Last year, the marijuana industry broke so many barriers that it was easy to lose count. Aside from just ending nine decades of recreational marijuana prohibition in Canada, we also saw the U.S. Food and Drug Administration approve its very first cannabis-derived drug, witnessed the first cannabis initial public offering on the Nasdaq in July, and had Vermont legalize recreational weed entirely through the legislative process. All told, there were well over a dozen marijuana milestones in 2018.

By the time the curtain closes on 2019, we're also bound to set additional records for the pot industry. We're liable to see the largest U.S.-based weed acquisition close in 2019 -- MedMen Enterprises' $682 million buyout of privately held PharmaCann -- and could witness Mexico become the third country to OK recreational pot.

An up-close view of a flowering cannabis plant.

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Marijuana stock investors must take the bad with the good

But at the same time, we could bear witness to a handful of dubious milestones, one of which was set on Monday, March 4, by Aurora Cannabis (NYSE:ACB).

In many ways, Aurora Cannabis is a trendsetter in the weed industry. It's a favorite holding among millennial investors due to its focus on expanding production capacity. Organic buildouts that include Aurora Sky and Aurora Sun, partnerships such as Aurora Nordic, and acquisitions of CanniMed, MedReleaf, and ICC Labs (to name a few) should put the company on track for roughly 700,000 kilograms in peak annual output by 2021 or 2022. With the exception of Canopy Growth, which should be able to hit 500,000 to 550,000 kilos annually by producing at the industry average rate across its 5.6 million square feet of growing space, no other cannabis growers are even close to Aurora.

Aurora Cannabis has also done an excellent job of expanding into overseas markets. Including its domestic Canadian market, the company has a presence in two dozen countries. Very few growers can even claim to have a presence in a dozen countries, let alone two dozen. When production has ramped up throughout the industry and dried cannabis flower becomes oversupplied (as expected) in Canada, these foreign markets will prove to be valuable commodities as a means to unload excess supply (for medical marijuana purposes).

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Aurora Cannabis makes history, but not in a good way

While special in many ways, Aurora also added quite the blemish to its record this past Monday when it closed its acquisition of Whistler Medical Marijuana for 175 million Canadian dollars (about $130 million).

On the surface, the deal would appear to make sense, with Aurora Cannabis adding a well-known brand in British Columbia to its portfolio. Plus, with the company's proven growing techniques that lead to above-industry-average yields, Aurora anticipates that the Pemberton facility can be expanded well past 5,000 kilos in peak yearly capacity to perhaps as much as 15,000 kilos annually in the future.

But Aurora paid for this transaction in much the same way it's paid for pretty much every deal it's made over the past year and change: by divvying out its common stock like there was an endless supply to go around. Upon closing, 13,667,933 common shares of Aurora Cannabis' stock was issued to Whistler shareholders. An additional CA$30 million in Aurora's shares are payable to Whistler's shareholders upon licensing of the Pemberton facility, with CA$10 million in additional stock-based compensation available once the facility achieves full production. 

Having ended its fiscal second quarter with 998.1 million shares outstanding in Canada, it means Aurora has the dubious honor of issuing roughly 1 billion shares in less than five years. These shares have been used for capital generation, to facilitate deals, and for share-based compensation, which have all been something of a necessary evil in the early going.

However, share-based dilution has also ensured that the company's investors have been given the shaft over the past year. Whereas Aurora's market cap has skyrocketed by 149% since Jan. 1, 2018, Aurora's share price has done... nothing. It's down 0.4%, all as a result of ongoing dilution. Since the end of fiscal 2014 (Aurora's fiscal year ends June 30), the company's share count has risen from 16.15 million to what I would estimate is now closer to 1.02 billion, inclusive of its recent 51% stake in Portugal's Gaia Pharm. That is a ridiculous amount of dilution in a relatively short amount of time, and it's almost maddening that investors have been willing to turn a blind eye to the proverbial cement blocks holding down their shares.

A hand holding a magnifying glass over a balance sheet.

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The impact of share-based dilution is far from over

Aurora's management team has acknowledged the company's share-based dilution, but has also pointed to brighter days ahead, including the expectation of positive EBITDA (earnings before interest, taxes, depreciation, and amortization) beginning in the upcoming fiscal fourth quarter. But having the company's share count balloon to north of 1 billion is bound to have an adverse impact on what matters most: earnings.

Now with more than 1 billion shares, Aurora will need more than CA$100 million in net income just to generate CA$0.10 in earnings per share. Mind you, that would give Aurora a price-to-earnings ratio of 102! For the company to generate a remotely reasonable forward P/E, Aurora is probably going to need to generate upwards of CA$250 million to CA$300 million in annual profit, and thus far in fiscal 2019, it's lost CA$192 million on an operating basis. In other words, this dilution has provided short-term production, but has done nothing to help the company deliver on the bottom line.

Worse yet, this dilution is nowhere near finished. As Aurora has demonstrated with its purchase of a majority interest in Gaia Pharm and Whistler Medical Marijuana, it believes that growing by acquisition is its best path forward. That's a strategy Aurora has made clear is best served by issuing its common stock to fund deals. Plus, as of Dec. 31, 2018, there were 24.8 million warrants outstanding, nearly 44.2 million stock options, and hundreds of millions of dollars in convertible debentures.

Issuing 1 billion shares is a dubious milestone, but Aurora Cannabis is nowhere near done diluting its shareholders, and that's a shame.