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Aurora Cannabis Inc. fell short of its own revenue target in the fourth quarter, despite increasing sales, improving margins and reining in its earnings before interest, tax, depreciation and amortization (EBITDA) loss.

The company reported $98.9-million in revenue, of which $94.6-million came from cannabis sales. While that is a record for the most cannabis sold in a quarter by an LP – including long-time rival Canopy Growth Corp. – Aurora did not hit its own quarterly revenue target of $100-million to $107-million.

The miss did not appear to faze the company’s chief corporate officer Cam Battley, who told Cannabis Professional in an interview that, “the key metrics are all looking good.”

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"We're delivering more consistently than our peers, without crises, without drama, without management changes, without a down quarter,” Mr. Battley said.

Here are some takeaways from the company’s filings and the interview with Mr. Battley.

Revenue miss due to ancillary businesses

The results from Aurora’s core cannabis business ($94.6-million in cannabis sales) were actually in line with the revenue guidance the company provided in August that put projected cannabis sales at between $90-million and $95-million. The broader revenue miss was due to Aurora’s subsidiaries that are not directly involved in the sale of cannabis, Mr. Battley said.

“The ancillary revenue, some of that is variable on a quarterly basis, such as our Aurora Larsen Projects division that’s focused on design, engineering and construction,” Mr. Battley said.

Revenue and margins helped by wholesale

In contrast to previous quarters, a large portion of the company’s sales were in the wholesale market, where it sold 5,574 kilograms of dried cannabis to other LPs for a total of $20.1-million.

According to Mr. Battley, this product was mostly trim and was sold on an opportunistic basis.

"We had the opposite situation from a number of our peers where they've been scrambling for product and they've had to retool and build additional capacity. We had sufficient capacity to meet our needs across all our channels, and additional capacity,” Mr. Battley said.

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While wholesale prices averaged only $3.61, margins were “generally higher at approximately 61 per cent due to lower conversion, packaging and shipping costs,” according to Aurora’s MD&A.

Due to the opportunistic nature of the wholesale business, however, wholesale numbers may prove hard to sustain, according to RBC analyst Douglas Miehm.

“We believe investors would have likely preferred sales to be driven by the Canadian recreational and/or international medical business. With the company unlikely to match its Q4 B2B sales in Q1, and structural issues (especially at the retail level in Ontario) persisting in Canada, we flag the risk of flat to lower revenues in the upcoming quarter ($122.7MM consensus),” Mr. Miehm wrote in a note to clients.

This was echoed in the company’s MD&A: “Given the early stage of development of the consumer market in Canada, we expect that quarter to quarter sales volumes and revenues will be volatile."

The road to profitability?

In early 2019, Aurora said it would be adjusted EBITDA positive by Q4. The company walked back on that projection in August, revising the promise to say it “continues to track toward positive adjusted EBITDA.”

Aurora’s adjusted EBITDA did improve in the quarter, to a loss of $11.7-million from a loss of $36.6 million in the previous quarter. Mr. Battley, however, did not give guidance on when he expects profitability.

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“We don’t know exactly what the timeline will be for the beginning of sales of legalization 2.0 products, and there’s a certain degree of external influence that we have to be mindful of, and that includes provinces opening up retail stores,” he said.

Costs coming down

With the company’s Aurora Sky facility in Edmonton and MedReleaf facility in Bradford, Ont., now fully licensed and producing at scale, the company’s production costs are declining. Cash cost to produce a gram of dried cannabis decreased to $1.14 per gram, down from $1.42.

Aurora produced 29,034 kilograms of cannabis in the quarter, up 86 per cent from the preceding quarter.

“The decline in our production cash cost per gram is primarily due to the increase in production volumes and higher plant yields from our higher scale facilities, which has resulted in significant economies of scale on labour, utility, maintenance and other overhead cost,” the company said in its MD&A.

Management is still targeting a cash cost per gram of under $1, and Mr. Battley said Aurora is approaching that metric at its Sky facility.

While production costs are down, so are average selling prices in the recreational market, where the net average selling price per gram dropped to $5.14 from $5.48.

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Between the drop in price and the drop in costs, Aurora achieved slight improvements in its gross margins, which remain better than most competitors. The company’s overall gross margin before fair value adjustments on cannabis sales was 58 per cent. Gross margins were 60 per cent for medical sales, 55 per cent for recreational sales, and 61 per cent for wholesale sales.

Where is Nelson?

Aurora hasn’t said much about its relationship with investment titan Nelson Peltz since announcing it back in March. According to Mr. Battley, the partnership is still strong but Aurora is not rushing into any deals.

“We work with Nelson on virtually a daily basis,” said Mr. Battley. “I know there’s some who would have liked us to make an announcement pursuant to that strategic adviser relationship already, but it doesn’t work like that. We’re trying to find the right arrangements, and enter into them on appropriate terms. These are significant, large-scale, multi-year partnerships that we’re discussing with these potential partners and it takes time to get it right. You don’t want to make an error on something that significant.”

Mr. Battley did say that the company was looking to enter the U.S. market in “a very significant way” in the “near term,” in addition to what it is doing with its spinoff Australis Capital.

Legal battles looming?

Aurora acknowledged in its MD&A that it is subject to several legal disputes.

One unnamed company, apparently in Europe, is seeking €14.7-million ($22-million) plus legal costs from Aurora due to the alleged “failure to supply product under a recently acquired subsidiary’s supply agreement.” Aurora said that it had “terminated the contract due to a breach by the plaintiff” and that it has filed a statement of defence.

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The company is also dealing with a dispute it took over when it acquired MedReleaf last year, related to “a formerly terminated MedReleaf employee.”

“The claimant is seeking performance under their employment agreement regarding the amount of severance payable. As a result, the Company recognized a provision of $4.2-million, which represents management’s best estimate of the costs required to settle the matter,” according to the MD&A.

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