This post will explore the Cashflow From Operations (or Operating Cashflow) from various Canadian cannabis companies.

The raw number for Cashflow From Operations can be found on the Statement of Cashflows in the respective companies financial statements. It is usually the very first aggregated dollar figure about a 1/3rd of the way down the statement.

The Ask Me Anything with Carl Merton, CFO of Aphria had a question last night about Operating Cashflow (OCF) .  Here is a link to the AMA.

In Carl’s answer he said it was best to isolate two components of OCF and look at them distinctly:

1. OPEX Cash Burn: Being the OCF less the cash used for Working Capital assets, and
2. Working Capital Assets

Think of Opex Burn as Adj EBITDA WITHOUT backing out current Tax, Interest or other one time operating expenses that are sometimes deducted from Adjusted EBITDA (eg. Transaction Fees)

Here is Carl’s answer:

“When the thread started [a thread on our subreddit], the individual starting it, proposed that the total cash consumed or generated from operations was an important metric. They then graphed that against all of the major public LPs and provided the comparison for the group. But I think they missed one very important factor in the analysis. They included the change in working capital as part of the operational burn. I don’t disagree that it is an important consideration but including it doesn’t allow you to assess the true operational performance of companies particularly when they are growing or in rapid decline. I believe that to truly assess operational capabilities, you should be excluding the change in working capital. To me, this allows you to assess two things, how much cash does the business burn or generate from actually operating and how much cash is the business burning or generating as a result of changes in its working capital. You need to look at both in isolation.

Changes in working capital need to be assessed differently because it affects individual businesses differently. I am not saying ignore it, I am saying isolate it so you can understand it and don’t let it mask the other variable. Arguably all cannabis businesses are currently growing in size and capacity. As that capacity increases, their yields increase. As yields increase, the company either sees its inventory increase or its accounts receivable increase. Inventory increases happen for a variety of reasons but the three primary ones are a volume increase tied to production increases, a volume increase tied to inefficiencies or an increase because costs increase. Inventory increases because production increases are only an issue if the company can’t sell the product. It is actually a good use of cash. Inventory increases because of inefficiencies or higher costs are not good uses of cash. Similarly, inventory decreases because of improvement in efficiencies or lower costs are greater but the working capital reduction isn’t sustainable. The same items apply to accounts receivable and accounts payable, although accounts payable works opposite to accounts receivable and inventory, decreases in payables are bad and increases are good.

I think if this group were to recalculate the chart they prepared by eliminating the change in working capital they would come to entirely different conclusions. They could then examine and compare the working capital increases or decreases amongst the companies to gain additional information.

As an example, in Q2, we had an operational burn of $4 million and a change in working capital of $36 million, for a total use of cash of $40 million (see page 29 of our MD&A). I believe that when compared to the other LPs the operational burn of $4 million will stand out from the crowd, particularly those LPs that compete with us on a reasonable size level. I see this as a positive for Aphria against its competitors.

Then you should concentrate on changes in working capital, how much is ours, where is it occurring and why. In our case, our yields are growing, our capacity is increasing, you should be expecting us to invest in working capital. Within a few quarters, you should see that increase stop though and accounts receivable should start increasing. That should also exist for a few quarters before it should stop growing and consuming cash. Alternatively, if you found a cannabis company in today’s environment with no increase or a decrease in working capital, that speaks volumes about the company. It either means it has stopped growing or it has regressed. Neither of which is good news but both of which would otherwise mask their true operational burn.”

Inspired by this discussion I decided to do a chart series on OCF (or Cashflow from Operations), breaking out the OPEX Burn and the Cash Used in Working Capital.

Peer Group

For changes in working capital items of note, you can check the respective Rundown’s on the various companies listed. I usually only note working capital items that have materially changed QoQ.

Canopy

Aurora

In Q0-1 Aurora may have had Accounts Payable from CAPEX leaking into their OCF calculation.

As per the first paragraph above from page 44 of ACB’s Annual Report, the $63 million increase in A/P noted in the OCF discussion is 100% of their increase in A/P QoQ.  Their Property, Plant and Equipment increased $138 million in that Q.  The $63 million wasn’t for purchase of inventory or other third-party working capital supplies that would generate an A/P of this magnitude. The increase in A/R they mention relates largely to the wholesale revenue from the sale of biomass that Q that they availed trade terms on, and terms offered to the provincial distributors.

Aphria

Tilray USD

Organigram

The only positive OPEX Burn.

Hexo

I will start to add OPEX Burn to my usual Rundowns.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has a long position in Aphria and does not intend to exit or accumulate in the next five days. The author has a no position in any of the other companies listed above and does not intend to exit or accumulate in the next five days.