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Why the Picture for Aurora Cannabis Just Got Bleaker

By Keith Speights - Apr 7, 2020 at 7:04AM

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A bad situation in Ontario is now even worse.

There's been nothing but bad news for Aurora Cannabis (ACB -3.01%) lately. The Canadian cannabis producer posted dismal fiscal 2020 Q2 results in February. Its longtime CEO stepped down. Aurora laid off staff. Its stock is down more than 60% year to date.

And now the picture for Aurora just got bleaker. One of the biggest problems for the company in 2019 became worse over the weekend.

Cannabis dispensary sign with picture of a cannabis leaf on the sign

Image source: Getty Images.

The dreaded word

Canada's most heavily populated province, Ontario, shut down all retail cannabis stores effective 11:59 p.m. on April 4. Ontario's government now classifies cannabis stores under the dreaded word "nonessential."

The province had previously designated cannabis stores as essential businesses with its response to the coronavirus pandemic announced on March 24. Essential businesses were allowed to stay open, while nonessential businesses were required to close. 

However, Ontario Premier Doug Ford announced on April 3 that further steps were needed to slow the spread of the novel coronavirus and limit the cases of COVID-19. He stated that the province had to take "additional steps to flatten the curve" by "announcing the closure of many more sectors of the economy." Ford added, "I can tell you this was no easy task."

The shutdown will extend through April 18. However, it remains to be seen if the closures of non-essential businesses will be extended for an even longer period.

Why it hits Aurora especially hard

Aurora Cannabis hasn't been shy in the past at pointing the finger at Ontario's inadequate number of retail cannabis stores as a big reason its revenue growth hasn't been as high as it expected. For at least the next couple of weeks, the big province won't have any retail cannabis stores open. Aurora's only venue for selling cannabis products in the province will be online through the Ontario Cannabis Store.

Obviously, the situation in Ontario affects many other Canadian cannabis producers as well. But it will hit Aurora especially hard, particularly as compared with Canopy Growth (CGC -4.25%) and Cronos Group (CRON 0.66%), because of Aurora's precarious cash position.

Aurora is already burning through cash quickly, even with its efforts to reduce capital spending and cut back staffing costs. The company had a little over $201 million Canadian in cash, cash equivalents, and restricted cash at the end of 2019. That's not enough to fund operations for very long, and particularly with what's sure to be lower cannabis sales in Ontario with the retail store closures.

Canopy Growth and Cronos Group have much larger cash positions. They also have big partners with deep pockets. Largely because of Aurora's past strategy of trying to remain independent without taking on an equity partner, it's in a more vulnerable position than these rivals.

Is there a light at the end of the tunnel for Aurora?

Maybe, just maybe, Ontario's cannabis stores will reopen this month. If the number of COVID-19 cases in Canada began to really fall off, it's possible that cannabis sales will pick up this summer. 

Ontario had previously committed to issuing more licenses for retail cannabis stores before the coronavirus pandemic. If the province quickly resumes those efforts, the addition of those stores could benefit Aurora Cannabis and other Canadian marijuana stocks this year.

Canada's cannabis derivatives products market could also gain momentum. Aurora has already launched vape and edible products and still hopes that this market will be a significant driver of revenue growth.

It's possible that there is a light at the end of the tunnel for Aurora. But with the company's financial woes, the present reality for Aurora remains pretty dark for now.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.61 (-3.01%) $0.05
Canopy Growth Stock Quote
Canopy Growth
CGC
$3.15 (-4.25%) $0.14
Cronos Group Stock Quote
Cronos Group
CRON
$3.05 (0.66%) $0.02

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