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Cannabis

Leading Cannabis Company Aurora Experiences a Hit in Earnings: A billion-dollar loss

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Aurora Cannabis earnings

Aurora Cannabis Inc. recently announced that Chief Executive and Co-founder Terry Booth would soon retire and made another revelation about a loss to come; a quarterly deficit of nearly a billion dollars. 

Aurora ACB, +7.48% ACB, +5.10% was scheduled to report its second-quarter fiscal reports and expected to reveal a loss of a whopping C$1 billion ($750 million), thanks to the asset impairment charges that it disclosed amidst a big shakeup for the organization. 

The Canadian based cannabis company said it had planned write-downs of C$190 million to C$225 million worth of plant, intangible property, and equipment charges as well as C$740 million to C$775 million in goodwill.

According to MarketWatch, Aurora and other Canadian based weed companies had made an array of acquisitions in the heydey of post-stock mania and bought assets at values that now seem to be inflated. Aurora was the leader of such investment deals, accruing nearly $2.4 billion in goodwill on its balance sheet, a large portion of which came from its acquisition of Medreleaf. 

Glen Ibbott, Chief Financial Officer of Aurora said that the impairment charges were related to the operations in Denmark and South America and that its core Canadian assets were not affected by the write-downs. Apart from the non-cash impairment charges, the company also said that it was forecasted to record a C$1.2 million write-off for future price reductions and product returns related to products that were sold in the previous quarter, mostly in the first half of 2019. 

Additionally, Aurora also announced that it would lay off 500 employees, reduce capital expenditure to nearly C$100 million and restructure its debt. Michael Singer, Executive Chairman will take the helm as the interim CEO until a permanent replacement comes. 

Earnings: The FactSet consensus calls for losses of about C$0.08 per share, against a loss of C$0.25 per share in the year-ago timeline. Aurora said that it estimates its cash costs per gram pot will remain below C$1. 

Revenue: FactSet polled analysts to predict the second-quarter revenue of Aurora and they reported it to be C$61.7 million versus C$54.2 million a year ago. However, the company’s sales in the second quarter are expected to decline sequentially from the first-quarter revenue of C$75.2 million. The major contribution to the revenue comes from the company’s sale from Canadian medical and recreational cannabis.

Aurora said that it estimates the net cannabis revenue of C$50 million with a fiscal second quarter of C$54 million and cannabis revenues of C$62 million to C$66 million. The singer said that the company is expecting little to negligible sales growth in its fiscal third quarter. 

Stock movement: According to the stock movement, Aurora has lost a little more than 50% of its value in the U.S. traded shares over the period of the last three months, while the S&P 500 index SPX, +0.18% jumped higher to a gain of 8.6%. Further, in the past three months, the ETFMG Alternative Harvest ETF MJ, +3.72%, which tracks several pot stocks, fell 19.4% as the Cannabis ETF THCX, +4.64% fell 26%.

What analysts are saying

Source: Marketwatch

Andrew Carter, a Stifel analyst, wrote in a note that they believe Aurora’s status as a going concern is in question now, and even if the company manages to navigate through the challenges, it will be of very limited value for the equity holders. 

Carter, who has a sell rating with a C$1 target price on Aurora said that the company won’t be able to keep pace with the dynamic market and its demands. Another analyst, Owen Bennett, wrote in a note that Terry Booth stepping down from the post of the CEO is not a big surprise as he faced criticism over his lack of publicity and the brand needed a “leadership profile” that propelled the organization towards execution versus promotion and entrepreneurship. Bennett added that the new CEO is expected to have a substantial Consumer Packaged Goods experience. 

In a January note to clients, Bill Kirk, an analyst at MKM Partners wrote that Aurora’s executives had a 50% chance that their predictions would come true. Aurora was right all of the time while making negative predictions, but only 46.2% of the time correct when making positive forecasts, according to an analysis. 

Kirk wrote in a second note that Aurora’s management led by Terry Booth and Cam Battley offered some of the most positive and ultimately incorrect predictions. Kirk also added that Aurora’s optimism, particularly around profitability and growth created an organization with a capital structure and bloated cost structure with heavy convertibles and a largely diluted equity base. 

Kirk rated the name a sell with a C$2 target price. 

Of the 19 sell-side analysts that cover Aurora, four have the equivalent of a sell on the name, four have the equivalent of a buy, and eleven rates the stock a hold.

Ivan writes about Cannabis at The Cannabis Radar. He has a degree in Nutrition Sciences from University of Oklahoma Health Sciences Centre. He likes to spend his spare time reading to his daughter or spending time with his wife.

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