Aurora Cannabis Inc. (NYSE: ACB) delivered its official results for the fourth quarter of fiscal 2020 following up from a recent preannouncement of unaudited numbers. The company reviewed the drop in quarterly revenue, but investors were more disappointed that the company suggested revenues could continue to decline. The stock was falling by over 16% in early trading to sell near $6.

A couple of weeks ago Aurora said its net revenue was expected to be in the range of $70 million and $72 million, versus $75.5 million in the third quarter. The company said that cannabis net revenue is expected to be between $66 million and $68 million, a sequential drop from the third quarter net revenue of $69.6 million. The actual number came in at $72.1 million, a sequential drop of 5%. Cannabis net revenue was $67.5 million in Q4 2020, a 3% decrease from the prior quarter.

First Quarter Revenue To Fall 10%

During the company’s earnings call after the market close on Tuesday, CFO Glen Ibbot said, “Following the divestiture of non-core subsidiaries during fiscal 2020, our net revenue in Q1 2021 should be comprised exclusively of cannabis net revenue, which is expected to be between $60 million and $64 million, compared to the $67.5 million of Q4.” The company noted that its medical cannabis business has remained steady, but the retail business continues to have problems. The company focused its efforts on the value brand Daily Special. Ibbot said, “Daily Special our value brand accounted for 62% of total net consumer revenue from flower in the quarter as compared to 35% in the third quarter. This is the primary factor impacting the decline in our average selling price per gram of dried cannabis flower.” The company also noted that once it began to focus on a value brand that its competitors did as well.

They were first mover into that value segment. However, others quickly followed. And when you’re displaying on price it just becomes diminishing return. And so, I think the company got a bit distracted by the success that they saw with that discount offering which was Daily Special, which sort of delayed other endpoints such as vapor and pre-rolls. There is a lot of growth in the category and then everyone else kept piling in and because there with such a reliance upon that discount business and a lot of different ways both on the gross side, on the sales side, on the trade marketing side when that was just completely you know pressed against by competitive pricing pressure it became hard to pivot.

New CEO Miguel Martin said, “Aurora has slipped from its top position in Canadian consumer, a market that continues to support material growth and opportunity. We look to expand beyond the value flower segment, leverage our capabilities in science and product innovation and put our effort on a finite number of emerging growth formats. This entails prioritizing our San Rafael, Aurora and Whistler premium brands in flower, pre-rolls and vapor, which will be shortly followed by strategic marketing and innovation efforts in concentrates and edibles.”

Reducing Expenses

On a positive note, Aurora has reduced its SG&A cost, which includes R&D spending from over CAD100 million in Q2 2020 down to CAD64.6 million in Q4 excluding approximately CAD3 million of non-recurring costs related to the business reset. The company sid it is now operating at a targeted quarterly estimated run rate in the low CAD40 million range as of Q1. “Reducing the run rate to below CAD40 million range was very important that has strived to deliver positive EBITDA. We also believe this level of SG&A and is quite sustainable and very capable of supporting a much higher revenue margin.”

Cash

The company continues to sit atop a mountain of cash – $230 million. Its cash use in the fourth quarter was similar to the prior quarter, however, the mix within the use showed significant positive progress. In Q4 2020, Aurora used $53.3 million cash to pay down term debt and lease obligations, and following further pay downs subsequent to the quarter-end, term debt stands at $110.5 million as of September 21, 2020. Cash used for capital expenditures was $32.8 million, which includes invoices paid related for work done in Q3, and was $51.2 million lower than in Q3. Cash used in operations was $63.9 million, excluding the $105.5 million of non-cash inventory impairment in the cost of sales.