You probably won't have to think for very long to come up with at least a few reasons to avoid Aurora Cannabis (NASDAQ:ACB) stock. Just look at the company's latest quarterly release. There was another huge loss, a major write-off of goodwill, and -- scariest of all -- a revenue decline that's projected to continue into the next quarter.
That's three reasons to include on the list. Now, after a regulatory filing from the cannabis producer last week, there are over 7 million more reasons to avoid Aurora.
Spreading the wealth
Aurora submitted its proxy circular to the U.S. Securities and Exchange Commission on Oct. 1. This proxy circular included information for shareholders in advance of the company's annual general meeting, which will be held virtually on Nov. 12, 2020. Arguably the most intriguing details revealed in the proxy circular related to how much money Aurora handed over to its executive team in its fiscal year 2020, which ended on June 30, 2020.
Former CEO Terry Booth received total share-based and option awards during fiscal 2020 of 1.95 million in Canadian dollars. Executive chairman and interim CEO Michael Singer received share-based and option awards totaling more than CA$2.3 million.
The Canadian cannabis producer didn't just line the pockets of the men who held the top spot. CFO Glen Ibbott raked in share-based and option awards of nearly CA$1.9 million. Co-founder and former President Steve Dobler received a little under CA$1 million. Chief Operating Officer Allan Cleiren pulled in nearly CA$1.4 million. Aurora gave Chief Legal Officer Jillian Swainson share-based and option rewards totaling close to CA$1.3 million.
In total, these six Aurora executives received roughly CA$9.75 million on top of their ample six-figure salaries. That equates to around $7.4 million in U.S. dollars. Each dollar represents a reason to not invest in Aurora, in my opinion.
What happened under their watch
Don't get me wrong: I think giving executives stock and options can effectively align the interests of a company's management and its shareholders. But in Aurora's case, it's obvious that the compensation packages failed to achieve this alignment.
Just consider what happened under the watch of the executives receiving so much money. Most importantly, Aurora's share price plunged 87% during the company's fiscal 2020. When management makes out like bandits while shareholders are left holding the bag, that's a big problem.
Of course, plenty of Canadian marijuana stocks experienced severe declines during this period. However, Aurora's collapse was worse than any of its major rivals' woes. Whose fault is that? I think you'd have to start with Aurora's leadership.
The reality is that Aurora wasn't managed very well. Canopy Growth and Cronos Group snagged major equity partners that strengthened their financial positions. Aurora deliberately avoided seeking an equity partner and now would have a very hard time landing a deal.
Several of its peers have been buying up other companies. Aurora, though, was practically in a league of its own when it came to the frenzy of acquisitions in recent years. Now the company is paying for its exuberance.
A structural problem
It seems absurd to pay top executives $7.4 million in bonuses when shareholders have lost nearly 90% of their investment, but it could have been even worse. Aurora's management team only made a little under half of what their short-term bonuses could have been in fiscal 2020. How did they even make that much? It comes down to the compensation system's structure.
A full 20% of management's short-term bonuses were tied to entering the U.S. market. Aurora's executives were able to receive another 6.67% of the total potential short-term bonus by holding onto a No. 2 position in the European medical cannabis market. Add another 10% to the total for contacting around 50% more European general practitioners than targeted. Other goals met included ranking No. 1 in Canadian medical cannabis market share and No. 1 in several key Canadian provinces' adult-use recreational marijuana markets.
My view is that over one-fourth of Aurora's short-term executive bonuses were related to goals that pretty much anyone could have achieved. I suspect that you or I could have figured out a way to enter the U.S. market and contacted a lot of European GPs.
The company stated that its fiscal 2021 bonus plan changes include "corporate performance objectives for EBITDA [earnings before interest, taxes, depreciation, and amortization], cash flow, international revenue, and employee engagement." It didn't, however, reveal how the individual goals would be weighted -- and that's critical.
Aurora could have given investors at least one reason to maybe consider buying the stock by truly aligning management's financial interests with shareholders' interests. It isn't clear that the company has done so.