With Aurora Cannabis (ACB) forecasting the June quarter reaching adjusted EBITDA positive, investors were likely caught off guard that a prominent investment firm questioned their cash position. The Canadian cannabis company once seemed smart for not taking large investments from big investors, but a cash crunch would quickly change that tune.
Image Source: Aurora Cannabis website
Cash Crunch
The market has generally ignored any balance sheet concerns with cannabis companies due to sector companies easily raising funds to finance future expansion and ongoing operating losses. Some of the sales struggles in the sector has investors thinking twice about floating these companies more cash to front wild expansion.
Anybody looking at the balance sheet will quickly understand why Bank of America’s Chris Carey has questions about the cash balance. Aurora Cannabis ended March with a cash balance of C$390 million with C$44 million restricted from use.
Source: Aurora Cannabis FQ3’19
For a stock with a market valuation that reached $10 billion, the balance sheet is awfully bare. The company only had C$83 million in inventory while listing C$3.9 billion in intangible assets and goodwill. In addition, Aurora Cannabis has quietly accumulated over C$600 million in convertible debt and loans.
Carey states the problem occurs when Aurora Cannabis has to redeem a large convertible debt of C$230 million in the March quarter. He forecasts the cannabis company only having C$70 million in cash by that time following more capital spending on four facilities adding 1.35 million square feet of new capacity.
Back in April, Aurora Cannabis filed a $750 million shelf prospectus for an at-the-market share offering over a 25-month period. The company further agreed to a sales agreement with Cowen and Company and BMO Capital Markets to offer up to $400 million worth of shares on the NYSE.
This offering will raise cash under the radar of investors and further dilute shareholders. An average price of $6 per share would require the selling of ~67 million shares. The diluted share count was already headed to 1.1 billion shares with a basic share count over 1.0 billion and nearly 100 million shares related to warrants and stock options.
Data by YCharts
Now, the majority of the warrants and stock options aren’t exercisable with the stock down at $6. The company won’t obtain the cash from exercising either equity instrument either.
Source: Aurora Cannabis FQ3’19
EBITDA Positive?
A big part of financing the future is whether Aurora Cannabis can reach the June quarter goal of adjusted EBITDA positive. The company generated a massive C$36.6 million loss in the prior quarter requiring Aurora Cannabis to close a massive gap that isn’t supported by the industry wide sales.
Canadian cannabis sales made a further increase in May with dried cannabis sales growing another 7% from April levels to 9,495 kgs. May sales were up 1,868 kg from the March levels for 24% cumulative growth.
Source: Health Canada
The issue for Aurora Cannabis is that this places the company likely on a path to sell no more than 15,000 kg of their forecasted 25,000 kg supply for the quarter. My previous work had forecasted a price decline to C$5 per gram and a gross margin dip to 50% leading to a similar EBITDA loss of C$37.5 million in the June quarter.
The best scenario for Aurora Cannabis is where the company sells 15,000 kgs at C$6.00 per gram to hold back inventory for edibles and vapes while gross margins remaining constant from the FQ3 level of 60%. The C$6.00 per gram price would match the sequential C$0.40 per gram dip as the company shifts more and more sales to lower valued recreational users.
- Revenue – 15,000 kgs @ C$6 per gram = C$90M
- Gross Margins @ 60% = C$54M
- OpEx = C$75M
- Adj EBITDA = -C$21M
So far prices have remained steady as the inventory flood has somewhat been constrained by inventory held back for Cannabis 2.0. The key here is that Aurora Cannabis needs substantial revenue growth to cut the loss. This forecast has revenues surging 38% sequentially from C$65 million, requiring substantial market share gains from the cannabis company.
No scenario seems to support Aurora Cannabis being able to sell enough supply at premium prices to wipe out the adjusted EBITDA loss from the prior quarter. With continuing cash losses, the cash position would become more of an issue and require the hidden share offerings and shareholder dilution. The Canadian cannabis company remains far too early in their development to worry about cash issues.
Takeaway
The key investor takeaway is that Aurora Cannabis likely has a bigger issue with operating cash flows than raising cash to cover a convertible debt and potential ongoing operating losses. The company likely still has the ability to sell shares at the market to satisfy any cash crunch long beyond the start of 2020, but the shares could be sold at increasingly lower prices.
The diluted share count will continue to bloat towards 1.1 billion shares and above. The stock rallied on the Aphria (APHA) quarterly numbers, but the big boost from Aphria was clearly more about low-margin distribution revenues and potentially taking market share than an improving cannabis sales environment. Aurora Cannabis will slump the other way, if the company misses positive EBITDA targets as predicted here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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