Canada-based Aurora Cannabis (NYSE:ACB) had a disastrous 2019. Its stock price slid so far that the company risked being delisted from the New York Stock Exchange (which will boot a company if its price stays below $1 for long enough). Only a 1-for-12 reverse stock split in May saved it from that fate…
Of course, that financial sleight of hand did nothing to address its core issues. And despite some intense efforts in 2020, the company has failed to bounce back. Aurora’s consistent inability to achieve positive earnings before income, tax, depreciation, and amortization (EBITDA) has left investors skeptical. Management did announce a new series of business transformation efforts in June to cut costs and conserve cash, but while those changes have helped bring costs down, they haven’t been sufficient to make the company profitable yet.
On Nov. 10, Aurora Cannabis delivered its first-quarter fiscal 2021 results, and the report only served to highlight its distressed condition. Although management has consistently assured investors that Aurora will achieve positive EBITDA in its fiscal second quarter (the end of which is just a month away), I still see a lot of red flags.
1. It isn’t making progress with cannabis derivative products
Canada legalized “Cannabis 2.0” products in October 2019, allowing the sale of cannabis derivative products including vapes, edibles, concentrates, and beverages. Not long after, in December 2019, Aurora launched new lines of cannabis-infused edibles and some vape products.
But since then, the company has gone radio silent on the launch of any new products — not a good sign. This is when Aurora should be pushing full tilt into the hot market for derivatives, which could boost its revenues considerably. One research report from Deloitte estimates that the cannabis derivatives market could be worth $2 billion Canadian annually.
In its fiscal Q1, which ended Sept. 31, net revenue from Aurora’s consumer cannabis extract products was up by CA$3.6 million thanks to the sale of higher-margin products (including cannabis derivatives), but it wasn’t enough to bring the company into the black. In fact, using the adjusted EBITDA metric, it rang up a loss of CA$57.8 million, compared with a loss of CA$33 million in the year-ago quarter.
Management’s efforts at reducing its selling, general and administrative (SG&A) expenses did have an effect; SG&A came in at CA$44.3 million, compared to CA$58.8 million in Q4. However, the company will have to cut costs further and boost revenue significantly to reach profitability, and that will only be possible if it launches additional, innovative derivative products that stand out in the market.
Rival Canopy Growth (NASDAQ:CGC) is already garnering positive reviews for its edibles, vapes, and cannabis-infused beverages in particular. The cannabis-infused beverage market has major potential in Canada, according to Deloitte, which estimates it could generate CA$529 million annually. And the U.S. cannabis beverage market could grow to be worth $2.8 billion by 2025, according to Grand View Research.
2. It lacks a deep-pocketed partner
The popularity of cannabis and the potential of the market has grabbed the attention of many U.S. tobacco and alcohol companies. Beverage giant Constellation Brands (NYSE:STZ) has a large investment in Canopy Growth, tobacco company Altria Group holds a stake in Cronos Group, and HEXO has a partnership with beverage company Molson Coors. However, Aurora Cannabis…
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