A few days following a dip into the $5s, Aurora Cannabis (ACB) stock has seen a reprieve due to the perceived strong numbers from Aphria (APHA) and positive pre-announcement from the company on June quarter results. The rather weak rally supports a stock that might not hold in the $6s.
Positive EBITDA
Aurora Cannabis has targeted the June quarter for turning a C$36 million EBITDA loss into a profit. The latest monthly numbers from Health Canada wasn’t supportive of a big enough boost in cannabis sales to support such a sequential improvement, but the Canadian cannabis company projects that FQ4 sales surged to top C$100 million.
Aurora Cannabis didn’t provide any details on kg sold or the price per gram. The major details were the company on track towards positive adjusted EBITDA and having 25,000 kg to 30,000 kg available for sale in the quarter.
For May, Health Canada reported dried cannabis sales only increased to 9,495 kg, up from 8,874 kg in April. Sales were up primarily due to the opening of 25 retail stores in Ontario and nothing much else.
While sales made a tepid increase, inventories soared to over 250,000 kg.
Canada now has 28 months’ worth of dried cannabis inventories based on the May sales rate. Cannabis oil has a similar supply and demand scenario.
Since the end of the March quarter, dried cannabis inventories are up about 89,000 kg while sales increased a meager 1,868 kg. The ultimate end result is pricing pressures that will eventually impact sales prices later this year as companies finally pull the unfinished inventory onto the market.
Aurora Cannabis topped their internal goal of having 25,000 kg available for sale by 20%. The new supply level equates to the whole amount sold in the Canadian market in May alone.
With profit margins last quarter in the 55% range, Aurora Cannabis probably had to hit 70% margins in the last quarter to generate enough gross profit to wipe out the EBITDA losses. All while, operating expenses must remain stable to completely eliminate such a large adjusted EBITDA loss.
Cash
The major risk to the Aurora Cannabis story is ongoing net losses and capital spending that burn the cash in a rather limited balance sheet for a company this size. The company ended the March quarter with a cash balance in the C$390 million range and an additional C$190 million in marketable securities.
Analyst Chris Carey from Bank of America sees the cash balance at risk due to convertible debt of C$230 million due in the March quarter. The more likely outcome is that Aurora Cannabis taps an at-the-market offering of up to $400 million worth of shares on the NYSE.
The tepid response to the Aphria news and the quarterly pre-announcement after the stock sold off below $6 is an indication that the company is selling stock on rallies to raise funds to support ongoing capital spending. A review of the diluted shares outstanding is crucial when Aurora Cannabis reports official FQ4 results.
Takeaway
The key investor takeaway is that Aurora Cannabis dipped below $6 to multi-month lows last week. The company is likely issuing millions of shares in order to raise funds for facility expansion plans and to support ongoing production ramps. The stock isn’t going to sustain this rally under this scenario.
