Earlier this month, Aurora Cannabis (NASDAQ:ABC) reported its second-quarter financial results, revealing a 10% decline in total net revenue, which totaled slightly over $60 million, and a $75.1 million loss.
The company’s CEO Miguel Martin touted a sequential improvement of $2.5 million in adjusted EBITDA, with the company remaining on a trajectory towards the profitability goal and a focus on further cost reductions.
However, New Cannabis Ventures’ Alan Brochstein says that the most interesting part of the company’s recent earnings report was “its aggressive use of its at-the-market (ATM) facility subsequent to the end of the quarter.”
Aurora sold 19.6 million shares at an average price of $4.58, raising $89.7 million to fuel its “aggressive” approach, disclosing that it has purchased another CA$13.4 million ($15.09 million) of debt at a steep discount following the quarter-end.
At the end of the second quarter, the company had more than CA$332 million unrestricted cash, but it also had CA$432 million of convertible debt, due in three years. During that period, it repurchased CA$7.1 million at a discount.
Considering a revenue drop and wider operating losses, Aurora is “prudent to sell shares in the market above tangible book value, especially in light of the situation at HEXO Corp (TSX:HEXO) (NASDAQ:HEXO),” Brochstein explained.
Moreover, with other cannabis LPs facing similar challenges, “we believe that investors should expect Canopy Growth and Tilray to sell shares in 2022 to shore up their respective balance sheets ahead of large debt maturities,” he added.
Canopy Growth
Canopy Growth Corporation’s (TSX:WEED) (NASDAQ:CGC) third-quarter financial report revealed that debt which amounted to CA$1.5 billion, now exceeds cash, totaling CA$1.4 billion, in addition to an 8% decrease in net revenue of $141 million.
The Canadian giant also wrapped up 2021 with the sale of its German subsidiary C³ Cannabinoid Compound Company GmbH, to Dermapharm Holding SE, for EUR 80 million ($90.24 million), which will “offset the likely continued drain of its operations on its cash balances,” Brochstein noted.
“The dwindling cash and limited prospects for achieving substantial cash generation would leave the company in a very vulnerable position ahead of the 2026 maturity of its CA$900 million credit facility,” he said, adding that it “requires a minimum liquidity of $250 million.”
With analysts suggesting that Canopy won’t be able to achieve positive adjusted EBITDA in the following three years, the refinancing of the debt could be questionable.
“While its stock is trading near a 5-year low, we think it makes sense for the company to sell stock, as it currently trades at 2X tangible book value despite projected losses ahead and looming debt maturities,” Brochstein said.
Tilray
Meanwhile, it seems that Tilray Inc. (NASDAQ:TLRY) is following suit with a substantial amount of debt relative to cash.
In November, the Canadian cannabis giant posted its second-quarter financial results, revealing a 20% year-over-year uptick in revenue and a slight sequential decline to $155 million. Adjusted EBITDA was $13.8 million, representing 8% growth compared to the preceding prior quarter and making for the eleventh consecutive quarter of positive Adjusted EBITDA.
While the company ended the quarter with $332 million, it reported total debt of $738 million, including two convertible notes -$278 million due in 2023 and $260 million due in 2024.
Moreover, its cash balance dropped by $150 million in the six months of the fiscal year, out of which $110 million was consumed by its operations.
Brochstein said that the “circumstances are not as challenging for Tilray” as for its industry peer Canopy Growth, even though it is “very dependent on an increasing stock price to cover the 2023 debt maturity unless they are able to borrow more.
“When we interviewed its CEO, Irwin Simon, last August, he expressed hope that the company would see its 2024 debt converted into stock, but its stock has declined from $14 to $6 since then,” noted Brochstein.
In addition, Simon revealed that the company could use an ATM, but this would likely be to help fund its M&A.
Conclusion
Aurora Cannabis’ move in January “may be a precursor to stock sales by other large LPs,” Brochstein said, citing Canopy Growth and Tilray.
Considering that the business didn’t scale as predicted and thus failed to support the current levels of debt, “the pending debt maturities next year will weigh heavily on investor sentiment,” Brochstein concluded.
Photo: Courtesy of Benzinga
