The 10 most important numbers in Aurora Cannabis' third-quarter report

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Earnings season is in full swing, and in case you weren't aware, that includes marijuana stocks. In recent days, the latest quarterly results have been reported for a number of the largest cannabis growers in our neighbor to the north, including what's arguably the most popular pot stock on the planet, Aurora Cannabis(NYSE:ACB). A little more than a week ago, I recounted the 10 most important numbers that Wall Street and investors would want to focus on when Aurora Cannabis reported its fiscal third-quarter operating results after the bell on May 14. With the company's report now out, let's take a look back and see whether Aurora lived up to some very lofty expectations. 

1. Gross or net revenue: CA$75.2 million/CA$65.1 million

Probably the headline of Aurora's third-quarter report is that it managed to grow sequential gross sales by 21% to 75.2 million Canadian dollars, and sequential net revenue (which excludes excise taxes) 20% to $65.1 million. Supply chain issues in Canada -- i.e., packaging supply shortages and regulatory red tape -- have limited the amount of cannabis that's making it to dispensary store shelves. While most of Aurora's peers have reported minimal sales growth, 20% net revenue growth is among the best in the industry. Although, it's worth noting that Wall Street's sales estimates for Q3 2019 have come down multiple times over the past two months.

2. Operating loss: CA$54.8 million (not including fair-value adjustments or share-based compensation)

Perhaps one of the biggest annoyances of investing in marijuana stocks is that their income statements tend to be highly complex as a result of International Financial Reporting Standards, derivative adjustments, and other (perfectly legal) accounting quirks. Because of all of these one-time benefits and expenses, Aurora Cannabis lost an eye-popping CA$160.2 million in the third quarter.

But I suggested ignoring all of Aurora's one-time expenses and focusing solely on its revenue and operating expenses to get a true gauge of the company's health. In the third quarter, Aurora lost CA$77.6 million on an operating basis -- but this still includes a CA$16.4 million gain from fair-value adjustments on biological assets, and CA$39.3 million in share-based compensation. Excluding both, Aurora's operating loss from its true operations was more like CA$54.8 million. It's a modest improvement from the previous quarter, but still nothing to write home about.

3. Recreational-to-medical sales ratio: 50%/50%

During the fiscal second quarter, Aurora shocked a lot of people when it reported that 55% of its cannabis revenue was derived from the medical market, with 45% coming from the recreational side. Given that adult-use weed is a much larger consumer pool than medical marijuana, it was a surprise to many. But consider that Aurora Cannabis has plans to focus on higher-margin medical pot patients going forward.

In the third quarter, the recreational-to-medical marijuana sales ratio pretty much evened out at 50% apiece. Aurora logged CA$29.6 million in adult-use sales in Q3 2019, representing a 37% sequential increase from Q2 2019, with CA$29.1 million in medical marijuana revenue, a 12% sequential quarterly improvement. Expect medical pot sales to continue to make up a significant portion of Aurora's pot sales going forward.

4. Cannabis oil revenue as a percentage of marijuana sales: 18%

Another important figure of note in Aurora's third-quarter report is the amount of sales derived from extracts (primarily oils). Cannabis derivatives are a much higher-margin product than dried flower, so the more the company focuses on extract sales, the higher the margins should be.

The company wound up recording CA$8.5 million in extract sales to medical marijuana patients, with CA$2.2 million going to adult-use consumers, working out to 18% of total marijuana sales. That's a bit lower than I'd have expected, but Aurora does note that oil supply was constrained during the quarter. A new partnership should help alleviate these derivative supply problems in the fiscal fourth quarter and beyond.

5. Average net selling price per gram for dried flower: CA$6.40, down 6%

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My expectation heading into the third quarter was that Aurora would see a possible uptick in its price-per-gram of product sold, primarily because of dried flower and extract shortages throughout Canada. However, the end result was a 6% decline in per-gram flower prices, which the company attributed to an increase in wholesale revenue (i.e., recreational sales to provinces). Adult-use consumers are less likely to buy higher-margin derivatives and, as noted, Aurora's supply of oils was limited in the most recent quarter.

