January 21, 2019

Aurora Cannabis Inc (TSE:ACB | NYSE:ACB) CCO Cam Battley Discusses Convertible Debenture; Dilution Unlikely

Midas Letter
Midas Letter
Aurora Cannabis Inc (TSE:ACB | NYSE:ACB) CCO Cam Battley Discusses Convertible Debenture; Dilution Unlikely

Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P) CCO Cam Battley shares details of the company’s just announced US $300 million convertible debenture. Battley reveals that the notes mature in 2024 and highlights that if the option is exercised in full, the total amount of the deal increases to US $345 million. Battley realizes the announcement initially weighed on Aurora’s stock, suggesting investors feared further dilution of Aurora’s shares. Battley confirms that the notes can be settled in cash or stock and at Aurora’s discretion. He indicates the company intends to settle in cash, without additional dilution. Battley is excited about the number of institutional shareholders who took part in the convertible debenture. He believes bringing more institutional investors into the space will reduce volatility in Aurora’s stock specifically and the cannabis sector more broadly. This deal allows Aurora to bolster its coffers and maintain flexibility as the industry evolves and additional economic opportunities develop.


James West:   Welcome back, everybody! As promised, in the house today, Cam Battley, CCO of Aurora Cannabis. Cam, welcome back.

Cam Battley:  Nice to see you.

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James West:   Cam, the hot topic of the day is a $250 million convertible debenture that Aurora announced yesterday and the terms were announced today. Walk us through it, please.

Cam Battley:  It’s actually bigger than that, it’s been upsized. So we’re looking at $300 million USD, with an over-allotment that would make it up to $345 million USD, which would be on the order of $450-plus million CAD.

James West:   Hmm. Why would Aurora be raising funds in US dollars right now?

Cam Battley:  Because we can.

James West:   I see.

Cam Battley:  And actually, this is important: this security is something that’s available only to the top companies in the cannabis sector, and it’s ideal for us right now because of it’s flexibility. And I could tell you that yesterday was a little bit of a stressful day because we were in the red; I think you used the term on a Tweet forcefully, that the market reacted forcefully. I think that’s because people assumed that there would be dilution associated with this raise.

James West:   That is exactly the concern that we saw on our chat boards yesterday. So how are we to look at the dilutive factor, here?

Cam Battley:  So this is a different instrument from what we’ve seen before, in the Canadian cannabis sector. This is not an equity raise, this is a convertible note. So we have the option to settle this note at our discretion, at Aurora’s discretion, in cash or shares. And I can tell you that it’s our intention to treat this as essentially a five percent loan, as a 5 percent, unsecured loan.

James West:   Oh. So it’s not actually a convertible debenture, it’s a convertible notes.

Cam Battley:  Right.

James West:   And any conversion is solely at Aurora’s discretion.

Cam Battley:  It’s at our discretion, and that’s really important because it also gives you a signal as to our level of confidence with respect to our future cash flow. So this matures in 2024, and you know, our projections as to our revenue growth and our free cash flow over that period give us a high degree of confidence that we’ll be able to settle this substantially, if not entirely, in cash.

James West:   So it’s non-dilutive.

Cam Battley:  Non-dilutive. And that’s very important – you know, I’m well aware that shareholders in cannabis companies are concerned about dilution, it’s understandable. Dilution has its place, and I think that we have deployed shareholder capital in a very intelligent way over the last three years since we began commercial operations. We’ve acquired an unmatched, I think, array of assets and capabilities, with the objective of being the most integrated cannabis company in the world, and also establishing the largest global footprint in the world, and we’ve done that; we’re now operating in 23 countries.

So we have, I think, deployed shareholder capital in a very prudent and intelligent way with a very specific strategy.

