Aurora Cannabis (ACB 12.87%) finally made the move that investors have anxiously awaited for a long time. The Canadian cannabis producer announced last week that it entered into an agreement to buy Reliva, which boasts one of the top-selling CBD brands in the U.S. market.
Investors cheered the news that Aurora will soon be able to jump into the big U.S. CBD market. Several of the company's top rivals, including Canopy Growth and Cronos Group, already have a presence in the U.S.
Aurora stated that Reliva is "profitable today" and will provide the company with a top hemp CBD brand that's currently sold in more than 20,000 retail locations in the U.S. The last part of that statement is true. But don't believe Aurora Cannabis' profitability spin.
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Adjustments required
Reliva is privately held, so there aren't public documents available that provide details on the company's financial performance. However, Aurora Cannabis interim CEO Michael Singer shared some interesting information in an interview with MarketWatch last week.
First, Reliva's annual revenue is in the ballpark of $13 million to $14 million. This represents only a fraction of Aurora's annual sales. Of course, the U.S. CBD market is still only in its early stages. Reliva could very well become a significant growth driver for Aurora.
The more eyebrow-raising thing that Singer said is that Reliva isn't profitable on a GAAP basis, the accounting standard by which U.S. companies report their financial results. Instead, the small CBD company has only generated earnings on an adjusted basis.
Sometimes, adjusted earnings give investors a more accurate picture of how well a company is performing. For example, one-time expenses that don't impact a company's ongoing performance can be factored out. However, it's impossible to know right now all of the adjustments that Reliva makes to be able to report its "profitability." Some of those adjustments might not be as defensible as one-time expenses.
The bottom line is that we really don't know how Reliva's true bottom line looks. What we do know is that Aurora's press release announcing the acquisition stated that Reliva was profitable (with no caveats or clarifications) and that it took a follow-up interview for investors to learn the rest of the story.
Unprofitable profitability
It's not surprising that Aurora would refer to an adjusted financial number as being profitable, though. The company's executives frequently do it when they discuss Aurora's financial future.
For example, Singer talked about the company's cost-cutting moves in his comments during Aurora's Q3 conference call earlier this month. He stated that these moves will "fuel profitability" for Aurora. However, anytime Aurora's management team mentions profitability, they're actually meaning adjusted EBITDA profitability.
If you're not familiar with EBITDA, the term stands for earnings before interest, taxes, depreciation, and amortization. Generating positive EBITDA is a good thing, especially for Aurora, which posted negative adjusted EBITDA of 50.9 million in Canadian dollars in the third quarter. However, positive adjusted EBITDA is categorically not the same thing as profitability.
Aurora thinks that it will be able to deliver positive adjusted EBITDA by the first quarter of fiscal 2021, which ends on Sept. 30, 2020. But the Canadian cannabis producer will still be losing money even if it achieves this goal. The company has over CA$246 million in loans and borrowings for which it must pay interest. And while Aurora has benefited from tax recoveries in the current fiscal year, at some point paying taxes will negatively impact its financial results.
Note also that the word "adjusted" is still being used. Unlike the situation with Reliva, though, we have a pretty good idea of which adjustments Aurora can take with its EBITDA figure because the terms of its financial covenants for its debt facility spell them out.
Beyond the spin
The good news for Aurora is that it appears to be making solid progress toward its goal of generating positive adjusted EBITDA by the end of September. The company's acquisition of Reliva should also be positive over the long run as the U.S. CBD market grows.
However, there are still significant challenges for Aurora. It remains to be seen how quickly the Canadian market will rebound as restrictions related to the COVID-19 pandemic are relaxed. The marijuana stock could give up much of its recent gains with any bumps in the road.
Most importantly, Aurora could have to go to the well yet again to raise additional cash through another dilution-causing stock offering or attempt to take on even more debt. Until the company is truly profitable, Aurora's prospects could be shaky. And what Aurora calls profitability isn't true profitability.
