So far, 2019 has been disastrous for Aurora Cannabis (ACB). Year-to-date, its stock is down 30.46% on the TSE (Toronto Stock Exchange) and by 24.19% on the NYSE.
ACB’s share price decline has even exceeded that of the ETFMG Alternative Harvest ETF (MJ). MJ has fallen by 21.25% so far in 2019. The Horizons Marijuana Life Sciences Index ETF (HMMJ) is down by 29.34%. Global uncertainty, the vaping crisis, black market sales, and pricing pressures are among the issues that contributed to the stock’s decline.
Maturing convertible debentures pose a challenge
However, there is one more problem lurking in the shadows for Aurora Cannabis. On June 30, the company had total contractual obligations of 1.55 billion Canadian dollars on its balance sheet. Of these, it has 230 million Canadian dollars of unsecured convertible debentures that mature in March 2020.
In March 2018, the company announced a private placement of these debentures at an annual interest rate of 5%. The conversion price is set at 13.05 Canadian dollars.
However, Aurora Cannabis has the right to force conversion of the debt into shares. According to the company’s latest filing, this would be possible if the VWAP (volume-weighted average price) of the company’s shares surpasses 17.00 Canadian dollars for 10 consecutive trading days.
However, in the current environment, the chances of Aurora Cannabis’ share price reaching or surpassing the conversion price look slim. So, debenture holders will not have any incentive to exercise the conversion to equity. This implies that the company must treat these debentures as debt and return the money to investors.
Aurora Cannabis has only 218.79 million Canadian dollars of cash on its balance sheet. Of this, 46.07 million Canadian dollars is restricted cash. As a result, investors are worried about the possibility of the company raising funds through equity dilution in the coming months.
ACB’s contractual obligations and their maturity
At the end of June 2019, Aurora Cannabis had long-term debt obligations of 737.78 million Canadian dollars on its balance sheet. The company reported 1.53 million Canadian dollars of capital lease obligations and 92.59 million Canadian dollars of operating lease obligations.
Aurora Cannabis’ contingent consideration liability equals 60.77 million Canadian dollars. Plus, its purchase obligations total 387.56 million Canadian dollars. Finally, the company reported other long-term liabilities of 269.28 million Canadian dollars and provisions of 4.2 million Canadian dollars.
At the end of June 2019, Aurora Cannabis reported obligations of 369.59 million Canadian dollars payable within one year. Plus, the company reported obligations of 252.7 million Canadian dollars payable in one to three years. It also reported obligations of 739.85 million Canadian dollars payable in three to five years. Finally, obligations worth 191.57 million Canadian dollars have a maturity of greater than five years.
Contractual restrictions on Aurora Cannabis
According to the company’s fourth-quarter earnings filing, Aurora Cannabis secured a credit facility worth 200 million Canadian dollars from the Bank of Montreal in 2018. This facility comprises a term loan of 150 million Canadian dollars and 50 million Canadian dollars of a revolving credit facility. This credit facility matures in 2021.
At the end of June 2019, the company reported 1.6 million Canadian dollars outstanding under the revolving credit facility and 146.2 million outstanding under the term loan facility.
According to its Q4 earnings filing, the company must maintain certain ratios until September 30, 2020, according to its June 28, 2019, amendment in the credit facility. The minimum cash ratio must be 1.25:1. The company’s total funded debt to adjusted shareholders’ equity ratio cannot exceed 0.25:1.
The company’s minimum fixed charge ratio must be 1.25:1. Finally, Aurora Cannabis’ total funded debt-to-EBITDA ratio cannot exceed 4.00:1. These restrictions limit the company’s sources of funds.
Does Aurora Cannabis have any other funding sources besides equity dilution?
On August 15, the company announced the amendment of the secured credit facility to 360 million Canadian dollars. The credit facility also has an accordion feature to increase it by 40 million Canadian dollars. Aurora Cannabis opted for this non-equity source of funding to support its future strategic growth initiatives.
The company also announced that it has access to 514 million Canadian dollars of ATM (at-the-equity) program. Aurora Cannabis can use these funds as well as its cash balance to repay the maturing debentures.
How much debt do ACB’s peers carry on their balance sheets?
Canopy Growth (CGC) has a stronger balance sheet than its peers. At the end of June 2019, the company carried 805.8 million Canadian dollars in long-term debt on its balance sheet. Of this, 18.29 million Canadian dollars of debt were due in one year.
The company also had 1.27 billion Canadian dollars of share repurchase credit facility and 212.99 million Canadian dollars of other long-term liabilities. However, the company also carried 1.82 billion Canadian dollars of cash and cash equivalents and 1.32 billion Canadian dollars of marketable securities on its balance sheet.
At the end of August 2019, Aphria (APHA) had 60.48 million Canadian dollars of long-term debt and 5.28 million Canadian dollars of lease liabilities. The company also carries convertible debentures liability of 407.16 million Canadian dollars.
However, these debentures will mature in April 2024. Plus, the company has a healthy cash balance on its balance sheet. The company reported cash and cash equivalents of 449.2 million Canadian dollars and marketable securities of 15.11 million Canadian dollars.
At the end of June 2019, Cronos Group (CRON) had 417 million Canadian dollars of long-term debt on its balance sheet. However, all of this debt is maturing in the coming year. The company carries other liabilities of 1.43 billion Canadian dollars on its balance sheet. However, Cronos Group has a well-funded balance sheet with cash and short-term investments of 2.32 billion Canadian dollars.