Debra Borchardt
Canadian-based Aurora Cannabis Inc. (NYSE: ACB) saw its shares falling in early trading after the company said that revenues fell in the second quarter of fiscal 2020 ending December 31, 2019. Aurora reported that its total net revenue reported in Canadian dollars fell 26% sequentially to $56 million in the second quarter from $75 million in the first quarter of 2020. It was higher than the 2018’s second quarter, which delivered net revenue of $54 million.
Medical cannabis net revenues decreased 10% sequentially to $27.4 million due to a short-term permit issue in Germany that has since been resolved. The company did state that its medical patient base remained relatively consistent at 90,307.
Wholesale bulk cannabis net revenues fell from $10.3 million in the first quarter to $2.4 million due to overall volume declines and the wholesale of lower potency (priced) product.
Losses Grow
The company also reported that the adjusted EBITDA loss was $80.2 million in the second quarter versus $39.7 million in the first quarter of 2020. The decline was attributed to “an increase in production costs relating to the ramp-up for the legalization of Cannabis 2.0, and the increase in SG&A expenses.” Aurora said it was taking actions to materially reduce SG&A expenses and was focused on achieving positive adjusted EBITDA.
“Despite delivering modest growth in our core medical and consumer business in Q2, we took immediate and deliberate actions to align our Company to current market conditions,” said Michael Singer, Executive Chairman and Interim CEO, Aurora Cannabis. “As announced last week, being a profitable cannabis company for our investors is the singular near-term focus for Aurora and we have begun to implement a business transformation plan where we intend to manage the business with a high degree of fiscal discipline.”
Those expenses increased by 23% to $99.9 million from the prior quarter. So even as revenues were dropping the company increased salaries, benefits, and annual merit increases. Plus there were investments in educational marketing campaigns related to the launch of Cannabis 2.0 products, and marketing initiatives related to the launch of the Aurora Drift brand. On February 6, 2020, Aurora announced decisive action effective immediately to reduce SG&A expenses from the Q2 2020 levels, and expects to manage the business with an SG&A expense run-rate of between $40 million to $45 million per quarter exiting Q4 2020 (June 30, 2020).
Debt Levels
Aurora’s current credit facility and other debt outstanding include $50 million in a revolving facility, of which $2 million was drawn as of December 31, 2019. $162 million of fully drawn senior secured term loans and US$345 million of senior unsecured convertible debentures due February 2024. The company also managed to secure credit facility amendments that removed EBITDA ratio covenants.
“The transformational actions we announced last week have already positively impacted SG&A expense and we are confident that our run-rate will be approximately $40 million – $45 million as we exit the fiscal fourth quarter of 2020. This is a very important step toward EBITDA profitability,” said Glen Ibbott, CFO. “In addition, our credit facility was amended to provide greater flexibility to Aurora. More specifically, Aurora chose to downsize the facility by $96.5 million with the elimination of undrawn term loan capacity, and further used $45 million of restricted cash to repay a portion of the drawn term loan balance for the purpose of reducing leverage and cash required for debt service.”
Prices Fall
The average net selling price of cannabis decreased to $5.54 per gram over the prior quarter of $5.68. This decrease was attributed to the provision for returns and price adjustments impacting Q2 2020 which did not affect Q1 2020, lower kilograms sold in Q2 versus Q1, and lower wholesale bulk volume and pricing. Gross margin before fair value adjustments on cannabis net revenue, excluding provisions was 48% in Q2 2020, compared to 58% in the prior quarter.
During Q2 2020, Aurora produced 30,691 kilograms of cannabis as compared to 41,436 kilograms in the prior quarter. The 26% decrease in production output was primarily due to previously announced changes to cultivation strategies, including a pivot to high-value, high-potency strains which are lower yielding. “With the continued refinement of our cultivation techniques, we expect to achieve quarterly harvest volumes leading to an average of 150,000 kgs annually or better.”
Looking Ahead
Despite the troubling earnings report, Aurora said it was bullish on the long-term potential for the global cannabis opportunity. “However, due to several short-term factors, there is likely to be a slower than previously expected rate of industry growth in the near-term. The Company has outlined a number of fiscally responsible steps it has already taken to realign its business operations to this expected industry growth rate. Aurora reiterates its outlook for fiscal third quarter that cannabis revenue will be impacted by previously mentioned industry headwinds, and as such will likely show modest to no growth relative to fiscal Q2’s cannabis revenue, excluding provisions, of approximately $65 million.”
