Author: Andro George (User Submitted Post)
Many Aurora Cannabis investors were concerned about the debt. One of three things listed below can happen:
- Extension can be given if there is progress
- Payment will be required
- Shares will be issued (meaning dilution)
When I read through the MD&A I noticed something very appealing to me. First, Cost per a gram is $1.14 and the Cost of Sales $1.47. That’s a combined costs of $2.61, so that is a huge improvement from Q3 2019 – $3.47; and Q2 2019 – $4.61. Second, Total Non-Current Liabilities is $676.4m vs. Total debt is $644.8m.
What are Non-Current Liabilities?
Long-term financial obligations listed on a company’s balance sheet. These liabilities have obligations that become due beyond twelve months in the future, as opposed to current liabilities which are short-term debts with maturity dates within the following twelve month period.
Third, Summary of financial instruments: Cash & Cash Equivalents – $172,727,000. restricted cash – $46,066,000 Accounts Receivables excluding taxes – $85,232,000
All of this is excluding the $86.5m that Aurora received from selling TGOD shares. That wasn’t reported in the 4th quarter, because it was received in beginning of September 2019 (not before June 30, 2019). Having said that, I think Aurora will be EBITDA positive in either Q1 2020 or Q2, 2020.
Total Debentures Overall
As of September 10, 2019 the total Convertible debenture is 65,310,447. So that’s how many shares will be issued if not paid back (All debentures including 230M debenture).
$230M Debenture Addressed
Aurora management, with regards to the 230m debentures, has stated in consolidated financial statement the following:
“On March 9, 2018, the Company completed a private placement of $230.0 million 2-year unsecured convertible debentures. The debentures bear interest at 5% per annum, payable semi-annually. The debentures are convertible by the holder into common shares of the Company at a price of $13.05 per share subject to a forced conversion if the VWAP of the Company’s common shares exceed $17.00 per share for 10 consecutive trading days, which has not occurred as of June 30, 2019.
During the year ended June 30, 2019, the Company issued 33,179 common shares on partial conversion of $0.4 million principal amount of the debentures (June 30, 2018 – 18,542 shares on the conversion of $0.2 million principal amount).”
Convertible at $13.05 if Aurora Cannabis exceeds $17.00 per share for 10 consecutive trading days, Which never happened. Therefore, there were no shares converted at $13.05 and now Aurora Cannabis will have to pay this back come march 2020.
Going back to the financials: only considering the Cash & Cash Equivalents and TGOD shares sold will have: $172,727,000 + $86.5m from TGOD = $ 259,227,000 in Cash. That’s excluding Loan money therefore Aurora Cannabis should be fine as of now to pay off their $230m debentures due March 2020.
Now what about the next quarters: Can Aurora maintain a steady growth with their cash position? My answer is yes.
Q4 showed signs of ongoing growth and high Gross margins, and recurring costs are being reduced (controlled). Production is increasing quarter over quarter. All of these are supporting factors towards LONG TERM profitability.
This message was delivered loud and clear by CEO Terry Booth and entering the largest consumer markets in the world (US) will support long term profitability for Aurora.
There were big losses in the fiscal year of 2019 mainly because of capital expenditures. (Page 45 MD&A) it states:
“The Company’s major capital expenditures for the year ended June 30, 2019 mainly consisted of equipment for Aurora Sky, the expansion of Aurora River (Bradford) and continued construction activities at Aurora Nordic and Aurora Sun. The Company’s principal capital requirements relate to expansion of current production facilities, construction of new production facilities, strategic investments and acquisitions and the support of new growth initiatives and diversification of product offerings.”
Expanding operations and building more facilities comes at costs. What are Capital expenditures? (They are usually ONE time costs) – They are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment.
Another example of a one time cost (Assumed liability) –
“In connection with the acquisition of MedReleaf, the Company assumed a contingent liability associated with a formerly terminated MedReleaf employee. The claimant is seeking performance under their employment agreement regarding the amount of severance payable. As a result, the Company recognized a provision of $4.2 million, which represents management’s best estimate of the costs required to settle the matter, associated with the acquisition of MedReleaf which remains unchanged as at June 30, 2019. (page 46 MD&A)”
Costs for sales and costs per gram are recurring costs and therefore they are not capital expenditures.
Having said that we expect another one time cost for Germany facilitiy –
“The new facility will be located at the industrial park in Leuna, Saxony Anhalt, near Leipzig. The Leuna industrial park provides all required industrial and logistical infrastructure required for the operation of the facility, with access to a considerable labour market. The facility is designed to have capacity in excess of the tendered amounts to provide flexibility for future growth. (page 36 MD&A)
Aurora Cannabis stated The Company expects future production costs per gram will continue to improve once the Company’s “Sky Class” facilities are fully optimized and the greater efficiencies from automation, scale and yield expertise are realized across all Aurora facilities. (Page 41 MD&A)
Aurora Cannabis business operation with regards to generating revenue is very strong and promising. The company is continuing to grow Quarter over Quarter (gross margins are proof) and the costs are pointing towards long term profitability and if Q1 and Q2 2020 results show reduced costs and expenses then Aurora should not have a problem paying off the debenture come march 2020.
Closing date of debenture was march 9, 2018.
Full Disclosure: Andro George has a position in Aurora Cannabis. He wrote this article himself, and it expresses his own opinions. He is not receiving compensation for it. He has no business relationship other than shareholder with any company whose stock is mentioned in this article.
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