Aurora shifts to survival mode with CEO change, guide down on earnings and plan to attain positive EBITDA

It was a day of big moves for Canadian cannabis giant Aurora. The company announced:

We believe it was part of a necessary move for survival.

(Download a transcript of the conference call about these announcements here.)

CEO experience shift

Aurora Cannabis tapped Executive Chair Michael Singer to serve as interim CEO as the company launches its search for an experienced CPG executive to lead the company. It’s appears to be a broader shift in focus for the firm, as it also expanded its board of directors with the addition of two executives with deep, global CPG experience.

When companies are losing a significant amount of money every quarter and haven’t articulated a viable plan to grow revenue, lower expenses and achieve profitability, senior management is often replaced.

Aurora Cannabis is the latest in a line of cannabis companies making significant leadership changes in order to get on the path to profitability.

Booth’s resignation is effective immediately. He will remain as a senior strategic adviser to the board of directors and a company director.

Lance Friedmann and Michael Detlefsen joined the company’s board, effective immediately as well.

Friedmann brings 25 years of experience with Kraft Foods and Mondelez International, where he worked in marketing and strategy in the United States, Latin America and Asia.

Detlefsen is currently the managing director of Pomegranate Capital Advisors, an active investor advisory firm with holdings in the branded consumer and B2B food sectors, agribusiness and financial services.

Shift in business model to focus on EBITDA profitability, lower costs with much lower revenue growth expectations 

The key new debt covenant for Aurora calls for a minimum of CA$5 million EBITDA for both F1Q21 and F2Q21, which implies CA$41 million in the second half of F2021.

Aurora’s fiscal year ends in June 2021.

While the existence of this covenant was given in the company’s news release, the amounts per quarter were only provided on the conference call.

The covenant of CA$51 million for F2021 compares to the most recent analyst consensus EBITDA of CA$56 million, but the newly announced cost structure is much lower than that estimate.

Given management’s guided cost cuts that put quarterly SG&A around CA$40 million to CA$45 million (CA$160 million to CA$180 million annually) and using the consensus-estimated 57% gross margin, the covenant implies F2021 sales of about CA$387 million, compared to the consensus estimate of CA$676 million.

The implied 2021 sales of CA$387 is still a high growth hurdle. It represents 50% year-over-year growth compared to this quarter’s midpoint of guided revenue, annualized, of CA$256 million (CA$64 million times 4). It also implies an EBITDA margin expansion to 13% from 8%.

This growth is still quite an acceleration from the flat sequential growth the company is currently experiencing.

F2021 End June Covenant Implications (in millions CAD)
Consensus Low SGA Mid SGA High SGA
Revenue 676.1 369.3 386.8 404.3
% Growth vs. F2Q2020 Annualized CA$256m 164% 44% 51% 58%
Gross Profit 386.3 211.0 221.0 231.0
Gross Margin 57.1% 57.1% 57.1% 57.1%
SG&A 330.1 160.0 170.0 180.0
Margin 48.8% 43.3% 44.0% 44.5%
EBITDA 56.2 51.0 51.0 51.0
Margin 8.3% 13.8% 13.2% 12.6%

F2Q20 results miss, guide down to flat revenue in F3Q20 

Aurora admitted it is losing market share because it does not have a value brand yet – where demand in Canada is growing. But the company plans to launch one soon.

Despite Cannabis 2.0 in Canada, Aurora is guiding to flat sequential growth, and that is off of a disappointing sales base.

Aurora preannounced results for F1Q20 (ended December) with sales of CA$62 million-CA$66 million – a 20% miss compared to the consensus estimate of CA$79.6 million.

However that CA$62 million-CA$66 million is before a charge of $12 million for price cuts and returns of low-potency flower that had been shipped in spring and summer of 2019 that required price reductions and returns. Including this return reserve, reported revenue will be CA$50 million-CA$54 million.

Sales from January through June 2019 totaled $164 million, so this return reserve is 7% of the prior sales. This highlights the price and return risk of the wholesale business model where customers can share pricing pressure back to their suppliers.

For the next quarter, Aurora guided to flat revenue sequentially at CA$62 million-CA$66 million, a 38% miss compared to consensus expectations of CA$102.8 million. This is before any provisions for returns or price reductions, though Singer and CFO Glen Ibbott repeatedly said on the conference call that they think the current provisions are conservative.

Regardless, this is much less than the 29% sequential growth expected by consensus.

Full F2Q20 results will be reported on Feb. 13.

 CA$200 million shares for at the money

Singer said that the company’s plan will tap the CA$200 million “at the money” offering plan, meaning it will raise up to CA$200 million in small chunks whenever it can.

Based on Thursday’s closing share price of CA$2.67, this means at least another 75 million shares coming to market on our in-the-money base of 1.034 billion shares, or about 7.2% dilution.

The company expects that the CA$156 million in cash at December and the proceeds of the CA$200 million offering will be sufficient to get the company to the positive cash flow in the F1Q2021.

But as noted above, this assumes some big revenue acceleration and big cost cuts.

Act like public companies

Aurora’s stock (NYSE: ACB) was halted at 1:35 p.m. ET Thursday and remained halted through the close for “pending news,” after the internal memorandum about the changes had leaked.

Investors do not like when stocks get halted, though it is preferable to having open trading while some have selectively disclosed, market-moving information.

If cannabis companies want a lower cost of capital and the confidence of public market investors, they need to up their game on investor communication.

Mike Regan can be reached [email protected]

Craig Behnke can be reached at [email protected].