The North American marijuana industry was widely expected to be the greatest thing since sliced bread. But over the past 10 months we've learned that no industry, not even one that existed in the shadows for decades before Canada legalized recreational weed, is immune to growing pains.
In the U.S., the most lucrative pot market in the world, high tax rates and a persistent black market presence have hampered growers and retailers. Meanwhile, in Canada, the only industrialized country in the modern era to have legalized adult-use cannabis, regulatory-based issues have stymied supply, creating either shortages or bottlenecks.
As these issues have befallen the marijuana space, it's pot stock investors who've paid the price. Following a year of constantly cautioning and warning investors that Aurora Cannabis (ACB 9.07%), the most popular of all marijuana stocks, was bad news, the you-know-what has finally hit the fan.
Aurora comes clean about its cost-cutting efforts, financing, and management changes
Following the closing bell on Thursday, Feb. 6, Aurora Cannabis wound up coming clean about a number of problems facing the company and outlined its plans to right the ship, so to speak.
The first order of business was to announce the departure of Terry Booth as CEO, a move that I'd portended happening just hours before it was announced. Considering that Aurora Cannabis' stock lost more than half of its value in 2019, and Booth has been unable to push Aurora toward profitability or secure a brand-name partnership bigger than a vape deal with PAX Labs, the writing was on the wall that it was time for him to step aside. Executive Chairman Michael Singer will step in as interim CEO until a permanent replacement is found.
Next, Aurora Cannabis outlined a major cost-cutting initiative. For starters, the company plans to reduce its selling, general and administrative expenses to a range of $40 million Canadian to CA$45 million. It'll do this by focusing solely on the Canadian consumer and medical markets (not on wholesale), as well as established international medical pot markets (ahem, Germany). For context, SG&A expenses topped CA$59 million in Q1 2020, so costs need to be cut considerably.
The company is also shedding 500 full-time employees (nearly 15% of its workforce), which is well over the 10% figure BNNBloomberg had opined was on tap on Wednesday, Feb. 5. A number of one-time severance charges are to be expected during the fiscal second and third quarters.
Aurora also announced it would restructure spending plans on information technology projects, professional services, and other non-revenue generating third-party costs, in an effort to reduce its expenditures and focus solely on ventures that could immediately generate revenue.
Moving down the line, Aurora Cannabis also made a number of amendments to its secured credit facilities. While the EBITDA ratio covenants were removed, the size of the total credit facility was also reduced by CA$141.5 million.
Lastly, the company noted that, as part of "thorough review of all business operations," it would take impairment charges of between CA$190 million and CA$225 million on property, plant, and equipment, and CA$740 million to CA$775 million in goodwill in the fiscal second quarter. A major writedown is something I've been expecting out of Aurora for at least a year.
Now, go ahead and take a breath, because that's a lot of information to process.
The worst may be yet to come
After being far too overzealous with its domestic and international expansion plans, it's not the least bit surprising to see the company's CEO step down, for the company to outline aggressive cost-cutting initiatives, or for a massive writedown to be undertaken. What you might find surprising is that things are likely to get much worse before they get better.
To be clear, I don't disagree with Terry Booth's stepping down, the company's move to rein in costs, or its decision to write down close to a quarter of its CA$3.17 billion in goodwill, as of Q1 2020. But I don't believe these announcements necessarily alleviate the company's numerous issues.
For example, even with the removal of EBITDA ratio covenants, Aurora is no lock to push toward positive EBITDA by fiscal Q1 2020, as required under the new amended covenant rules. Sure, Aurora will be able to reduce expenses by laying off workers, halting a number of core projects, and idling expansion efforts into quite a few international markets, but this doesn't guarantee that supply issues in Canada, or the regulatory framework regarding imports in overseas markets, will be worked out within the next six-to-nine months. Essentially, Aurora may have merely kicked the can on a breach of its covenant just a few months further down the road.
Financing also remains a real concern. The company detailed that its $400 million (that's U.S. dollars) in at-the-market offerings is down to about $200 million. At the same time, CA$141.5 million has been removed from its available credit line. With Aurora's share price sinking, the only means this company has to access cash is to sell its common stock and continue diluting its investors into oblivion. As of Dec. 31, Aurora only had CA$156 million in cash, and this is after selling CA$325 million in stock over a six-month period.
In addition, while I'm glad to see Aurora Cannabis somewhat coming to terms with its ugly balance sheet via writedowns, the corporate update notes these impairment charges primarily reflect its Denmark and South American assets. Thus, the company doesn't appear to be admitting defeat on its CA$2.64 billion acquisition of MedReleaf, which I've labeled the worst cannabis deal of all time.
With Aurora trying to sell the Exeter greenhouse for a meager CA$17 million, the end result could be a CA$2.62 billion price tag for 35,000 kilos in annual output from Bradford and Markham combined, and MedReleaf's brands. There's zero chance in my mind that these assets come anywhere close to CA$2.62 billion (assuming CA$17 from the future sale of Exeter) in value. Roughly CA$2 billion of the company's existing goodwill is from this deal, and it's my suspicion that a major portion of this amount still needs to be written off.
The point is that, while management is finally getting real about the issues the company is facing, there's no guarantee Aurora Cannabis hasn't already passed the point of no return. My suggestion would be to continue avoiding Aurora Cannabis like the plague in 2020.