It’s getting tougher to remain bullish on Aurora Cannabis (NYSE:ACB) with every passing day. Aurora stock has tumbled as the company stumbled from one issue to the next throughout February.
Aurora stock has lost roughly 80% in value over the past year alone, and although there was a blip in Aurora’s stock price on Feb. 13, after it dropped a widely expected earnings report on the fiscal second quarter of 2020, there was not much to cheer about in Q2.
Earlier in the month, the company founder and CEO, Terry Booth, resigned from his position. Although he will remain on the company’s board of directors and work in an advisory capacity, shares tanked after the announcement. And investors are hardly to blame. Booth’s retirement and a listless earnings report are just the latest round of bad news the company has suffered. Although management is trying to salvage the situation, it does not look pretty.
One of the main reasons Aurora stock has performed so poorly is its overt reliance on the Canadian pot market. The country legalized weed back in 2018, resulting in a frenzy of excitement, but times have changed since then.
Increased competition, a robust black market and a confused regulatory environment have led to interest waning, and several marijuana companies are in danger of losing substantial value or going bust this year.
Aurora has a presence in 25 different countries, but Canada remains its primary operational hub. Investors can hold their breath, but unless significant changes occur in the Canadian market, Aurora stock will continue to suffer due to negative headwinds and its inadequacies.
Aurora’s financials did not reveal anything new about the company’s fortunes; that’s why the lousy report did not send the stock into a further tailspin. But then again, it did not have any good news either.
The company’s net sales fell 26% from the sequential first quarter, mainly due to 10.6 million CAD in provisions to adjust prices. It is essential to note the role of Aurora Cannabis’ German operations in the revenue figures.
German authorities suspended the company’s license to sell medical cannabis in the country after Aurora failed to obtain permission to market irradiated cannabis products before retailing its products. That led to a loss of 3.2 million CAD in the second quarter.
Cost Reduction Program
With these adverse sales figures, shareholders were looking for the company to cut its losses in other areas.
Management has already revealed its intention to reduce expenditure to roughly 100 million CAD in fiscal 2020. Still, the figures for the second quarter show that there has not been any significant progress in pursuit of this goal.
Aurora plans to reduce costs to between 40 million CAD and 45 million CAD per quarter. However, the company managed a second-quarter figure of 99.9 million CAD, a rise of 23% on a sequential quarterly basis.
Recently, Aurora announced a 500-person layoff, but the effects will kick in during the next few quarters. Apart from cutting down the scale of its operations, layoffs seem to be the only initiative that the company can use regarding cost reduction. Aurora employs around 3,400 employees as of this writing.
One of the bright spots in this earnings cycle is the write-downs the company made to its bloated balance sheet.
Goodwill and intangible assets saw the most significant decrease in values at around 762.2 CAD million and 158.7 million CAD, respectively.
The impairment notwithstanding, goodwill still stands at 2.41 billion CAD, representing 52% of total assets. Considering the liquidity crunch and negative headwinds the company is facing, such lofty goodwill is hardly representative of the underlying fundamentals. Hence, expect further write-downs in the coming quarters that will ultimately lead to further losses for Aurora stock.
No Source of Growth
The company’s international plans for expansion are now firmly on the back burner with these results.
Aurora is also facing issues regarding capital raising, having unveiled a 141.5 million CAD cut to its credit facility, with a cap of 218.5 million CAD. The reduction is substantial, but the most important news regarding the credit facility is that one of the provisions now calls for the company to generate positive EBITDA figures by the first fiscal quarter of 2021.
As we move further along in the year, EBITDA numbers will be critical to the long term prospects of the company. Other options available are now using cash on hand or issuing fresh stock.
At the end of last year, Aurora Cannabis had 156 million CAD and another 200 million CAD of capital under it’s at the market offering program, thus giving it 356 million CAD of wiggle room. However, with the company in cash burn mode, it will be tough if all ongoing CAPEX and operating costs can be satisfied through equity alone.
The Bottom Line on Aurora Stock
It’s tough to be bearish on Aurora at this stage. The company has made necessary structural changes to place it back on a path of profitability.
But the steps are not enough to warrant a change in outlook, and Aurora remains in a weak position.
It has unveiled a comprehensive cost reduction program and changes to management, which should help it in 2020, considering its liquidity position. But it’s not enough for investors to buy into a stock that has so many things going against it at this point.
As of this writing, Faizan Farooque did not hold a position in any of the securities mentioned above.