If there is a bright side here, cash cost to produce each gram of dried cannabis sold fell 26% as the economies of scale from the 800,000-square-foot Aurora Sky campus are beginning to be felt.

6. Overseas sales: CA$4 million

Despite having a presence in an industry-leading 24 countries, Aurora isn't truly bearing the fruits of its international expansion just yet. In many instances, this is because Aurora is still in the process of laying the distribution or production groundwork in overseas markets.

For the quarter, the company recognized CA$4 million in European dried cannabis sales, which was a 40% increase from the sequential second quarter. But in terms of total cannabis sales, the international market made up less than 7% of revenue, and just 6% of total sales. This isn't negligible, but it's not a game-changer yet, either.

7. Percent of Canadian marijuana sales: Not mentioned, but 15,590 kilos produced

Of all the figures I suggested investors keep a close eye on, this was the only one that wasn't guaranteed to be in Aurora's earnings report. In the fiscal second quarter, Aurora accounted for 20% of all sales in Canada, but it didn't divulge this percentage for the recently ended quarter (through March 31, 2019).

However, the company did wind up producing 15,590 kilos of cannabis during the quarter, and is now operating at an annual run rate of at least 150,000 kilos, mainly due to Aurora Sky coming online. The 15,590 kilos produced was essentially a doubling from the sequential second quarter, while kilos sold rose 31% to 9,160 kilos from Q2 2019. With the exception of Canopy Growth, which has yet to allow investors a look under the hood over the comparable time period, Aurora may lead the industry in both production and sales.

8. Cash and cash equivalents, plus short-term investments: CA$347.9 million

Aurora Cannabis didn't end the fiscal second quarter with a lot of cash on hand, which is a bit worrisome given the company's aggressive capacity expansion efforts. According to the new report, the company had CA$347.9 million in cash, cash equivalents, and short-term investment as of March 31, 2019. That's still not a lot of capital for a company the size of Aurora, but it certainly provides more financial flexibility than it had just three months ago.

Furthermore, Aurora recently announced a shelf offering of up to $750 million (that's in U.S. dollars), of which $400 million may be at-the-market common stock issuances. Thus, Aurora has access to capital-raising opportunities, even if its balance sheet doesn't look all that impressive from a cash standpoint.

9. Outstanding shares: 1.01 billion

Easily the biggest negative that Aurora Cannabis brings to the table is that its acquisition-heavy strategy has caused its outstanding share count to skyrocket. That's because Aurora appears allergic to using its cash to pay for acquisitions. Instead, the company has financed most of its 15 buyouts since August 2016 by issuing shares of its common stock.

As of the end of March 2019, Aurora's share count had crested the 1.01 billion share mark, up from just 16 million shares outstanding at the end of June 2014. This means Aurora has issued roughly 1 billion shares of stock in less than five years. With so many shares outstanding, it'll be incredibly difficult for the company to produce a meaningful per-share profit that attracts fundamentally focused investors.

10. Goodwill: CA$3.18 billion

Finally, one of the ugliest, yet under-the-radar, numbers that investors should be paying attention to is Aurora's goodwill. Goodwill simply represents the premium that Aurora is paying for its acquisitions, above and beyond book value. While it's not uncommon to see goodwill on a company's balance sheet following an acquisition, it is uncommon for goodwill to make up such a large percentage of total assets. In Aurora's case, the CA$3.18 billion represents 57% of total assets, down from 63% of total assets in the sequential second quarter.

Nevertheless, this is a worrisomely high figure that suggests writedowns are probable at some point in the future. I don't doubt that some of this goodwill should be recouped as acquired assets are developed for dried flower and derivative production, but I have little faith that the full $3.18 billion in goodwill will be recouped.

That, folks, is Aurora Cannabis' third-quarter report, by the numbers.

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