It's quite difficult to time the market as you never know when a particular stock will bottom out or touch record highs before staging a decline. Right now, Aurora Cannabis (NASDAQ: ACB) stock is trading 97% below record highs, after losing 70% in market value this year. Does this mean ACB stock will gain momentum going forward?
Aurora Cannabis enters into a financing agreement
Shares of Aurora Cannabis fell by 47% in the last week after the company announced $125 million of bought-deal financing. The deal says that the financing underwriters, led by Canaccord Genuity and BMO Capital Markets (NYSE: BMO), agreed to buy 51.1. million units of the company for $2.45 per unit. Aurora said that this translates into $125.2 million of gross proceeds.
The market viewed this strategy as a desperate attempt at financing by Aurora and punished its stock price. Typically, a bought deal eliminates risk from the issuing company, in this case, Aurora Cannabis. Why then, did its stock tank? In a bought deal, the investors assume all the risk and guarantee the issuing company a certain amount. But this often comes at a significant discount.
That’s what has happened with the Aurora bought deal. But wait, there are a few more clauses. Apart from one share, each unit includes a warrant that gives permission to Canaccord to purchase an additional Aurora share at any time in the next three years.
The execution price for the warrant is $3.2. This means that shares need to go up a little less than 100% by 2025 so that the warrants will have some value. It also means that any gains made by Aurora in the time period will be diluted making this the deal a lost cause for Aurora shareholders.
The company has said that these funds will be used for general corporate expenses which was also a factor in the beatdown. There don’t seem to be any growth plans for Aurora.
Aurora Cannabis will reduce production capacity
On May 6, Aurora announced that it completed the acquisition of TerraFarma (parent company of Thrive Cannabis) for $38 million in cash and common Aurora shares and $30 million in potential earnings. The potential earnings clause kicks in if Thrive is able to achieve certain specified revenue targets within two years of this transaction.
On May 27, the company announced that it would close its Aurora Sky facility in Edmonton, Alberta. Aurora Cannabis also disclosed plans to sell off its Sun Greenhouse facility at an 80% discount to its original investment.
Aurora explained that demand for its product in Canada is limited and it won’t need all the capacity it currently has. In a video message to employees, Aurora CEO Miguel Martin stated, “Simply put, our business is bigger than what we need, and we must position ourselves to better secure our path to profitability and ultimately be successful in this industry in the long term.”
Aurora is undertaking these steps in a bid to cut costs for the company. It aims to save between $118 million and $133 million by the first half of next year. Its total revenue in the March quarter stood at $50.4 million, compared to $55.1 million in the year-ago period.
ACB stock is trading at $1.68 and analysts have a 12-month price target of $5.1 for the company. However, given the weak fundamentals of Aurora Cannabis, it remains a high-risk bet despite its depressed valuation.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
