Strong Investment Decisions by Aurora Cannabis Leads to Strong Q1

Aurora Cannabis Inc (TSX:ACB) (NYSE:ACB) started the fiscal year with a bang as it released its Q1 earnings which showed significant year-over-year growth. Sales were up as much as 260% with the company’s top line reaching just under C$30 million during the past quarter – a significant improvement from the $8 million in sales that it achieved this time last year.

But since recreational marijuana was just legalized last month, these numbers are still a result of medicinal sales only. Next quarter is when we’ll start seeing just how big of an impact the recreational market is going to have not only on Aurora, but on other cannabis producers as well. The company is sounding optimistic about the performance so far, stating in its earnings release that it “recorded a strong performance, ranking top or among the top-selling products and brands in many of the provinces the Company committed to supplying, for the first two weeks to October 31, 2018.”

The caveat here is that a few weeks is a very small sample size, especially when things are still very new and exciting. It’s unlikely that the pace will continue throughout the quarter, but it sounds like things are off to a good start nonetheless.

Not only will recreational pot sales give the Company a boost in future quarters, but so too will Aurora’s expansion into international markets as the company has its sights set on global dominance, with Latin America and Europe being its latest targets.

Costs Increase

Preparing for recreational marijuana and planning international expansion costs a lot of money, however, and so it’s no surprise that Aurora saw a significant increase in costs from a year ago.

Operating expenses of $120 million more than wiped out the $8 million that Aurora generated in gross profit this past quarter. General and administrative, sales and marketing, and share-based payments accounted for more than $86 million of operating expenses in Q1. A year ago, those line items totaled just $9 million.

However, it’s hard to discern how much of these costs are related to inefficiencies that will be pruned out as a result of all the acquisitions that have taken place over the past year, and how much of the costs are actually a problem. Anytime you’re in acquisition mode, you’re going to see your expenses spike, and clearly, what’s happening with Aurora is no exception.

Investors will want to keep an eye on just how well Aurora will be able to keep its costs under control in future quarters, because if it doesn’t and the Company isn’t able to generate positive cash flow, it’ll need to draw on funds from somewhere. And that somewhere is likely debt or issuing additional shares – which won’t be ideal for investors.

Aurora Cannabis Makes Strong Investments

Although Aurora posted a heavy operating loss of more than $111 million in Q1, unrealized gains and a deemed disposal helped add $220 million back to the company’s bottom line, launching it into the black. Much of this were the result of some smart investment decisions by the Company.

Q1 2019 net income increased to $104.2 million, compared to a net income of $79.3 million in Q4 2018 and $3.6 million in Q1 2018. The increase was primarily attributable to the unrealized non-cash gain on derivatives and marketable securities, which was partially offset by increased finance costs, share-based payments, acquisition and project evaluation costs.

Net cash and cash equivalents on hand increased from $89.2 million at the end of Q4 2018 to $147.8 million as at Q1 2019. Working capital at the end of Q1 2019 was $548.4 million, as compared to $144.5 million at the end of Q4 2018. The inclusion of MedReleaf’s balances accounted for $57.6 million in additional working capital.

Investment in Green Organic Dutchman Strengthens Aurora Balance Sheet

It’s important to note that the change in working capital was largely attributable to an adjustment to the Company’s investment in The Green Organic Dutchman (TSX: TGOD), which was previously treated as an investment in associate and was reported at cost; the investment is now treated as a marketable security and reported at fair value.

Based on the insider filings of TGOD, Aurora has been selling shares of TGOD and making a handsome profit, likely using profits from the sales to fund other investments, such as its recent investment into retail brand Choom Holdings (CSE: CHOO).

The Company also has strategic investments in a number of publicly-traded companies. Based on the closing prices at November 9, 2018, the value of the common shares and “in-the-money” warrants held by the Company was $407.57 million.

However, depending on how the marijuana sector fairs in the next few months, the value of these “in-the-money” shares and warrants may not necessarily be realized, and investors should keep that in mind. Furthermore, as Aurora looks to fund other acquisitions and investments, they could sell their current “in-the-money” shares and warrants, which could place downward pressure on those respective investments.

Overall, investors were not overly concerned with the Company’s performance from Q1 as the stock was down less than 2% on Monday. Later this week, rival Canopy Growth Corp (TSX:WEED) (NYSE:CGC) is expected to release its quarterly results as well.