The news that long-time CEO Terry Booth is departing Aurora Cannabis should not come as a surprise to anyone.

As soon as perennial talking head Cam Battley was fired/asked to leave/resigned/wanted to spend more time with family the writing was on the wall that the old ways of doing things were soon coming to an end inside Aurora Cannabis.

Aurora was a company built on the business model of hype at any cost.

This strategy is a winning one when an industry is in its early days and no one can fact check your claims, but the minute management had to live or die by their real-world results, everything quickly fell apart.

With the two architects of Aurora’s current troubles gone, is it time to load up the boat?


New Leadership Doesn’t Put More Cash in the Bank

Aurora is finally admitting drastic changes need to be made, which is an improvement over the previous status quo, but turning over management won’t fix the company’s lack of cash, lack of growth, and significant debt coming due over the next 24 months.

The company is still operating on a razor’s edge.

As of September 2019, they had enough cash to last them through March, and here we are, already into February.

Yes management is now saying they will cut SG&A in half to $43 million from $88 million, but that will take until June of 2020 to flow through.

Too little too late.

Aurora is burning $200 million in cash a quarter today and these cuts only imply the burn falls to $100 million.

Aurora is targeting a cost structure that will break even at $300 million of annual sales. The problem is sales fell to $250 million in the latest quarter and the breakeven point is still five months away. With only two more months of cash left, more stock issuance from Aurora is absolutely guaranteed.

Compounding matters Aurora will now be in default with the new covenants on their loan if they don’t generate positive EBITDA by the third quarter of this year or the cash balance falls below $35 million.

Aurora now has three different ways it can still default:

  • More than $900 million of additional write-downs
  • Failure to generate EBITDA by Mid-July
  • Cash balance falls below $35 million


What Should Investor’s Expect Over the Next Six Months

Aurora announced in today’s press release that they have exactly enough cash to last until the end of March.

Since we know the company will be burning at least $100 million a quarter, we guarantee they are going to issue at least the $200 million of stock still remaining on their at-the-money equity program.

This would equal another 7% dilution for investors.

Based on their weak guidance for the first quarter of Cannabis 2.0, they may have to issue even more than $200 million of stock driving the price much lower than where it currently sits at US$1.77.

Investors should also expect to see even more write-downs than the $1 billion announced today.

Aurora only wrote off the value of certain international assets meaning we have at least another billion to go to bring the MedReleaf and CanniMed acquisitions down to their true values.

Investors are looking at a further 7-10% stock dilution and more writeoffs to come in 2020. The bottom is still not in.  

Aurora remains a falling knife, it still is do or die for this stock.


A Note on Cannabis 2.0

Buried in the press release was a comment about the first quarter of 2020 that should send shivers down the spine of any cannabis investor.

The outlook for cannabis revenue for Aurora’s fiscal third quarter is expected to be impacted by the general industry headwinds mentioned above, and as such will likely show little to no growth relative to fiscal Q2’s cannabis revenue of $62 million to $66 million<span class="su-quote-cite">Aurora Press Release, Feb. 6, 2020</span>

Aurora is basically saying the rollout of cannabis 2.0 products has been a complete and utter failure so far.

The only reason potstocks bounced back in January was due to excitement around the rollout of edibles, vapes, and topicals.

Stock prices imply big increases in revenue this year for the entire industry.

If Cannabis 2.0 isn’t able to bring in more consumers from the black market, we are looking at another potential bloodbath for cannabis stocks in 2020.

We recommend investors sit on the sidelines until balance sheets are cleaned up, the stock spigot is turned off and companies get their hands dirty making the real cost cuts necessary to survive.


Debt Facility Details

BMO agreed to provide up to C$360 million of secured debt maturing on Aug. 29, 2021.

Aurora has already borrowed C$196 million and we believe only has another C$20 available that isn’t revolving (i.e. short-term debt).

Facility D can only be drawn to pay for construction of Aurora Sun and with Aurora Sun construction halted, the ~C$100 million facility D is off-limits.

Aurora’s BMO Credit Facility ($ millions)

Facility Outstanding Total Notes
A $2 $50 Revolving
B $144 $150 Repaid Quarterly
C $50 $64 Must be Drawn by 12/31/2019
D $97 Only available for Aurora Sun

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