Aurora Cannabis names new CEO, takes $1.8-billion impairment charge

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Aurora Cannabis Inc. has appointed a new chief executive and announced another round of writedowns, including a goodwill impairment charge of up to $1.8-billion, as it continues to struggle with a history of lavish spending and short-sighted deal-making.

Miguel Martin, who joined the company in July as chief commercial officer, will take over as CEO, permanently filling a position vacated by Aurora co-founder and long-time CEO Terry Booth earlier this year.

Mr. Martin, the former head of Reliva, a U.S. cannabidiol (CBD) company Aurora acquired earlier this year, takes charge of the Edmonton-based marijuana grower at a critical moment. Nearly two years after recreational cannabis was legalized in Canada, the company is navigating lower-than-expected sales and declining investor interest while trying to manage a balance sheet bloated with expensive and unprofitable assets.

Between 2015 and 2018, Aurora expanded rapidly through acquisitions, often paying jaw-dropping prices for assets that have since proven difficult to integrate and less lucrative than anticipated. On Tuesday, Aurora said it expects to report between $1.6-billion and $1.8-billion in goodwill impairment charges.

These charges will hit the company’s earnings for its fourth quarter ended June 30, which it will report on Sept. 22. Aurora’s stock price on the TSX fell 10.8 per cent on Tuesday.

This is Aurora’s second major goodwill impairment this year. In February, it took a $762-million writedown, primarily related to underperforming assets in South America and Denmark.

The impairments are a kind of indigestion from excessive deal-making.

Goodwill is recorded during an acquisition when a buyer pays more than the fair value of the target company’s assets. Goodwill sits on the balance sheet as an intangible asset, and is tested on a regular basis. A company must record a goodwill impairment charge when it becomes apparent the financial performance of the acquired asset has failed to meet expectations.

The deals Aurora is now reckoning with include the company’s $3.2-billion takeover of MedReleaf Corp. in 2018, the high-water mark for cannabis M&A, and its $1.1-billion hostile takeover of CanniMed Therapeutics, also in 2018.

“Those were acquisitions when the industry was very different, the market caps of us and our peers were very different,” said Michael Singer, who served as interim CEO after Mr. Booth’s departure in February and will continue as the company’s executive chairman.

Aurora was forced to take the writedowns because the goodwill on its balance sheet had come to exceed the company’s entire market capitalization, he said.

“This is really about cleaning up the past. This was in no way an indication of the strength of the business today,” Mr. Singer said. “We made those writedowns really to clear the deck for the announcement of our new CEO.”

The company also said Tuesday that it expects to write off $90-million worth of production assets and $140-million worth of inventory. Aurora has shuttered several of its cannabis growing facilities to bring production in line with anemic demand in the legal marijuana market. Likewise, the inventory write-offs are an attempt to “align inventory on hand with near term expectations for demand,” the company said in a news release.

Aurora also said that it has “mutually terminated” its partnership with the mixed martial arts league Ultimate Fighting Championship. The partnership, announced in 2019, was intended to promote research into the use of CBD in sports medicine. Aurora will pay US$30-million to end the arrangement.

Analysts responded negatively to Aurora’s business update, which included a prerelease of some of quarterly financial results. Revenue for the three months ended June 30 came in below consensus expectations. One analyst also expressed surprise at the choice of Mr. Martin as CEO.

“The fact that he was given the CEO role so soon after [joining the company as chief commercial officer] would suggest limited availability of suitable (or indeed interested) parties externally," Jefferies analyst Owen Bennett wrote in a note.

Mr. Singer responded by highlighting Mr. Martin’s previous experience in the cannabis industry as the head Reliva. He has also served as president of e-cigarette manufacturer Logic Technology and general manager of sales and distribution at the cigarette giant Altria.

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