Aurora Cannabis remains in tight cash position despite restructuring, analysts warn

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Aurora Cannabis Inc. remains in a precarious cash position, analysts warn, even after a dramatic overhaul of the company’s finances last week that saw the announcement of hundreds of layoffs and as much as $1-billion worth of writedowns.

The Edmonton-based marijuana grower said it is slashing costs in an attempt to become profitable by July, the beginning of fiscal 2021. The company’s plan, unveiled Thursday, includes keeping capital expenditures at less than $100-million in the next two quarters, and cutting quarterly selling, general and administrative (SG&A) costs by more than half. It cut 500 full-time equivalent positions, including a quarter of corporate positions, and replaced its chief executive.

Analysts, however, questioned whether Aurora can bridge the gap to profitability without raising more money and further diluting its stock price, given its stagnant revenue forecast and its rapidly diminishing cash stockpile.

“Although we welcome the SG&A reset and steps to shore up the balance sheet, the initiatives could result in significant dilution – an effect magnified by potential share price weakness in the context of industry headwinds,” Royal Bank of Canada analyst Douglas Miehm wrote in a note on Friday, in which he cut his 12-month price target for Aurora shares to $2.50 from $3.00.

The company’s stock price dropped 15.2 per cent on the Toronto Stock Exchange on Friday, closing at $2.26.

Aurora had $156-million in cash on its balance sheet at the end of 2019, and an additional $200-million available in an “at the market” (ATM) share issuance program that lets it sell stock continuously at market price.

The company also has around $25-million left on a revolving loan facility. However, a group of creditors led by the Bank of Montreal cut another loan facility by $141.5-million, from $360-million, meaning the company has significantly less money available to it.

“Cash concerns have, and will continue to dominate, with a 40-per-cent cut to their credit facility unlikely to help,” wrote Owen Bennett, a Jefferies Financial Group analyst, in a note. He cut his 12-month price target for Aurora shares to $1.90 from $3.00.

“If the company executes [on expected earnings], they can likely negotiate an upsizing to the facility, removing fears of further dilution," he wrote. If the company comes in below its forecasts, as has happened before, the stock price could see further pressure, Mr. Bennett said.

He also said he expects the company to have sufficient cash to last until the first quarter of fiscal 2021.

The company’s chief financial officer Glen Ibbott acknowledged the tight cash position in a call with analysts, shortly after the cost-cutting announcement.

“We’re not flush with cash but we think with the access to the ATM and these changes here it should allow us to get to the cash-flow positive situation that we’re trying to get to,” Mr. Ibbott said.

Part of the problem is that top line growth has stagnated. The company said on Thursday that its revenue for the quarter ended Dec. 31, 2019, declined sequentially by more than 20 per cent, after accounting for potential product returns. Things aren’t looking better going forward in the short term, with Mr. Ibbott projecting “little to no growth” in revenue in the coming quarter.

“While we are bullish on the long-term potential on the global cannabis market, we are cautious in our short- term outlook for the Canadian market," Mr. Ibbott said.

"Until we see material growth in Canadian retail store licensing, we are being careful with our revenue growth expectations, and are managing our business to achieve positive EBITDA [earnings before interest, taxes, depreciation, and amortization] over a very low-growth scenario for the next few quarters,” he said.