The countdown creeps ever closer. In only 15 days, on Oct. 17, recreational marijuana will be completely legal for adults to purchase throughout Canada. This makes Canada the first industrialized country in the world to have legalized adult-use weed, and puts the industry on track to generate billions of dollars annually, once it's fully up to speed.
Though there are dozens of marijuana stocks for investors to choose from to potentially take advantage of this growth, none has been more popular (or polarizing) than Aurora Cannabis (NYSE:ACB). That's because Aurora is expected to lead all growers in aggregate annual production, yet it's not the largest marijuana stock by market cap (it currently sits at No. 3, behind Tilray and Canopy Growth Corp.).
It also just so happens that marijuana darling Aurora Cannabis reported its fourth-quarter and full-year 2018 operating results last week. And while Wall Street and investors are probably focused on the company's 223% year-over-year Q4 sales growth, its plans to uplist to a major U.S. exchange, or its surprise profit of over 79 million Canadian dollars, there are 10 other things listed throughout its report that bear even more significance. If you've been monitoring Aurora Cannabis, or you own shares in the company, here's what you really need to know.
1. Per-gram prices are up, but weakness was seen in oil pricing
Forget the top-line sales figure. Instead, pay attention to what's going on with the price per gram of the weed that Aurora Cannabis is selling. During the quarter, Aurora recognized an average selling price for dried cannabis of CA$8.02 per gram, which was 18% higher than the fourth quarter of the previous year. As for cannabis oil, the price rose 5% to CA$13.52 per gram from the sequential third quarter, although it fell 24% from Q4 2017, where it went for CA$17.91 a gram.
Why the drop? More than likely it simply has to do with oils being somewhat rare last year and more commonplace now. Either way, Aurora Cannabis recognized a higher aggregate sales price per gram for its products during the fourth quarter, which helped push revenue higher.
2. Oils are accounting for a higher percentage of sales
One of the key reasons sales are moving in the right direction, aside from healthy demand, is that more of Aurora's sales are coming from cannabis oils. Dried cannabis has shown the potential to be commoditized over time in adult-use legal states like Colorado, Washington, and Oregon. This suggests that margins associated with dried flower could fall in the not-so-distant future. These same pricing pressures aren't felt by cannabis oils, even though Aurora noted a significant year-over-year decline in per-gram pricing. A higher percentage of oil sales should mean more bang for the buck for Aurora Cannabis and its shareholders.
3. Growing costs are moving in the right direction
Another positive is that Aurora is starting to scratch the tip of the iceberg with regard to economies of scale. As the company produces more pot, its growing costs on a per-gram basis should fall. During the quarter, cash costs to produce each gram of dried flower fell 11% from the prior-year period to CA$1.70. Admittedly, though, there will be some lumpiness to these figures as new facilities are brought online, which is evidenced by the 11% increase in production costs per gram from CA$1.53 in the sequential third quarter.
4. Production targets are being met
Aurora Cannabis remains on target with its goal of producing well in excess of 500,000 kilograms of pot per year. As of September, Aurora's annual run rate with existing rooms is 45,000 kilograms, with a goal of reaching approximately 100,000 kilograms by the end of the calendar year. When its fiscal year ends June 30, 2019, the company is angling for over 150,000 kilograms of production. With the exception of Canopy Growth and Aphria, no other grower should even be remotely close to these annual run-rate production figures.
5. A registered patient decline?
Pretty much every marijuana earnings report has at least one head-scratcher, and for Aurora Cannabis it was the company's sequential quarterly decline in registered active patients. Yes, I said "decline." Although its patient count catapulted from 16,400 to 43,308 on a year-over-year basis, it somehow lost more than 2,400 patients from the sequential third quarter. How? Not exactly sure, since the company doesn't address it in the press release. Still, given Aurora's focus on higher-margin medical patients, this is a bit concerning.
6. Active on the acquisition front
Arguably, no company has been more aggressive on the acquisition front than Aurora Cannabis. During fiscal 2018, the company completed 11 acquisitions, and it has one ongoing (ICC Labs). This includes the $852 million purchase of CanniMed Therapeutics, as well as the $2.5 billion buyout of MedReleaf, both of which are the biggest closed deals in marijuana history.
Just as important, Aurora continues to push into new international markets. Given that domestic markets will demand only so much cannabis, Aurora and its peers are counting on healthy purchasing from foreign countries with nascent or nonexistent grow industries to meet their medical pot needs.
7. Its inventory grows ahead of legalization
A very important figure that may have slid under your radar is just how much Aurora Cannabis has built up its inventory prior to legalization. Total cannabis inventory and biological assets spiked higher by 248% to CA$41 million by the end of fiscal 2018 from the end of fiscal 2017. Although most of this is dried flower, which may come with lower margins, it still puts Aurora in good position to take advantage of an influx of demand once the green flag waves on Oct. 17, 2018.
It's also worth pointing out that on a pro forma basis, which is inclusive of Aurora's acquisition of MedReleaf, inventory and biological assets stood at CA$88.8 million.
8. These profits come with an asterisk
Sure, Aurora Cannabis surprised Wall Street and investors with a profitable quarter, but this profit comes with a pretty notable asterisk. Namely, its reversal of fortune was due to "the unrealized non-cash gain on derivatives and marketable securities." Or, put in another context, the company's core operations aren't even close to generating a profit as of yet.
According to Aurora's filing with financial regulatory agency SEDAR in Canada, it generated CA$55.2 million in full-year revenue, but saw CA$139.3 million in expenses and another CA$19.6 million in cost of sales. That's a loss of about CA$100 million, if we exclude investment gains and legal accounting tricks of biological asset revaluation.
9. Investment gains are mouthwatering
If there's one thing Aurora has really excelled at, it's the company's investing prowess. As of Sept. 21, 2018, the company's investments in public companies were worth more than CA$700 million! The euphoria surrounding cannabis stocks has allowed Aurora to make a pretty penny on its investments in the space. For instance, its 17% stake in The Green Organic Dutchman, which cost CA$133.2 million, was worth a cool CA$256.7 million by the end of fiscal 2018. Aurora could somewhat easily liquidate these assets, if necessary, to generate the capital needed to expand its capacity or make additional acquisitions.
10. Dilution remains an ongoing and long-term concern
Finally (and you knew this was coming, so don't act surprised), share-based dilution continues to be a drag on the company and its shareholders. In order to finance Aurora's roughly one dozen acquisitions and its handful of organic build projects, the company has turned to one bought-deal offering after another. By selling common stock, convertible debentures, stock options, and/or warrants, it's ballooned its outstanding share count.
At the end of fiscal 2018, Aurora had 568.1 million shares, up from just 16.2 million shares exactly four year prior. Mind you, this doesn't include the all-share deal with MedReleaf or its share-based buyout of ICC Labs. By this time next year, the company could easily have 1 billion shares outstanding. This could make generating a meaningful per-share profit almost impossible.
Though Wall Street appears enamored with Aurora Cannabis's Q4 report, this investor sees plenty of flaws.