Aurora Cannabis (NYSE:ACB) continues its stunning fall from grace. Aurora stock has collapsed following a dreadful earnings report last week, along with a major change in corporate strategy going forward. This, along with a flood of share dilution, has caused traders to dump their ACB stock as fast as possible.
To put some perspective on things, last year, Aurora bought MedReleaf in an all-stock deal worth roughly C$3.2 billion ($2.5 billion). Now the entire Aurora stock market cap is less than they valued the MedReleaf deal at not so long ago.
It has been a long decline for the Canadian marijuana industry in general, and Aurora Cannabis stock in particular. Sadly, it’s still not over yet. In fact, a close look at Aurora’s earnings report showed plenty of problems beyond the obvious headlines.
An Expensive Solution to ACB’s Debt Problem
Aurora had been facing a major issue; it has convertible debentures coming due in 2020. Paying these off would have caused the company to have to spend a lot of cash, and that’s in short supply at the moment. Aurora figured out a solution that will allow it to avoid having to come up with cash next year. But it didn’t come cheaply.
The company is allowing the 2020 convertible debtholders to convert their claims into common stock at a price based on the average of the past few days’ trading in ACB stock. That’s sharply lower than the old conversion price, which was up at C$13 per share. This is a strong deal for the debtholders, who now see their option to convert the stock repriced back to something around $3 a share. Many will undoubtedly cash in.
However, owners of ACB stock will now see their share position diluted. And don’t expect the debtholders to hold their new ACB stock shares for long. It’s common for convertible debtholders to dump their stakes as soon as they change their holding into equity. This will likely create more selling pressure into year-end. And if that weren’t enough…
Aurora Stock: More Dilution Coming
On the quarterly conference call, Aurora CFO Glen Ibbott disclosed that the company is heavily selling new ACB stock into the market to raise money. Ibbott said:
Finally, we have been active on the overall US$400 million at the market financing programs as it represents a strategically valuable source of equity capital. To be clear, cash raised under this program is transacted at the market price with no discounts, warrants, or other sweeteners offered. We consider the availability of the ATM for Aurora given our normal trading volumes could be a very important tool, especially given the current market conditions.
Let’s break that down. Aurora has a program to sell up to $400 million of new stock to the general public using an at-the-market “ATM” offering. This means Aurora can simply create new shares, sell them during the course of normal daily trading, and keep the cash proceeds. The CFO goes on to note it has already raised $124 million by selling about 29 million shares so far. This suggests an average sale price of roughly $4.28 per U.S.-listed ACB stock share.
That’s not so bad. Consider if it tried to raise another $124 million now. Say ACB stock averages $2.50 per share going forward, it’d now have to sell nearly 50 million shares to raise the same amount of cash. This type of financing is a type of death spiral. The lower the ACB stock price goes, the more stock the company has to sell to raise cash. And as the share count balloons, it causes existing holders to lose confidence and sell out of the company. Short sellers love going after companies raising money this way because it indicates grave weakness.
Rosen Law Firm Investigates Aurora
Rosen, a law firm specializing in investment litigation, announced Monday that it is investigating Aurora. In their press release Rosen suggested that Aurora “may have issued materially misleading business information to the investing public.”
The press release goes on to note specific points in the company’s recent earnings release. These include the disappointing earnings figures, the decision to stop building certain production facilities, and the accelerated conversion of the company’s debentures. Rosen says that it is preparing a lawsuit to try to recover damages suffered by ACB stock owners, and urges shareholders to consider joining the class action against the company.
Should ACB stock owners be particularly worried about this lawsuit? Probably not. It’s common for these sorts of law firms to threaten legal action after a company disappoints shareholders and the stock price craters. Usually, it doesn’t amount to much. However, it’s still a hassle for the company to deal with, and could lead to higher corporate overhead in the near-term.
ACB Stock Verdict
Long-time readers know I’ve been bearish on the cannabis industry all year. The supply glut has ruined marijuana producers’ plans at every turn. That said, I’ve tried to look for a bullish argument on some of the marijuana stocks, at least the higher-quality ones. Any new industry is going to have growing pains. It’s never a straight path from an IPO to being a home-run stock; there are always going to be setbacks.
Last month, I made an argument for how Aurora could potentially cultivate a comeback in 2020. I cited the company’s better management compared to industry peers, and a changing regulatory environment that could favor responsible operators like Aurora.
Sadly, this earnings report has totally wrecked any sort of comeback thesis for now. It’s hard to look at that earnings report and find much of anything inspiring. And the stock dilution coming from the the debt conversion and ATM stock offering will ensure ACB stock suffers more weakness through at least the next quarter.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.