Shares of Canadian pot giant Aurora Cannabis (TSX:ACB)(NYSE:ACB) gained over 15% on September 22 to close trading at $9.73. ACB stock moved higher after it was upgraded by Jeffries analyst Own Bennett from “underperform” to “hold.”
However, the analyst slashed Aurora’s price target by almost 40% to US$6.53. Aurora Cannabis closed trading at US$7.32 on the NYSE. Bennett expects Aurora Cannabis will continue to face liquidity challenges due to its negative profit margins and will have to raise additional capital, which might dilute shareholder wealth significantly.
Investors were also hoping for better-than-expected Q4 results from the company, which could be another reason for Aurora’s upward spiral.
How did Aurora Cannabis perform in Q4?
In Q4, Aurora Cannabis reported net sales of $72.1 million, a sequential decline of 5%. Analysts expected the firm to post Q4 sales of $79.6 million. Aurora’s cannabis net sales were $67.5 million — a fall of 3% compared to Q3.
Aurora said consumer cannabis net sales fell 9%. While the total volume of dried consumer cannabis rose 36%, it was offset by a 30% decline in average net selling price per gram of cannabis. Adjusted gross margin before fair-value adjustments for consumer cannabis was 35%, up from 29% in Q3.
Comparatively, medical marijuana sales were up 4% at $32.2 million. This increase was attributed to a sustainable and profitable Canadian medical marijuana business that was up 2%, while sales in Europe grew 14%.
Though Aurora Cannabis posted an EBITDA loss of $34.6 million in Q4, it was $15.8 million lower compared to its EBITDA loss of $50.4 million in Q3. After accounting for severance costs, R&D termination costs, and divested businesses, the EBITDA loss for Q4 stands at $30.7 million.
Aurora’s production volume in Q4 was 44,406 kilograms, which were 23% higher than Q3, which helped the company decrease its cost to produce per gram of cannabis by 27%. Its capital expenditure for Q4 was $16.4 million, significantly lower than the $73.7 million reported in the previous quarter.
ACB continued to report balance sheet adjustments that include a fixed impairment charge of $86.5 million and a charge of $135.1 million in the carrying value of inventory. It also reported a goodwill writedown of a massive $1.6 billion.
ACB continues to burn cash in Q4
In the June quarter, Aurora Cannabis used $53.3 million in cash to pay down long-term debt and lease obligations. The company’s term debt stands at $110.5 million as of September 21. Its cash balance declined to $162.17 million at the end of Q4, compared with $228.46 million in the previous quarter.
Aurora believes its cash burn will decline in fiscal Q1 of 2021 due to higher gross margins before fair-value adjustments and a reduction in selling, general, and administrative expenses as well as capital expenditures.
The Foolish takeaway
During its Q3 earnings call, Aurora Cannabis had estimated it would report a positive EBITDA by the first quarter of fiscal 2021. This has now been pushed back to Q2 of fiscal 2021.
Aurora’s Q4 results failed to meet expectations, but the company managed to reduce losses. Its cash burn suggests that ACB will need to infuse additional capital, which can drive its stock price lower and wipe out recent gains. ACB stock is already trading 95% below its record high and remains a risky bet for investors.