company reported dismal overseas sales during the fiscal second quarter. International revenue came in at CA$1.8 million, down 64% from the sequential first quarter. This decline was due to a temporary suspension in product offerings in Germany, which has since been resolved. The problem is, medical cannabis sales are a substantially higher margin product than adult-use marijuana. In addition, Aurora invested heavily overseas, and it doesn't look as if those investments will pay dividends anytime soon.
5. Ancillary revenue fell across the board
One of the more overlooked aspects of Aurora Cannabis is that it has multiple sources of ancillary revenue, including patient counseling services, analytical testing services, and hemp production. At one time, these ancillary revenue sources were growing across the board. However, Q2 2020 saw every single ancillary sales category decline on a year-over-year basis, including a 70% drop in patient counseling services and a 53% plunge in analytical testing revenue.
6. Aurora's annual run rate down to 150,000 kilos
Certainly one of the bigger kicks in the behind for Aurora's shareholders had to be the company's update regarding production. As noted in the press release, "With continued refinement of our cultivation techniques, we expect to achieve quarterly harvest volumes leading to an average of 150,000 kgs annually or better." For context, this is a company that had been forecasting at least 625,000 kilos of run-rate output by the end of its fiscal 2020 (June 30, 2020). It's crystal clear that Aurora Cannabis is no longer Canada's leading producer.
7. SG&A soared, including salary and benefit increases
During the company's corporate update on Feb. 6, it outlined plans to reduce its selling, general, and administrative (SG&A) expenses to a rate of CA$40 million to CA$45 million per quarter in an effort to become profitable. However, the company wound up reporting CA$99.9 million in SG&A during Q2 2020, which actually represents a 23% sequential quarterly increase. While some of this spending makes sense on paper, such as investing in educational campaigns surrounding the Cannabis 2.0 launch (i.e., derivatives), the press release also notes that salaries and benefits were increased (insert management-is-oblivious comment here), leading to higher SG&A.
8. Growth could be nonexistent in Q3
Further putting the nail in the coffin for Aurora Cannabis was the company's vague outlook for the fiscal third quarter. While often a leader in being highly transparent about its sales and profit outlook, the company expects "modest to no growth relative to fiscal Q2's cannabis revenue, excluding provisions." In other words, Aurora is counting on just CA$65 million in gross revenue in Q3 2020, which would not compare favorably to the CA$66.6 million in gross sales for this past quarter. It made no mention of what to expect on a bottom-line basis, but it's fairly evident that a loss is imminent.
9. Goodwill still accounts for 52% of total assets
Aurora Cannabis also wound up doing some much-needed balance sheet cleaning during the quarter, albeit it has a long way to go. The company took a CA$762.2 million writedown on goodwill, a CA$158.7 million impairment on its intangible assets, a CA$51.9 million impairment on property, plant and equipment, and a CA$46.2 million impairment on investments in associates. This is a big reason Aurora logged a CA$1.31 billion loss for the quarter.
But the thing to realize here is that its CA$2.41 billion in remaining goodwill still accounts for 52% of total assets. Add in intangible assets, and 62% of the company's balance sheet is built on hope and finger-crossing. I believe more big writedowns await.
10. Access to capital declined by CA$141.5 million
As the icing on the cake, even though Aurora Cannabis was able to rework the debt covenants on its secured debt, its available line of capital was reduced by CA$141.5 million. This leaves the company with few avenues to raise cash, other than issuing its own stock. And, to speak to this point, Aurora ended calendar year 2019 with 1.17 billion shares outstanding. That's up from only 16 million shares outstanding on June 30, 2014. Yikes!
Aurora Cannabis offered virtually nothing encouraging for Wall Street in its fiscal second-quarter operating results, and investors would be wise to keep their distance. Remember, popularity is no guarantee of profitability when it comes to investing.