That said, we started with our guidance last week indicating that we’re now shifting gears. We’re shifting gears away from the era of really aggressive M&A, we’re slowing that down. We’ve decided to let people know that we’re going to be really selective right now in terms of our future M&A, with a focus on opening up international markets, and at the same time, shifting gears to focus on very disciplined execution, on cost management, and that stake that we put in the ground through our guidance last week with respect to achieving profitability in the middle of this year.

So what we said, specifically, is that we believe that we will be EBITDA-positive in the second calendar quarter.

James West:   Fantastic. So then can we talk a bit about who are the investors in the debenture?

Cam Battley:  SO let’s start with our bankers, because I really want to give them a shout-out. Our bankers were BMO, Bank of Montreal, and Cowan in the US. And they have been a dream to work with: really, really smart people, really dedicated. They work at our pace, so no problem working seven days a week, and they’ve helped us come up with a very, very good security.

Now, the investors themselves, there are actually dozens of them, and it’s primarily large US Institutions, some from Europe as well, some from Canada, and that’s important as well, because these are long-term shareholders. These are not day traders. And one of the things that you and I have talked about before is that it’s been my objective for 2019 to, if we can reduce the volatility in our stock by bringing in more institutional shareholders – in the cannabis sector, you know, it’s very clear that the overwhelming majority of shareholders, of investors, are retail. And one of the things that we can do to help mature this industry faster is to bring more institutions into the story, and that’s what we’re doing right now.

James West:   Okay, can you tell me: what measures, what covenants are in the –

Cam Battley:  No financial covenants.

James West:   None whatsoever? So what protects the lenders, that’s what I want to know: how are they protected from downside?

Cam Battley:  This is unsecured debt, essentially, the way we’re looking at it.

James West:   Really?

Cam Battley:  and so it’s a vote of confidence, I think, in our business strategy and our plan. And the story that we told them, and a lot of institutions – and I should emphasize, our CEO, Terry Booth, our CFO, Glen Ibbott, our Chairman, Michael Singer, and I, have been on the road a lot, and we’ve met with well over 100 institutions in just the last couple of months. And the story that we’ve been telling them is of a global cannabis leader. It’s about the position we have on a global basis, about our capabilities in terms of production today and the forecast as to where we’re going to be. It’s about the fact that there are only two companies in this sector that are anticipated to have over 500,000 kilograms of production capacity by next year, by 2020, and that’s us and Canopy.

And then also about what differentiates us in terms of our production style, our Sky Class facilities, the efficiency there. The application of technology, the automation, the robotics. All of that stuff that sets us apart and that has allowed us to become the fastest—growing cannabis company in the world since we began commercial operations three years ago; that’s the story that we told, and, touch wood, it’s looking very good. The response has been excellent so far. The security was heavily over-subscribed.

James West:   Interesting that, though, I mean, I want to go back to the fact that it’s US dollars. Are we to read to that that maybe some of this cash is earmarked for some kind of acquisition operation in the United States?

Cam Battley:  I’m going to choose my words carefully, because I don’t want to signal anything here. When we have something to disclose, we’ll disclose it properly, but it’s not unfair to assume, as we have stated in the past, that we are interested in the US market in a number of ways.

So since the Farm Bill passed, there are now opportunities for hemp-derived CBD, and the hemp business itself, through which we are heavily invested through Hempco, through Agripro in the EU, and through ICC in Latin America. And we’re also involved in the US market through our spinoff, Australis Capital, which is assembling this delightful, very valuable suite of assets in the us and for which we have a back-in right to the tune of 40 percent if and when cannabis becomes federally legal in the US.

So it’s not unfair to assume that we’re focusing very hard on what we want to do, when we can, without disturbing our relationship with the TSX and the NYSE in the US.

James West:   So then can I safely assume that this cash isn’t really targeting anything specific right now, it’s more or less just a topping up of the war chest?

Cam Battley:  We need to maintain our agility. And so we’ve been more aggressive, I would say, than any other cannabis company in terms of opening up new markets, striving to be first or second into these new markets; recent ones include, you know, Poland and Czech Republic and Luxembourg and Italy and so on. There will be more of that. And not just in Europe, but in other jurisdictions, as well.

