Marijuana giant Aurora Cannabis announced its fiscal fourth quarter of 2020 results last week and reported net revenue of $72 million which was below consensus estimates of $79.6 million.
The company also reported an EBITDA loss of $34 million which means its operating expenses far exceed Q4 sales. Further, Aurora provided a tepid outlook for the first quarter which sent the stock lower by 30% soon after its quarterly results were out.
However, one of the most important metrics for investors was the pot stock’s goodwill impairment charge of a staggering $1.6 billion. Goodwill impairment is a non-cash accounting charge that a company records when its carrying value is higher than its fair value.
Goodwill is the difference between the acquisition price and the book value of a company. For example, if a company’s book value is $1 million and it is acquired for $1.5 million, the acquiring firm will report $500,000 as goodwill on the balance sheet.
So, a goodwill impairment charge occurs when a company pays a premium while acquiring the assets of another company, and if the assets of the acquired company deteriorate, the fair value of the goodwill should be below its book value.
Goodwill is recorded as an asset on a company’s balance sheet and it checks for impairment on an annual basis. An impairment charge confirms that the value of the acquired asset has fallen below the amount that the company has paid for it, which means the asset’s value has to be adjusted to appropriate levels.
A large goodwill impairment charge would suggest the company’s acquisitions were overvalued raising questions over the decision-making ability of its management team.
Aurora Cannabis went on an acquisition spree
Aurora Cannabis has acquired several companies over the year.s While the big-ticket acquisitions were funded with common stock, Aurora also purchased companies by cash which reduced its liquidity. It also raised debt to fund a few acquisitions, which in hindsight, was a poor decision.
In 2018, Aurora Cannabis spent US$852 million to acquire CanniMed Therapeutics, US$2.5 billion to acquire MedReleaf, and $290 million to acquire ICC Labs. These companies were acquired at the time when Canada was about to legalize cannabis for recreational use.
The investor sentiment was expectedly bullish with Canadian pot stocks crushing the broader markets. The optimism surrounding cannabis legalization and positive market sentiment would have led to overvalued acquisitions that have now come back to hurt Aurora Cannabis.
At the end of the September 2019 quarter, Aurora’s goodwill stood at a massive $3.7 billion which indicates it has overpaid for over a dozen acquisitions in the last five years. Its goodwill then accounted for 55% of total assets which means an impairment or write-down was always on the cards.
Aurora ended June 2020 with goodwill of $928 million and it now accounts for 33% of total assets. Goodwill still represents a significant portion of Aurora’s net worth which means the company’s value is still overstated given lower than expected demand for cannabis products.
ACB stock is trading 96% below record highs
While Aurora historically acquired companies at sky-high valuations, a significant amount of goodwill on its balance sheet is one of the many concerns for investors. Cannabis companies continue to be impacted by a slew of structural issues that include a slow rollout of retail stores in major provinces, a thriving black market, health concerns arising from the vaping scandal, and low profit margins that have resulted in tepid consumer demand.
Aurora Cannabis stock is trading 96% below its record high and has been one of the worst performers for pot investors.