The collapse in Canada-based pot stocks is not finished. Over the past two years, the worst-performing cannabis company has been Aurora Cannabis Inc. (NYSE: ACB), which has lost just over 87% of its value as the stock price dropped from around $6.40 to $0.71 on May 5. At Aurora’s stock price peak, the shares traded around $12.50, in October of 2018.

Unlike many of its competitors, Aurora never received a major investment from a tobacco or alcoholic beverage company. Partly that was due to the company’s strategy to grow by acquisitions, funded primarily by its own stock. The MedReleaf acquisition in May of 2018 cost Aurora C$3.2 billion (US$2.3 billion) in stock and no cash. That may be one of the big overhangs on shares of Aurora as it prepares to report earnings after the markets close on May 14.

With a share price below $1.00 and a soft market, Aurora’s ability to avoid bankruptcy is sure to be severely tested.

Expectations for the Third Quarter Are Modest

The consensus estimate for Aurora’s loss per share in the third quarter is C$0.06, considerably better than the loss of C$0.16 per share in the same quarter of last year. Net revenue a year ago totaled C$65.1 million (net of excise taxes totaling C$10.2 million). For the current year, analysts are expecting net revenue of C$66.1 million.

The weakness in sales is down to slow growth in Canada’s cannabis market. Late last year, most of the country’s pot growers were planning their move into Cannabis 2.0 to begin by early in 2020. New derivatives, like edibles, oils and vapes, were supposed to hit the market and boost sales all around.

That didn’t happen, primarily because the companies were moving faster than the Canadian federal and provincial governments. Product approvals were delayed and retail outlets, particularly in Ontario, were slow to be licensed. Buying adult-use cannabis from a black market supplier is not only cheaper, but easier.

Canada also prohibits brand marketing of marijuana strains, making it difficult for one company to differentiate its products from another’s.

What the Stock Market Is Looking For

Last November, Aurora stopped construction of a facility in Denmark and deferred spending on construction and commission costs for another in South America. The company expected to save about C$200 million in near-term cash.

In the same month, holders of some C$227 million in near-term debt converted their debt to common stock. At the end of 2019, just C$2.3 million had not been converted. Aurora also listed its grow facility in Exeter, Ontario, for sale at C$19 million (since reduced to C$17 million). The facility was a major part of its MedReleaf acquisition.

These moves increased Aurora’s liquidity and flexibility to meet its financial commitments, including its near-term obligations of C$373.6 million. On December 31, the company reported cash and cash equivalents of C$156.3 million, excluding restricted cash of $45.0 million.

Aurora took a goodwill write-down of C$762.2 million in the second quarter and is reasonably likely to take another of similar size in the third quarter. The goodwill impairment was largely tied to its MedReleaf acquisition. Aurora’s carrying value on MedReleaf is still around C$1.2 billion, and a write-down of $1 billion is not out of the question.

Earlier this year, Aurora issued 3.6 million common shares in an at-the-market (ATM) offering that grossed C$7.5 million. The ATM prospectus allows for the sale of up to US$400 million of common shares by registered dealers on behalf of Aurora through the New York Stock Exchange at prevailing market prices at the time of sale.

The company also has committed to reducing its selling, general and administrative (SG&A) expenses to a range of C$40 million to C$45 million per quarter. In the December quarter, Aurora spent C$70.8 million on SG&A and C$29.1 million on sales and marketing. Reaching the company’s goal means slashing costs by half. That’s possible, but not without some serious pain.

Is Aurora Cannabis headed for bankruptcy reorganization? The signs are unmistakable, though maybe not unavoidable.

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