For years, there was no hotter investment on the planet than marijuana stocks. With Canada legalizing recreational cannabis in 2018 and tens of billions of dollars in sales being conducted annually in the black market worldwide, the door appeared to be wide open for North American licensed producers to seize this opportunity and deliver the green for investors.

But over the past 13-plus months, investors have only seen a sea of red. Regulatory-based supply issues in Canada, stubbornly high tax rates in the U.S., and financing concerns throughout North America have haunted the industry and sent pot stock valuations tumbling.

A black silhouette outline of the U.S., partially filled in by baggies of cannabis, rolled joints, and a scale.

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Millennials' favorite pot stock has been an eyesore

Arguably the biggest disappointment of all has been Aurora Cannabis (NYSE:ACB). The most popular pot stock among millennial investors was, at this time last year, projected to produce more than 650,000 kilos of marijuana annually at its peak. It also had a production, research, export, or partnership presence in two dozen countries outside of Canada. In other words, on paper, it looked like a dominant player.

Aurora had also hired billionaire activist investor Nelson Peltz as a strategic advisor in March 2019. Peltz's area of expertise happens to be the food and beverage industry, making him the perfect liaison to negotiate a possible partnership or equity investment between Aurora and a brand-name company.

Unfortunately, little has gone Aurora's way over the past year and change. It's suspended construction at two of its largest projects and sold another large greenhouse, effectively paring down its peak production potential for the time being by at least 400,000 kilos a year. This was necessary to reduce its operating costs, as well as align production to more accurately match demand.

What's more, Aurora's international sales have been especially dismaying for shareholders. Despite its notable global presence, Aurora managed a meager $4 million Canadian in overseas sales during the fiscal third quarter (ended March 31, 2020) and hadn't yet outlined its strategy to enter the potentially lucrative U.S. market -- that is, until now.

A gloved individual holding a full dropper and vial of cannabidiol oil in front of hemp plant.

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Aurora announces its strategy to enter the U.S.

Following the closing bell on Wednesday, May 20, Aurora announced that it would acquire privately held hemp-derived cannabidiol (CBD) products company Reliva in an all-stock deal valued at $40 million (that's U.S.). CBD is the nonpsychoactive cannabinoid best-known for its perceived medical benefits.

As a reminder, cannabis isn't federally legal in the United States. This means New York Stock Exchange-listed or Nasdaq-listed companies would risk delisting by operating in the U.S. pot industry. However, the Farm Bill, which was signed into law by President Trump in December 2018, gave the green light for the industrial production of hemp and hemp-derived CBD. Thus, Canadian licensed producers do have the ability to enter the U.S. CBD industry without violating any federal laws. That's important, because it allows Canadian licensed producers to establish infrastructure on U.S. soil and forge partnerships that could become fruitful if and when the U.S. federal government legalizes cannabis.

According to Aurora's press release, the real allure of this deal is that Reliva has generated positive adjusted earnings before interested, taxes, depreciation, and amortization (EBITDA ) over the trailing 12-month period. This makes the deal, which expected to close in June, accretive to both its fiscal 2020 and fiscal 2021 adjusted EBITDA. As you might recall, Aurora is required to generate positive adjusted EBITDA by the end of the fiscal first quarter of 2021 (ended Sept. 30, 2020) as part of its new debt covenant. Reliva should help push Aurora in the right direction.

As per the release, Reliva ranked No. 2 in overall CBD market share, with product availability in over 20,000 retail locations (which includes e-commerce). Reliva also has contracts with 40% of the top-20 national convenience-store chains.

Assuming certain financial targets are hit over the next two years, Reliva stakeholders can earn up to an additional $45 million in payments, which is payable in cash or common stock. 

A businessman putting up his hands, as if to say, no thanks.

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Don't break out the champagne just yet

At the time of this writing, Aurora Cannabis' shareholders were beyond thrilled with this long-awaited move into the United States. Shares of the company, which conducted a 1 for 12 reverse split last week, were up more than 32% to nearly $17 a share in after-hours trading on Wednesday evening. But before you uncork the champagne and re-anoint Aurora as the greatest thing since sliced bread in the cannabis space, consider a few factors.

First off, Aurora has a really poor track record when it comes to acquisitions. Let's not forget that the CA$2.64 billion all-stock MedReleaf deal ultimately got the company 35,000 kilos of annual production and a handful of unique brands. The crown jewel of the deal -- the Exeter greenhouse -- was sold off this past week for only half of the company's asking price.  In my view, the vast majority of this deal will need to be written down.

Secondly, Aurora is, once again, leaning on its common stock as a financing tool when making a purchase. With the exception of the CanniMed deal, Aurora has almost exclusively relied on growing its reach by issuing stock and diluting its long-term shareholders. Inclusive of its reverse split, the company's outstanding share count has ballooned from 1.3 million in June 2014 to more than 109 million today. The all-stock Reliva deal could add anywhere from 2% to 5% to the company's outstanding share count, while a $350 million at-the-market offering has the potential to increase the company's outstanding share total by another 20% to 25%.

Third, you should understand that the U.S. CBD market hasn't delivered the jaw-dropping growth that was expected. Although demand for CBD products continues to grow, the U.S. Food and Drug Administration (FDA) put its foot down on allowing CBD to be added to food, beverages, and dietary supplements. The FDA's Nov. 25, 2019 consumer update also cautioned consumers that "CBD has the potential to harm you." Suffice it to say that the FDA's unwillingness to bend on this view without conducting additional research has significantly lowered the glass ceiling on CBD's U.S. sales potential.

Logistically, entering the U.S. CBD makes complete sense for Aurora Cannabis. But the question its shareholders are constantly left wondering is, at what cost to them?