Aurora Cannabis (ACB -3.55%) saw sales rise by 154% last quarter and even recorded a profit. However, with Aurora's bottom line benefiting from a large unrealized gain on its derivative liability and the fact that the recreational market wasn't open for business a year ago, the results aren't nearly as impressive as they look at first glance. But the biggest problem facing Aurora today is cash, and whether the company's growth could be the stock's undoing.
Cash burn continues to grow
During the past three months, Aurora has used up 94.9 million Canadian dollars to fund its operations. That's up 37%, or CA$25.8 million from the same quarter last year. And with Aurora continuing to invest into capital and investing activities burning through an additional CA$29.5 million, the company has been using a lot of cash.
One area that investors will want to keep a close eye on is on the company's noncash working capital. Aurora burned through CA$42.8 million compared to just CA$3.9 million in the prior year. Working capital can fluctuate from one period to the next, but it can also be affected by the level of risk in the industry. For instance, vendors may not be as willing to lend out generous credit terms to cannabis companies given the lack of profitability in the sector, and that could lead to a company like Aurora needing to make invoice payments on a much quicker schedule.
This past quarter, the company spent CA$7.2 million on its accounts payables and accrued liabilities, while a year ago these balances increased, and Aurora was able to add CA$22.7 million to its working capital. When accounts payable balances increase, that adds to working capital, while paying those balances down results in a net outflow of cash. The significant swing here in just one year might suggest that vendors are doing some tightening, as they could be pushing for earlier payments, which could intensify in future quarters.
Any increase in the outflow of cash could be problematic for Aurora, especially since its cash balance isn't all that high.
Cash on hand not sufficient for this level of burn
As of Sept. 30, Aurora had CA$152.5 million on hand in cash and cash equivalents. With a combined CA$124.4 million burned from investing and operating activities, it's easy to see how urgent this situation becomes for Aurora. The company can scale back on its capital expenditures -- and it recently announced that it would halt the construction of two of its facilities, including Aurora Sun. The company expects to save CA$190 million as a result of the stoppages. However, that's not something investors want to hear, and it highlights just how problematic the company's lack of cash flow has become.
But for Aurora to be able to continue to grow and invest in itself, it needs to generate positive cash flow. Taking on debt could be too costly, and the covenants could be restrictive in light of the cash-flow issues. Further, issuing shares is also not optimal, as that would likely send the struggling stock down even further in price.
Aurora will face some tough decisions if it's not able to find a way to get closer to being cash-flow positive. Unlike some of its peers, the company doesn't have a big investor or partner that can provide it with more money should cash continue to get tight; Aurora is going to have to fix its problems all on its own.
Why investing in Aurora is a big risk today
Aurora's shares have been cut in half this year, and there could be more pressure on the stock as the company's financials continue to pose significant question marks.
If things get dire and Aurora continues to struggle to generate cash, the company could cut back significantly on capital expenditures and lay off staff to conserve cash while also issuing shares to add some capital. However, that's still only a short-term solution. The bigger uncertainty is how Aurora will be able to manage these challenges over the long term, and how cash-related issues may impact its overall growth strategy.
Ultimately, if the company has to limit its growth to conserve cash, that could spell bad news for what's been one of the top marijuana stocks to date.