Aurora Cannabis unfazed by revenue miss, Columbia Care anticipates over 50% gross margin potential & more

Earnings reports started to ramp this past week. Here are some key takeaways that especially caught our attention at Investor Intelligence this week:

Cronos’ EBITDA guidance

As detailed in in our Rapid Reaction, Cronos Group shares traded down 4% on Thursday as the Toronto-based company guided larger adjusted EBITDA losses that are larger in the second half of 2019 than the first.

Thus, the adjusted EBITDA loss for this year is at least CA$24 million greater than consensus expectations.

However, those losses are being driven by discretionary investment to increase growth, primarily to boost the company’s presence in the American CBD market after its acquisition of Redwood Holding Group last week.

On the earnings call, Cronos CEO Michael Gorenstein confirmed the company’s shift to target the CBD market in the U.S., saying “it is fair to estimate that the U.S. CBD market will likely be the largest contributor over the next year or two.”

Aurora unfazed by revenue miss

Aurora Cannabis preannounced its June results, noting that increased-production guidance and positive metrics trends more than offset a slight revenue miss and sent the company’s stock up 8%.

Revenue for the quarter ended June was guided to be CA$100 million-$107 million, a 3%-9% miss compared with the consensus estimate of CA$110 million.

Despite the miss, Aurora’s revenue growth is still up 441% year-over-year and 59% quarter-over-quarter, and the Edmonton, Alberta-based company noted that its KPIs improved versus the full third quarter ended March 31.

Aurora also raised the production guidance to “high end” of 25,000-30,000 kilograms versus its previous guidance of 25,000 kilograms.

Thus, for the full fourth quarter 2019, the following metrics should be higher than those from March 31:

  • Gross margin will be higher than 55%.
  • Kilograms sold will surpass 15,590.
  • Cash cost per gram will be less than CA$1.42.

Aurora will report full results before Sept. 15.

Columbia Care anticipates over 50% gross margin potential

Because of expansions in production, Columbia Care‘s gross margins were 28% in the June quarter, down from 56% in the prior June quarter and 34% in the March quarter.

On the earnings call, management confirmed that in a steady state the gross margin would be “well north” of 50%.

Now that Columbia Care is a publicly traded equity, having recently joined Canada’s NEO exchange (ticker CCHW), management is also looking at mergers and acquisitions to drive revenue growth with a focus on return on invested capital (ROIC) and dilution.

Target assets include distribution to reach the consumer directly and technology platforms.

Columbia Care also has high expectations for a credit card it plans to roll out to all its dispensaries by year end.

More interesting, however, the company views the service as a turnkey payment solution for the whole industry.

In the company’s New York trial, credit card users’ average basket size was 18% in store and 40% for delivery, so the program has the potential to significantly drive sales growth.

Columbia Care is still focused on expansion, with management confirming the company should have “in the neighborhood of 50” dispensaries by the end of 2019, including 20 in the key Florida market.

GW Pharma cautiously optimistic

GW Pharmaceuticals posted another very strong quarter driven by sales of Epidiolex, the first cannabis-based drug approved by the U.S. Food and Drug Administration (FDA).

Physician and patient demand has been high since the drug launched in early 2019.

Despite the tremendous short-term sales ramp from patients and physicians who participated in the drug trials and studies, GW Pharma’s management believes a more normal demand pattern will occur relatively soon.

Two factors might counter management’s caution, however:

  • Epidiolex is expected to launch in several European countries around October 2019 and could spur a strong revenue spike similar to what happened in the United States.
  • We could see pricing growth. Physicians are starting patients with low dosages to check for adverse reaction, but dosages could rise significantly over the next six to nine months.

The London-based company also has Epidiolex in FDA trials for other medical conditions such as Rett syndrome, which commonly includes epileptic symptoms.

Flowr’s complicated deal

The Flowr Corp. of Toronto closed on a deal to issue nearly CA$50 million of equity and warrants to pay for its acquisition of European-based Holigen Holdings, continuing the trend of more complex capital structures in the cannabis sector.

For CA$4.10, the security provided investors one share and a warrant to purchase 0.5 shares at CA$5.00. Thus, Flowr issued 10.6 million shares, but once the shares trade above CA$5.00, there is the potential that another 5.3 million shares will be issued.

As shown in Flowr’s Aug. 2 prospectus on SEDAR, the true pro forma share count for all the transactions is 194.5 million shares, of which 5.3 million will be issued only if the stock trades above CA$5.00 in the next two years.

If the stock does not trade above CA$5.00 before Aug. 8, 2021, the warrants will expire worthless, and total shares will reach only 189.2 million.

At the Thursday close of CA$4.05, Flowr had a market cap of CA$786 million – much higher than the CA$200 million-$400 million cited on many financial data services using stale share counts.