​Aurora Cannabis' Problem in Germany is Not the Company’s Biggest Problem

Stephen L Kanaval  |

Header source: iStockphoto.com, photosvit

Aurora Cannabis is already in hot water in Europe’s cannabis market.

International sales were supposed to be an important growth driver for ACB as the company weathered a turbulent and slow-moving Canadian cannabis market. Now, the company cannot sell any medical cannabis products in Germany until further notice. First reported by MJBizDaily, there was apparently a substance in the cannabis to extend the shelf life that German chemists and pharmacists needed to review.

The company “stands behind the safety of products previously sold to medical patients and has not initiated a recall,” Aurora’s spokesperson told MJBizDaily. “Products for the German market are sourced from an EU GMP (Good Manufacturing Process)-certified facility and are safe to consume.”

Aurora stated that sales would resume in 2020, but this is not for certain. Either way, the impact on sales will certainly be felt by the company as German patients will need to switch to another supplier in order to not interrupt treatment, and they may not switch back after Aurora can resume sales of the flower. Lastly, doctor’s in Germany would need to re-write the prescription, and they may be uneasy rewriting the prescription based on the company’s track record in the early going.

Cash Flow Might be a Bigger Problem Than German Pharmacists

This set back in Germany is compounded by a cancellation of three lots of medical cannabis in Italy. The cancellation occurred because Aurora was not compliant with EU GMP standards. Marijuana Business Daily said that the Italian government canceled the high-CBD medical cannabis lot because "stability studies to define the shelf life of the products were not carried out." That seems to be an oversight that Aurora could address in the future without too much trouble. This problem pales in comparison to their blunder in Germany, but it does not look good that Aurora has lots cancelled only a few months after signing their supply agreement in Italy.

International sales were up 7% for Aurora in the last quarter and were a lone bright spot for the company. Aurora has higher gross margins in Europe, and now those numbers will likely take a hit. This is bad news because Aurora is hemorrhaging cash. Last quarter – even with two primary production facilities shuttered – the company lost $200 million in cash from operations and investments.

The company has made some desperate moves to keep things afloat like lowering the conversion price on its 2020 converts and shutting down Aurora Sun. At the end of September, Aurora had borrowed more than $180 million in term loans. At the end of last quarter, the company had 4153 million in cash – Aurora offset cash losses by selling its TGOD stake for $87 million, borrowed another $50 million and issued $58 million of shares under the market purchase program, which dilutes existing shareholders.

Furthermore, the company will also need to comply with a new covenant starting in September 2020. The terms are as follows:

  • Fixed charge ratio of > 1.25x
  • Senior funded debt / EBITDA < 3.0x
  • Total funded debt / EBITDA <4.0x

Those terms should scare the heck out of the company’s leadership considering where it currently stands.

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