Aurora Cannabis Inc updated shareholders on its business operations along with certain unaudited preliminary fiscal fourth-quarter 2020 results. The Company also announced the appointment of Miguel Martin as its new CEO.
With deep, diverse experience in consumer packaged goods, highly regulated industries and the U.S. cannabinoid industry, Miguel is well-positioned to execute the next phase of Aurora’s business transformation, with a focus on commercial strategy. Michael Singer, who has served as Interim CEO since February 2020, has stepped down from his temporary role and will remain Executive Chairman.
“Over the last six months, Aurora has focused on building the infrastructure and capabilities necessary for a successful and diversified business,” stated Michael Singer, Executive Chairman and former Interim CEO of Aurora. “The first phase of our business transformation, which is now substantially complete, included the rationalization of our cost structure, reduced capital spending, and a more prudent and targeted approach to capital deployment. As a result, we now have a far more efficient asset base and infrastructure to supply our key global markets. I am delighted to now be transitioning the CEO responsibilities to Miguel and I am confident that Aurora is in a strong position to succeed under Miguel’s leadership.”
“Material progress has been made to optimize our Canadian operations and put Aurora on a much stronger footing,” stated Miguel Martin, newly appointed CEO of Aurora. “With market leading brands and a culture rooted in innovation and science, I now feel even more confident in the opportunity to create a global leader in a rapidly growing industry.”
The Company recently provided the following updates:
Preliminary Unaudited Net Revenue, Adjusted Gross Margin and SG&A Results for Q4 2020
Net revenue in Q4 2020 is expected to be between $70 million and $72 million, compared to $75.5 million in Q3 2020. Cannabis net revenue is expected to be between $66 million and $68 million, compared to $69.6 million in Q3 2020. We expect adjusted gross margin before fair value adjustments on cannabis net revenue to be within a range of 46%-50%, with lower gross margins expected from non-cannabis business segments.
As previously stated, Aurora has focused on prudently managing its sales, marketing and administrative (“SG&A”) costs in the second half of fiscal 2020. Aurora successfully reduced SG&A costs (which include R&D spending) from over $100 million in fiscal Q2 2020 down to an expected range of $60 to $65 million in fiscal Q4 2020, excluding approximately $3 million of non-recurring costs related to the business reset and $2 million of costs associated with divested businesses.
Cost Rationalization and Near-Term Revenue Plan
The Company is now operating at its quarterly SG&A run-rate in the low $40 million range, and expects operational cost reductions from facility closures up to $10 million per quarter starting in the second half of fiscal 2021. With a tailwind of growth in the Canadian recreational market, the Company is better positioned for its next phase focused on profitability.
Under Aurora’s new CEO, the team expects to be focused on executing a tactical plan intended to (1) grow Aurora’s leading market share in key profitable Canadian consumer categories (2) protect and enhance Aurora’s leading market share in Canadian medical, (3) grow our international medical business and (4) build leading brands under Reliva in the US CBD market. Ultimately, Aurora believes that it is capable of supporting significantly higher levels of net revenue in the future without a corresponding level of growth in SG&A.
As previously announced, and as part of the business transformation and cost reset, Aurora expects to record a number of balance sheet adjustments in Q4 2020 to recognize market realities and to position the Company for future performance. These adjustments include previously announced fixed asset impairment charges, now expected to be up to $90 million, due to production facility rationalization, and a charge of approximately $140 million in the carrying value of certain inventory, predominantly trim, in order to align inventory on hand with near term expectations for demand. Approximately 40% of the expected inventory provision relates to the non-cash IFRS fair value adjustment within inventory. Although the business prospects for Aurora remain strong, under IFRS, management is required to recognize the impact of overall industry risk, and to consider the book value of the Company relative to current market capitalization. Accordingly, the Company expects to recognize a non-cash write-down of goodwill and intangible assets in the range of $1.6 to $1.8 billion.
In addition, and consistent with a focus on financial discipline and the drive to positive Adjusted EBITDA, Aurora announced today that the Company and the UFC have agreed to mutually terminate their partnership. For Aurora, this decision reflects the evolution of the realities of the cannabis market and a focus on near term profit pools. In connection with this decision, the Company expects to make a one-time payment of US$30 million to terminate the contract in Q1 2021, which is expected to avoid more than $150 million in fees, research costs, and marketing activation expenses over the next five years.
Amendments to Credit Facility Provide Increased Financial Flexibility
Aurora has reached an agreement with its syndicate of banks regarding amendments to its secured credit agreement. These amendments are expected to provide additional flexibility during the Company’s Business Transformation Plan and include:
- Adjustment of the total funded debt-to-equity covenant to 0.28:1 for Q4 2020 and Q1 2021, and 0.25:1 thereafter, allowing for room to take the balance sheet adjustments noted above
- Reduction in the Adjusted EBITDA milestones required for the trailing twelve-month period ending June 30, 2021 from $51 million to $20 million, including delaying the requirement to generate positive Adjusted EBITDA to Q2, in line with management’s revised tactical commercial plan
- Reduction in the size of the revolving facility from $43 million to $15 million to better align with the Company’s average receivables balance and to reduce unnecessary standby fees
“With the difficult actions we have taken since February to right-size our team and our production footprint now behind us, these amendments to our credit facility provide us with greater flexibility over the next few quarters as we focus intensively on top line opportunities,” stated Glen Ibbott, Aurora’s Chief Financial Officer. “We thank our lending partners for their continued support to reach this agreement. At June 30, 2020, Aurora had approximately $160 million cash on hand. Today, we also have approximately $275 million (US$220 million) available under our existing at-the-market (“ATM”) program which provides us with additional balance sheet support if required as we drive toward achieving Adjusted EBITDA profitability in the near term. With Miguel having been part of Aurora’s executive team since May 2020 the next phase of our business transformation is already well underway. We have established what we believe to be a secure foundation from which to drive shareholder value in fiscal 2021, and to firmly establish Aurora as a profitable, growth-oriented leader in the global cannabinoid market.”