Shares of Canadian cannabis company Aurora Cannabis (ACB) took another tumble on Monday. With its stock down 65% since the start of the year, and cash burn accelerating to an annualized pace of more than $600 million over the past year, patience seems to be draining out for investors.
In a Form 6-K filing with the SEC, Aurora on Monday announced that after burning through much of the $400 million raised from “At-The-Market” (ATM) stock sales in 2019 (Aurora has about $205 million of that left), it is returning to the public markets with a new offering to sell stock and raise an additional $350 million “to provide further balance sheet strength and preserve flexibility given macroeconomic uncertainty caused by COVID-19.”
Aurora Cannabis stock promptly fell another 13% to close the day at less than $0.76 per share — which is understandable.
After all, in order to raise the targeted $350 million, Aurora Cannabis will have to float and sell 460.5 million new shares at the going ATM price of $0.76. Meanwhile, Aurora’s entire share count right now is only 1.17 billion shares. Thus, the new share issuance will dilute existing shareholders out of about 28% of their ownership interest in the company.
And that’s not all. As the number of shares outstanding rises, and the value of each such share falls, Aurora Cannabis begins to look more and more like what it currently is: A penny stock. In order to make itself look a bit more respectable to stock investors therefore (and also to comply with stock exchange listing requirements), Aurora also revealed on Monday that it plans to conduct a 12-for-1 reverse stock split (which it calls a “consolidation”).
The effect of this will be two-fold. First, for every 12 shares of Aurora that an investor owns today, he or she will end up with just one share after said “consolidation.” And second, Aurora’s share price will immediately and apparently improve to perhaps $9 or so after the consolidation takes effect.
Aurora’s stock, though, might not hold onto this new and improved price tag for long. In a note Monday commenting on the company’s moves, Jefferies analyst Owen Bennett points out that these developments do “not suggest a particularly positive near term outlook” for Aurora stock.
In Bennett’s opinion, Aurora Cannabis no longer looks like the kind of company that can “achieve profitability in the near-term,” and “without profitability, cash concerns [are] significant.” Executives, including a CEO and a CCO, have already fled Aurora, the business is in “transition,” and the big cash-raise-cum-stock dilution announced in 2019 has, instead of being a cure to the company’s ills, turned out to be merely a prelude to a nearly-as-large cash raise-cum-stock dilution less than a year later, in 2020.
Granted, Bennett holds out hope that Aurora’s latest stock offering will generate cash “sufficient for the foreseeable future,” justifying at least a “hold” rating on the stock. However, with a $205 million in cash Aurora says it has available, plus the $350 million it hopes to raise from its latest ATM, Aurora wouldn’t have enough cash to finance another year’s worth of $600 million-plus cash burn.
Overall, Aurora stock has a Hold analyst consensus rating with only 1 recent Buy rating. This is versus 11 Hold and 3 Sell ratings. Meanwhile, the $1.79 price target suggests an upside potential of 138% from the current share price — most likely a result of the quick drop and analysts’ inability to turnaround new price targets so quickly. (See Gilead stock analysis on TipRanks)
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