For the quarter, Aurora managed to report $75.5 million Canadian in net sales, representing a 35% increase from the charge-laden CA$56 million in revenue recorded in the sequential second quarter. This 35% growth included a 24% jump in adult-use weed sales in the Canadian market, and a 6% increase in medical pot revenue.
Having previously forecast only modest sales growth in the sequential quarter, the 35% net sales increase (and 32% net cannabis revenue jump) handily topped expectations.
However, this doesn't tell the full story. A deeper dive into Aurora's regulatory filing with SEDAR in Canada, and a thorough read of its operating results press release, show that this quarter was more of a train wreck than a turnaround. Here are seven reasons Aurora's shareholders should be very worried about the company's future.
1. Aurora failed to include its operating loss in its PR news release
First of all, I just find it a bit odd that nowhere in Aurora's operating release did the company truly discuss its bottom line. The company did cover adjusted EBITDA in its key financial and operational metrics, but it didn't provide a true bottom-line result.
In order to get this figure, investors had to peruse the company's SEDAR filing. In total, Aurora generated CA$31.9 million in gross profit before fair value adjustments , but faced CA$111 million in operating expenses, pushing its loss from operations (inclusive of fair-value adjustments) to CA$83.6 million. With other charges factored in, Aurora's net loss totaled CA$137.4 million, or CA$1.37 per share. Even with a 32% increase in net cannabis sales, that's still ugly.
2. SG&A expenses are still way too high
The company's selling, general, and administrative (SG&A) expenses are another source of frustration for shareholders. In February, the company announced plans to reduce its SG&A to between CA$40 million and CA$45 million per quarter in order to generate positive adjusted EBITDA by the fiscal first quarter of 2021 (ended Sept. 30, 2020). This positive adjusted EBITDA is needed by Q1 2021 to meet new debt covenants.
However, even with Aurora halting construction on a number of key projects and laying off more than 10% of its workforce, SG&A expenses still came in far higher than I would have expected. Aurora lists Q3 2020 SG&A at CA$75.1 million, albeit this excludes one-time termination costs associated with its business transformation plan. That's down from about CA$99.9 million in Q2 2020. Nevertheless, SG&A costs are still up year-over-year, and Aurora paid out more than CA$9 million in share-based compensation in Q3 2020 despite its stock cratering.
3. Inventory continues to rise
Also take note of the fact that Aurora's inventory continues to rise. While some level of backlogged product is good, Aurora's inventory levels have more than doubled over the past nine months to CA$251.2 million. With Canada's cannabis supply chain having all sorts of issues and Aurora Cannabis not selling any weed on a wholesale or bulk basis in the fiscal third quarter, the potential for a writedown or even destruction of some of the company's inventory is rising with each passing day.
4. A sudden focus on market share, rather than sales growth
To build on the previous point, note the language that Aurora uses in its press release when discussing how its managing the uncertainty tied to the coronavirus disease 2019 (COVID-19). Here's an excerpt taken from the company's third-quarter press release:
The variables associated with the COVID-19 pandemic and the still-developing Canadian consumer market, including consumer buying behavior and new store rollout, have led Aurora to focus on market share for the near term, rather than revenue targets, to manage the business.
Aurora is flat-out telling Wall Street and shareholders that near-term growth in the Canadian pot businesses is going to be hard to come by, and that, among other factors, COVID-19 is to blame. Aurora may have dazzled with CA$75.5 million in net sales in Q3, but it's unlikely to see much in the way of rapid sales growth for the foreseeable future.
5. Shareholders are drowning in at-the-market offerings
A big reason Aurora's Q3 report shouldn't be cheered is because of the company's cash-burn rate and ongoing at-the-market offerings to raise capital.
Although Aurora Cannabis ended the quarter with CA$230 million in cash and cash equivalents, as well as CA$11.8 million in marketable securities, it would up burning through CA$154.6 million in cash in Q3 2020 and CA$273 million in cash in Q2 2020. This is after the company sold CA$262.4 million worth of stock in Q2 2020 and another CA$206.5 million in Q3 2020.
Furthermore, Aurora recently authorized a $350 million (that's U.S.) at-the-market offering that's going to allow this jaw-dropping amount of dilution to continue.
6. International sales remain subpar
On one hand, it is a positive to see that Aurora's international medical cannabis sales rose 125% from the sequential second quarter to hit CA$4 million. Then again, let's remember that the previous quarter resulted in Aurora not being able to sell product in Germany for a couple of months, so this surge in revenue is simply a function of sales recommencing.
What really stands about international sales is that they're not really growing, despite the fact that Aurora has the largest overseas presence of any Canadian licensed producer. In fact, international revenue was higher in Q4 2019 (CA$4.5 million) and Q1 2020 (CA$4.6 million) than it was in the most recent quarter. Overseas sales remain a massive disappointment for Aurora and its shareholders.
7. Goodwill wasn't addressed
Lastly, Aurora's goodwill continues to be an eyesore at CA$2.42 billion. This works out to approximately 51% of the company's total assets.
For those who may recall, Aurora wrote down CA$762 million in goodwill in the fiscal second quarter. However, this writedown was tied almost entirely to its Denmark and South American assets. Somehow, management still seems convinced that they're going to recoup about CA$2 billion in value from its MedReleaf acquisition, despite the fact that the 1-millon-sqaure-foot Exeter greenhouse has been put up for sale. It's my take that a very large writedown of at least $1 billion (U.S.) awaits Aurora in the future.
There were some strides made in Q3 in the cost-cutting department, but all-in-all Aurora's quarterly report was another in a long line of train wrecks.