A big thesis of the Canadian cannabis LPs investment story was global expansion. The news last week of Aurora Cannabis (ACB) being blocked from Germany sales highlights the bigger problems of trying to operate in dozens of countries. With a concerning low level of cash, the cannabis giant doesn’t need another revenue problem while a competitor just opened up a potential financing source to solve the cash crunch.
Unsurprisingly, investor sentiment is also very negative, with individual portfolios in the TipRanks database showing a net pullback from Aurora stock.
According to MJBizDaily, Aurora Cannabis’ medical cannabis products aren’t going to be on the Germany market until early next year at the earliest. Health authorities apparently are concerned about a “proprietary step” used by the Canadian company to ensure the shelf life of the products.
The news outlet suggests Aurora Cannabis could have a problem with prescriptions following regulatory approval next year as German pharmacists move onto another product for treatment of patients. In the last quarter, the company had C$5 million in international cannabis sales with the majority of the revenues from the German market. The issue speaks to the bigger concern of trying to meet regulatory requirements in dozens of countries as the company ramps up global operations.
Just last week, the company announced plans for entering Ireland. The CBD oil drops are approved by the Medical Cannabis Access Programme for three medical conditions.
This news should again caution the excitement over global operations, especially considering Aurora Cannabis will report virtually nothing for ongoing international operations that were a cornerstone of the stock story.
While investors are facing another revenue disappointment for Aurora Cannabis, the company got some good news from Aphria (APHA) and a potential game plan for resolving current cash crunch fears. The ability of Aphria to obtain a C$80 million secured loan with an interest rate in the 5% range is a very positive sign for Aurora Cannabis. The larger cannabis company has nearly C$1 billion worth of property and equipment on the balance sheet.
The large cannabis company ended the last quarter with only C$237 million of cash on the balance sheet or roughly enough cash to wrap up the capital spending for the rest of FY20 ending next June. Aurora Cannabis must fund ongoing operating cash burn via funding sources such as the existing at-the-market stock offering which already sold C$107 million worth of stock in FQ2.
The market would welcome low cost debt based on the massive facilities already in operation. Any anti-dilutive option is a concern with the company already having borrowings of C$282 million plus another C$283 million in convertible debt after the recent conversion of C$230 million worth of converts.
Aurora Cannabis lacks the immediate path to EBITDA profits that makes Aphria a more attractive company to extend secure facilities loans.
The key investor takeaway is that Aurora Cannabis faces more operational struggles after a big hit to their international expansion plan. The company can’t face any hits that impact the path to profitability.
A low-cost loan, secured by facilities would be one strong signal that Aurora Cannabis has turned the corner. For now though, investors are best watching on the sideline waiting for the cannabis company resolve funding issues first.
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