While the cannabis market enters 2020 with tons of promise, the year is turning into one of whether companies can operate within the current scope of the market. Aurora Cannabis (ACB) is no exception with the September quarter producing a C$40 million EBITDA loss and the near-term revenue boosts highly in doubt. In response, the company cut costs via restructuring and the CEO retired in order to generate a path towards EBITDA profits.
With at least 1.2 billion shares outstanding, the stock has a market value of ~$1.84 billion. The guidance for quarterly revenues of only C$64 million isn’t going to inspire investors to hold the sock. The company needs to generate some decent revenue growth starting with the June quarter to justify the current market valuation.
In the September quarter alone, the Canadian cannabis company reported an EBITDA loss of C$39.7 million on revenues of only C$75.6 million. In the course of the year, Aurora Cannabis has substantially reduced the production output to only ~150,000 kg according to the February presentation. The company will need to spend a great deal of the FQ2 earnings materials and conference call rationalizing the current business prospects despite an intention to exist some international operations.
The company has far reduced the ability to increase production beyond current capacity without substantial capital expenses. The main two facilities will require a combined C$190 million in capital spending to complete and the third forecasted greenhouse with the potential for over 100,000 kg in annual capacity is being sold for a pittance.
The big story is the plan to restructure operations to reduce the operating expense base of C$45 million after the December quarterly expenses surged to ~C$100 million. Aurora Cannabis already has solid gross margins near 60%, so the key to success is matching the expense side of the equation with gross profits limited by disappointing sales in Canada and around the globe.
Aurora Cannabis has to generate C$80 million in quarterly sales to just reach EBITDA break even, if it can truly cut quarterly operating expenses to below C$45 million. This amount doesn’t even cover financing costs and depreciation expenses, though the latter is a non-cash expense.
Grand Scale Hit
The biggest problem facing Aurora Cannabis is any reduction in the grand scale of the company will trigger less interest in the stock. Unfortunately, the best way to reduce operating expenses is cutting the global scale of operations.
In the latest presentation, Aurora Cannabis still lists operations in more than 20 countries. The list is uninspiring with countries like Estonia, Latvia and Uruguay.
Despite these issues and the clearly planned reorg, Aurora Cannabis announced the certification of the Aurora River production facility for EU GMP needed to export medical cannabis. In addition, the Germany regulators removed the sales suspension on their medical cannabis products suggesting the Canadian cannabis company is still moving forward with some global expansion.
While the embattled cannabis company has a lot of positive catalysts to play out in 2020, it still needs to reduce the grand aspirations of the cannabis business. Aurora is headed full speed into areas like CBD in the U.S. and some promising international locations while liquidity questions still persist.
Investors should avoid the stock until a better valuation appears and the company is able to squeeze out EBITDA profits.
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Disclosure: No position.