Aurora Cannabis Inc could be cash-flow positive in December 2016
David Bar | Ubika Research Analyst | October 21, 2016: Sentiment in the marijuana industry continues to grow, and Aurora Cannabis Inc. (CVE:ACB) is leaving a trail of smoke and ashes behind it as its stock price has surged 49% since we last discussed it less than a month ago, bringing its year-to-date stock appreciation to more than 250%. Stock value aside, Aurora has had a great couple of months and to cap it all off it announced its acceptance to the TSX Venture Exchange (TSXV) on October 4th. This marks yet another incredible milestone for the Company after it received the OK from Health Canada back in September to sell medical marijuana to its patients via mobile app (pictured below), along with other significant accomplishments. The article analyzes the highs and lows associated with the Aurora Cannabis stock.
Related:
Pot is Hot, But Can These Marijuana Stocks Sustain Its High?
Marijuana Legalization in Canada: 4 Stocks That Could Reach New Highs
Figure 1: A preview of Aurora Cannabis mobile app.
More Good News from Aurora’s Financing Activities
Back in September, Aurora Cannabis announced that it had initiated a $15 million private placement. As of September 28th, that placement closed and yielded some great results for the marijuana producer. Aurora completed the placement obtaining $15 million in proceeds from unsecured convertible debentures, bearing an interest rate of 10% per annum paid semi-annually convertible at a price of $1.15 per share at any time before maturity on March 28th, 2018.
However, attached to the debentures is a term that states should the volume weighted average price (VWAP) of the common shares equal or exceed $2.00 for 10 consecutive days, the Company can force conversion of at the price of $1.15 per share, upon giving 30 days’ notice. The Aurora Cannabis stock could thus have limited exposure of dilution to its current shareholders. This is because if the stock continues to climb right through to maturity then the Company can minimize the loss to its existing shareholders by enacting the conversion sooner. Considering that as of October 6th, 2016, the Aurora Cannabis stock has traded above $2.00 per share, this arrangement most certainly favours the investors for when the debentures are converted.
Of the $15 million in proceeds, $4 million was used immediately to deleverage Aurora’s balance sheet of high interest, senior secured debt. This is tremendous for Aurora’s balance sheet as ridding its secured debt, which is backed by collateral (usually company assets) that could be sold if the Company was to default on its repayment of the loan, and replacing it with unsecured debt decreases the risk for equity investors. By also replacing a debt with higher interest for debt with a lower interest rate, decreases the liability of the Company and increases free cash flow as interest payments are reduced.
In addition, pursuant to the terms set forth in two private placements that closed on December 31st, 2015, and January 19th, 2016, Aurora has accelerated the warrant conversion, for which it will receive proceeds of up to $3.79 million if all private placement common share purchase warrants and finder warrants are exercised. These warrants, which had exercise-able prices of $0.66 per share for common share purchase warrants and $0.53 per share for each finder warrant, carried a similar term as described above. This addition of $3.79 million further reduces the liability on Aurora’s balance sheet and adds a significant amount of working capital, which will eliminate the need to raise additional capital for its operating activities.
Where To From Here For The Aurora Cannabis Stock?
With the release of Aurora’s year-end financial statements around the corner, you should see some favourable circumstances presented in the Company’s MD&A, as it has raised more than $35 million since the year ended on June 30th, 2016. Not only has it been able to raise money from the market, but Aurora has also been growing its revenue base at an outstanding rate. Consider that for the three months of 2016 ended March 31st, revenues sat at just over $200,000 for the entire quarter, however for July, sales broke through $1 million and August saw sales grow an additional 20% to $1.2 million. Conservatively assuming that all of the revenues from the quarter ending March 31st were made in March, that is a revenue growth rate of 500% over five months. If this growth continues, which is likely with the state of the market and the continued growth in its customer base, Aurora Cannabis could become cash-flow positive from operations as early as December 2016 which should help the Aurora Cannabis stock price.
Inherent Risk in the Industry
As with any venture there is inherent risk, even more so when dealing with a new company in a new industry. Since it received its Marijuana for Medical Purposes Regulations license, in November 2015, and first started selling as of January 5th, 2016, the Aurora Cannabis stock has seemed to have no setbacks but such operational flow may not be sustainable. With the first 200,000 square foot phase of the new 600,000 square foot facility expected to be completed and operational by the summer of 2017, any delay in construction that may result from inclement weather, which is common in Alberta, could disrupt Aurora’s ability to meet its growing demand, and investors’ expectations. In addition, the possibility of the government task force established by Canadian Prime Minister Justin Trudeau to construct the legislation around the legalization of marijuana not being completed by the spring of 2017 is a possibility.
