Yesterday, May 11th, Aurora Cannabis (ACB) implemented their 12 for 1 reverse stock split. The stock traded down 8% by the close on Monday, as investors continued to express their lack of confidence in the company moving forward.
ACB initially announced the reverse stock split in April. The company decided on this after shares traded below $1 each for more than 30 days which threatened their listing on the New York Stock Exchange. It seems as if the company only saw one option regarding getting their share price above $1 and that was to initiate the reverse stock split.
Yesterday, Cowen analyst Vivien Azer also lowered the price target of ACB to C$12 (US$8.55) for shares listed on the Toronto Stock Exchange.
Azer said, “We have a market perform rating on ACB. With one of the largest production capacities among the LPs, ACB has gotten off to a solid start in the Canadian adult-use cannabis industry (an estimated C$12 billion by 2025). However, cost overruns and missed targets have resulted in notable management turnover and the need to refinance debt with strict mandates around -profitability.”
For current investors in ACB, they will now see their share count decrease by a factor of 12 but will also notice that the value of the stock has increased by 12 times. The reverse stock split brought the total amount of outstanding shares down to 110 million from more than 1.3 billion. Now that ACB’s share price is back into the double digits (at least in Canada) many investors are concerned about how management will make use of the remaining capital. Dilution has always been a big issue with ACB and now that shares look like they have gone up in value management might not be as careful moving forward.
So what’s next for investors in ACB?
ACB is set to report their quarterly earnings this week on May 14th, after the close. We will be looking at how close they are to achieving positive EBITDA. The company has new debt covenants that require them to achieve positive EBITDA by the first quarter of fiscal 2021. As this is now less than a year away, ACB could be in serious trouble if they can not achieve this.
Second, and equally important, we want to see whether or not ACB has found a new permanent CEO. The company is in dire need of a new CEO to steer them in the right direction. The longer they take the more pain shareholders will feel due to uncertainty around the company, time is ticking.
Finally, we will look at revenues and whether the company was able to show any signs of improvement in terms of growing revenues. Another quarter of shrinking revenues will not fare well for ACB especially when short-sellers are circling the company waiting for their next opportunity.
(Disclosure: The author is long ACB)
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ACB shares were trading at $6.71 per share on Tuesday afternoon, down $0.70 (-9.45%). Year-to-date, ACB has declined -74.11%, versus a -9.02% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More…