You'll hear most of the big Canadian cannabis producers talk a lot about revenue growth. However, it's a different story when it comes to profits. In most cases, any reported profit for one of the five biggest Canadian producers will come with an asterisk: a paper profit fueled by a one-time gain rather than true operating profitability.
Sooner or later, though, the top marijuana companies will have to achieve profitability or fade away. Here are the most likely time frames for Aphria (NYSE: APHA), Aurora Cannabis (NYSE: ACB), Canopy Growth (NYSE: CGC), Cronos Group (NASDAQ: CRON), and Tilray (NASDAQ: TLRY) to operate in the black.
Aphria stands as the only top-five Canadian cannabis producer to deliver a quarterly profit without relying on a one-time gain or adjustment from the fair value of biological assets. The company reported net income of 15.8 million Canadian dollars, or CA$0.05 per share, in its fourth quarter ending May 31, 2019.
It's important to note, however, that Aphria didn't achieve profitability based on its Canadian marijuana operations. Instead, the company's profit stemmed primarily from its acquisition earlier this year of German medical cannabis and pharmaceutical distributor CC Pharma. Still, a profit is a profit. Aphria Chairman and interim CEO Irwin Simon said in the company's Q4 conference call that Aphria's team is "energized and excited to drive growth and profitability for many, many years to come."
Aurora Cannabis isn't anywhere close to being profitable at this point. The company announced a net loss of CA$158.4 million, or CA$0.16 per share, in the quarter ending March 31, 2019, and hasn't reported its fiscal 2019 fourth-quarter results yet.
But Aurora's chief corporate officer, Cam Battley, said in the company's last quarterly conference call that it is on a "pathway to profitability." He mentioned that Aurora expects to report positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in the fiscal 2019 fourth quarter. However, positive adjusted EBITDA isn't true profitability. It seems likely that Aurora will generate real profits no sooner than its fiscal 2021, which ends on June 30, 2021.
After Canopy Growth's disastrous fiscal 2020 first-quarter results, you might think the big cannabis producer is a long way from becoming profitable. And you'd be right.
While Aphria is already profitable and Aurora expects to report positive adjusted EBITDA this quarter, Canopy Growth isn't likely to post positive EBITDA overall until its fiscal 2022, although it could report positive EBITDA for its Canadian business in fiscal 2021. CEO Mark Zekulin projects that the company will deliver positive net income within the next three to five years.
Cronos Group posted a huge profit of CA$251 million in its latest quarter. But the good news stemmed from the company's big gain on revaluation of warrants owned by its partner, tobacco giant Altria.
When might Cronos achieve consistent profitability without extra help? It's hard to say. The company's executives haven't provided an estimated timeline for profitability like several of its peers have. My best guess is that Cronos, like Canopy Growth, is at least three years away from turning an operating profit on a consistent basis. However, Cronos could use more of the cash from Altria's investment to make acquisitions that accelerate its path to profitability.
Tilray is another Canadian marijuana producer that you wouldn't think is on a great track to delivering consistent profits. The company's net loss of $35.1 million, or $0.36 per share, in the second quarter was a lot worse than expected.
However, Tilray CFO Mark Castaneda predicted in the company's Q2 conference call that the company will deliver positive EBITDA by the end of 2020. He also said that it expects to generate positive cash flows within the next three to five years. You might want to also take into account what CEO Brendan Kennedy said, though. Kennedy expressed his view that "if you're trying to dominate a global industry, you'd be constraining yourself if you were focusing entirely on profitability at this point."
Consequences for any delays
Kennedy's perspective has some merits. It's still very early in the game for the global cannabis industry. Sacrificing the opportunity to get a head start into potentially large new markets to deliver a profit could prove to be penny-wise and pound-foolish. However, there are consequences for several of these cannabis producers in failing to achieve profitability in the near future.
Canopy Growth and Cronos Group can still tap into their big cash stockpiles funded by major partners. Aphria, Aurora, and Tilray don't have this luxury. Aphria, at least, has CC Pharma to help it operate in the black. But until Aurora and Tilray find a way to produce profits, both companies could be forced to raise cash in ways that hurt existing shareholders over the short term.
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