Aurora Cannabis: more than half of its total assets could be impaired


What a difference a profit report makes if you are a shareholder in the world’s most popular jar stock, Aurora Cannabis (NYSE: ACB).

After a steep 14-month downtrend that saw Aurora’s shares lose up to 95% of their value and undergo a 1 in 12 reverse split to avoid being delisted from the New York Stock Exchange , the company’s stock went huge 158% in a two-day stretch. The two days had a daily volume of almost 100 million, suggesting a large number of short-term trades given that there are only around 109 million Aurora shares outstanding (and can -being less in its float) after its reverse split.

A close-up view of a flowering cannabis plant on an indoor commercial farm.

Image source: Getty Images.

Three reasons why Aurora Cannabis rose 158% in two days

What got investors so excited that “FOMO” – that is, fear of missing something – returned to Aurora Cannabis stock? First, the company recorded sequential quarterly sales growth of 35% and a net increase in cannabis sales of 32% from the second sequential quarter. Aurora did not sell wholesale or bulk cannabis at low margins, but did see adult weed sales increase by 24%, which is likely the result of the excitement surrounding the launch of margin derivatives higher (for example, edibles, brewed beverages and vapes)).

Second, management continues to believe that the company’s cost reduction measures are poised to generate positive adjusted EBITDA by the first quarter of 2021 (ended September 30, 2020). As some of you may know, Aurora’s new restrictive covenant requires that it generate positive adjusted EBITDA by the first quarter of 2021. Based on the company’s results of operations, the costs of Sales, General and Administrative (SG&A) fell to approximately C $ 75 million in the third quarter of 2020, almost C $ 100 million in the sequential quarter. Aurora is targeting C $ 40-45 million in quarterly selling, administrative and other general expenses by the first quarter of 2021.

A third reason why Aurora likely took off like a rocket is the company’s short extended position. Short sellers make money when a stock drops in value. Unfortunately for short sellers, their winnings are capped at 100%, while their losses are, in theory, unlimited. With Aurora’s shares rising so sharply in the past two days, short sellers may have had no choice but to hedge their positions, which only further fueled a rise.

An accountant chewing a pencil while carefully examining the numbers in his print calculator.

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Total Aurora assets may need to be reduced by more than 50%

There is no doubt that the third quarter report of Aurora Cannabis was not the worst case – but it was not great either. What worries me is that investors who buy in Aurora during its 158% two-day hike may not understand what they are really getting into. More specifically, what you see on the company’s balance sheet is not necessarily what you will get.

During the third quarter recently ended, Aurora’s total assets reached C $ 4.72 billion, compared to C $ 5.5 billion at the end of its fiscal year 2019 on June 30, 2019. The reason for the decline over the past nine months has been linked to a multitude of impairments and impairments. taken by the company in the second quarter. This included the $ 762.2 million impairment of goodwill. Based on the US close and a market capitalization of $ 1.83 billion (C $ 2.55 billion) as of Monday, May 18, Aurora likely looks like a bargain on book value. But this is not the case.

Currently, 51% of the company’s total assets (C $ 2.42 billion) are classified as goodwill. This roughly means that Aurora is largely overpaid for the companies it has acquired, and management hopes that it will be able to use the infrastructure, brands and patents acquired from these companies to recover the premium that she paid. As you can imagine, this is not a guarantee to happen.

The biggest problem with the goodwill impairments taken by Aurora in the second fiscal quarter is that they were linked to its South American and Danish assets. While these assets may have been overvalued, they are nowhere near as overvalued as the MedReleaf transaction. Completed in July 2018, the MedReleaf buyout was a C $ 2.64 billion equity transaction, with approximately C $ 2 billion classified as goodwill.

The fact is that the 1 million square foot Exeter greenhouse, which needed to be renovated to 105,000 kilos per year, was the gem of this acquisition. Aurora never stopped moving forward with this renovation and put the Exeter greenhouse on sale. Indeed, Aurora paid CAD 2.64 billion for a meager annual production of 35,000 kilos and a handful of unique brands. In my opinion, almost all of this Canadian $ 2 billion goodwill could eventually be written off.

A hundred dollar bill burns from the center outward.

Image source: Getty Images.

It’s not just a matter of goodwill …

But that’s not all. Inventory levels have soared in the past nine months for all licensed Canadian producers. Aurora ended the last quarter with C $ 251.2 million in stock, more than double the C $ 113.6 million it had in stock as of June 30, 2019. Make no mistake, having a product in stock is a good thing. But the rapid growth in inventory levels across the industry suggests a combination of rampant oversupply and insufficient retail channels to move legal goods. It is increasingly possible that part of Aurora’s inventory may need to be written down, discounted, or even destroyed, if it cannot be sold through traditional retail channels.

This brings us to the next point: C $ 1.05 billion in tangible capital assets of Aurora. The company has already written down part of the value of its Aurora Nordic 2 installation in Denmark, but has not fully resolved the underutilization across its portfolio. It uses only 238,000 square feet of growing space in the Aurora Sun facility (construction of which is currently on hold), and its inventory is skyrocketing with an annual execution rate of approximately 150,000 kilos per year . It was a company that was preparing for more than 650,000 kilos of annual production at the same time last year.

Finally, there is C $ 501 million in Aurora’s intangible assets, which may need to be adjusted in light of the current retail difficulties experienced by licensed producers in Canada.

Given that Aurora’s cash balance is also expected to decline as the company continues to lose money on an operational basis, I would say that Aurora’s total assets are more likely to be valued at approximately $ 2 billion. Canadian dollars, rather than the $ 4.72 billion investors see today. This makes the purchase of Aurora because of FOMO a dangerous proposition.


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