It's been a wild ride for Aurora Cannabis (NYSE: ACB) so far this year. Analysts came out of the woodwork to recommend the stock early in 2019.
Aurora delivered sizzling revenue growth quarter after quarter. It brought billionaire investor Nelson Peltz on board to help line up partners from outside the cannabis industry. And Aurora accelerated its push to boost production capacity beyond the levels of all its rivals.
All of this helped fuel a meteoric rise for Aurora, with its stock more than doubling at one point. But then came the downturn, and analysts changed their tune about Aurora. The company over promised and under delivered on its fourth-quarter results.
Don't think the challenges for Aurora are over yet. The Canadian cannabis producer has a ticking time bomb on its hands that could cause more problems.
Due date looming
What is this ticking time bomb? Aurora has 230 million in Canadian dollars worth of convertible debentures that mature in March 2020. This debt offering closed two years ago and all the cash is gone. Aurora used the money primarily to fund its acquisition of CanniMed Therapeutics and toward the construction of the Aurora Nordic facility in Denmark.
By definition, convertible debentures can be converted to stock if the holders choose that option. But the conversion price for this particular debt offering was 13.05 Canadian dollars per share. Aurora's current share price is less than half of that amount. No one will convert a debenture to stock at such a huge loss.
It's possible that Aurora's share price could skyrocket between now and March, alleviating the need to pay off the big debt. The company might receive a boost if it lands a major partner that will help it enter the U.S. hemp CBD market. Maybe the "Cannabis 2.0" cannabis derivatives market that launches soon could provide a major catalyst for Aurora. Don't hold your breath.
For one thing, Aurora's management has been clear that the company isn't seeking an equity investment from an outside partner. As a result, any deals that Aurora makes could have a more muted impact than the big partnership deals for Canopy Growth and Cronos Group. Also, the Cannabis 2.0 market won't have a significant financial impact on Aurora until the company reports its fiscal 2020 Q3 results -- and that will be after the looming convertible debentures maturity date.
The odds appear to be overwhelmingly high that Aurora will need to muster up CA$230 million to pay off the holders of its convertible debentures that mature in March 2020. But where will the company get the money?
Aurora had CA$172.7 million in cash and cash equivalents on hand at the end of June. However, it's a stone-cold certainty that cash will dwindle considerably between now and early next year. Aurora posted an operating loss of CA$44.6 million in its last quarter. While the company expects improvement, it won't be enough to avoid tapping into its cash stockpile throughout the rest of this year and into 2020.
That leaves Aurora with three primary alternatives for raising the cash needed to pay off the CA$230 million in debt. The company's options are to do one of the following:
- Conduct a stock offering.
- Issue more convertible notes.
- Tap its existing debt facility with the Bank of Montreal (BMO).
It seems unlikely that Aurora will directly issue new shares since the company hasn't taken this path over the last couple of years. Chances are that it will instead either issue even more convertible notes, lean on its BMO debt facility, or do a combination of both.
Earlier this month, Aurora closed on an expansion of its debt facility with BMO. The company added CA$160 million in term loans to its original CA$200 million credit line and has the flexibility to increase the debt facility by around CA$40 million. All of this debt matures in 2021.
Reason to worry?
Investors shouldn't worry too much about Aurora's ability to pay off its CA$230 million debt by March. However, depending on how the company chooses to repay that debt, it could mean that even more dilution is on the way. That is something to worry about.
Aurora has been able to deliver impressive stock gains over the last few years, even as it's diluted the value of existing shares like crazy. It might not be able to keep doing both for much longer.
The reality is that Aurora Cannabis keeps kicking the can down the road with its borrowing. Investing in marijuana stocks comes with plenty of risks, but a company that's up to its eyeballs in debt has even more risk than one with a healthy balance sheet.
With its steadily increasing debt, Aurora may be facing more time bombs ticking away that might not be as easy to defuse.
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