Legalizing pot in Canada has helped Aurora's sales, but added to its excise taxes and regulation-inspired costs.
12 Feb, 2019FORTUNE.COM
The legalization of marijuana is proving to be a two-edged sword for cannabis startups: On the one hand, it means more revenue; on the other, it can involve higher taxes and other regulatory costs.
That’s one takeaway from the first earnings report from Aurora Cannabis after marijuana was legalized in Canada. The Edmonton, Alberta-based cannabis producer, which claims to control one-fifth of consumer pot sales in the country, said revenue in the last three months of 2018 quadrupled even as its net loss increased comparably during the period.
Aurora said its gross revenue in the quarter came in at $62 million, a 430% rise from the same quarter a year ago. But net revenue, which subtracts out Canadian excise taxes on the sale of recreational cannabis, rose a slightly more modest 363% to $54.2 million.
Aurora also reported a net loss of $237.8 million in the same period, against a net profit of $7.7 million a year ago. In other words, Aurora lost nearly four dollars for every dollar in revenue it brought in.
There are a few reasons for that growing loss, and some of them underscore why, for all its promise, the nascent cannabis industry is not free from the problems many startups face. Aurora is a growing startup: The amount of kilograms Aurora sold last quarter surged 162%, accounting for the growth in its top-line. At the same time, the cost of sales per gram of cannabis the company produced rose 36% last quarter to $1.92.
One challenge Aurora faces is that the average net selling price of dried cannabis fell 21%, while the price for cannabis extracts fell even further, by 25% to $10.00, the company said. That, along with the excise taxes mentioned above, cut into the gross-profit margin.
And there are other operational costs. One of them, as Aurora explained in its earnings report was increased packaging requirements under Canada’s Cannabis Act. Another was the “ramp-up and optimization costs” that the company expanded its Aurora Sky facility to full production. Aurora Sky was described by Marijuana Business Daily as “one of the biggest cannabis facilities in Canada.”
Aurora has become a darling of cannabis-stock speculators because, early on, it shrewdly got in on an industry that was about to take off, thanks to the legalization of cannabis. Its earnings report offers two lessons to cannabis investors: First, legalization brings more regulation, which often means more costs.
Second, a cannabis startup like Aurora is still a startup. And being a startup means that, to build on the impressive growth you’ve enjoyed in the past, you must invest in the present to keep growing in the future.