So on a go-forward basis, we need to make sure that we are property capitalized to be able to move with a agility, to do the kinds that of thins that have benefitted us thus far on an international basis, with an eye on that massive economic opportunity. And I’ll say it again: there’s been a lot of attention on the Canadian consumer system, on consumer legalization in Canada, and it makes sense, because it is a big development, it’s positive public policy, it’s smart public policy, it’s also good economic opportunity to the tune of perhaps $10 billion per year, and it’s also a great source of cash flow for companies like Aurora who are doing well in the Canadian consumer system.

But our major focus over the next several years is on the international medical systems. We see that as the largest economic opportunity, and that’s why we’ve got to have this additional war chest, to make sure that we can bridge through to profitability, which once again, is coming very, very fast. It’s headed this way.

James West:   Right, you bet. The presence of so many Tier 1 institutional investors in this financing in the United States, does that signal that the conflict of interest that has been kind of foisted on the perception of investors globally that the unites States is not going to be a participant in the Canadian Cannabis market and vice versa, is that sort of perception being diminished by the fact that these big institutions are in?

Cam Battley:  This is a coming of age for cannabis companies, and in particular, the leading Canadian public cannabis companies. I’ve been saying for some time that institutions in the US, in Europe, other parts of the world, have been signalling their interest; I would say that what we’re seeing right now is that being put into action. They realized that this is a significant new opportunity, that a brand new industry on a global basis is being born. These institutions do not come into your story because they’re looking to day trade; they come in as long term investors because they believe that there is a long term opportunity. So that’s what we’re seeing happening right now. It’s very exciting; we’ll look back at this moment, I think, as a critical inflection point in this industry.

James West:   Matt Bottomley, the Canaccord cannabis analyst, was here with us this week and he suggested that Aurora was very likely one of the most likely companies that was going to be the next beneficiary on the scale of a super conglomerate, multi billion dollar, Pubco-like, Novartis, Constellation brands. Is it safe to ask you if any of these discussions are underway or have they proceeded?

Cam Battley:  As long as I answer it carefully, it’s safe to ask, bearing in mind that I really like not being incarcerated. So we are not going to be making any news today, but I will give some colour. One of the things that we spoke about with the institutions in the US as we were marketing and telling the story of Aurora is that it’s fair to assume that the companies from the US an Europe an elsewhere, the leading companies in major mature industries that have ben speaking t other companies, have been speaking to us, and I would say, in most cases, probably first.

Now, that said, we are keeping our powder dry, and I’ll tell you why: we have received, I think, really wise counsel from the US that we should be patient, not rush into partnerships. Because as much as some of these big companies want to partner with us today, they will want to partner with us more tomorrow, and what changes over time is that we will be a much more valuable company, Aurora will be much more valuable company, in 12 months, than we are today – in six months, even. In other words, the value of our company is rising based on our fundamentals, based on the revenues that we’re generating, based on our growth. I think we’re projecting, based on the guidance we gave last week, about 68 percent growth quarter-over-quarter in our December 31st quarter, and that comes after an average of 44 percent quarter-over-quarter growth for the last six quarters.

So when you’re growing that fast you don’t want to sell yourself cheap, and therefore it’s worth considering whether you want to hold off, be smart, understand that you’re going to be a player, but whether you enter into a partnership today or at some pointing the future is a major consideration if you know that you’re going to be more valuable tin the future I’ hope I’m not being too cryptic here, but it’s an important consideration here, because my feeling and the feeling of our CEO Terry Booth and our management team is, we measure twice and we cut once.

I have zero doubt that we’re going to end up with partnership with mature industries; I have zero doubt it’s a question of when an it’s a question of on whose terms.

James West:   Well, fantastic update Cam. Thank you very much. We’ll come back to you soon.

Cam Battley:  It’s always good to see you.

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