Over the next decade, marijuana is projected to be one of the fastest growing industries in North America.
There are tens of billions of dollars in sales conducted annually in the black market, which implies that demand for cannabis products is strong. As legalizations pick up throughout the U.S., and with Canada becoming the first industrialized country to green light adult-use weed in the modern era in 2018, the time is ripe for investors to consider pouncing on pot stocks.
Throughout North America, no marijuana stock has been more popular or polarizing with the investment community than Canadian licensed producer Aurora Cannabis (ACB -2.79%).
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Aurora's growth blueprint goes up in smoke
By the midpoint of 2019, Aurora looked as if it had a clear path to become a cannabis leader. The company had 15 cultivation facilities that, if fully built out, could yield north of 650,000 kilos of weed a year. Being able to produce so much cannabis made it more likely that the company's production costs per gram would be among the lowest in the industry, and that it'd sign numerous wholesale supply agreements.
It also had access to around two dozen international markets. This includes the U.S., which Aurora entered with its acquisition of cannabidiol (CBD)-focused company Reliva in May 2020. Since Canadian demand was expected to peak between 800,000 kilos and 1 million kilos per year, these international markets were being counted on as another channel of significant growth, and as a means of insulating the company's operating margins from dried cannabis oversupply in domestic markets.
Aurora even brought billionaire activist investor Nelson Peltz onboard in March 2019 as a strategic advisor. Peltz's expertise lies with consumer-packaged food and beverage companies, making him a logical choice to bridge an equity investment and/or partnership after Canopy Growth and Cronos Group had secured billion-dollar investments.
But as of today, Aurora has shuttered five of its smaller facilities, sold a 1-million-square-foot greenhouse that was never retrofit for pot production, and halted construction on two projects to conserve cash. Additionally, its international sales have been virtually nonexistent for a company with its reach, and Nelson Peltz recently resigned, with no equity investments or brand-name partnerships to show for it.
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News flash: Aurora Cannabis isn't helping its shareholders
Aurora Cannabis is an absolute mess, and there are three figures that unequivocally prove that this company doesn't have its shareholders' best interests in mind.
Relentless share-based dilution
To begin with, Aurora Cannabis is a serial diluter. For the past six years, the company has been issuing stock to raise capital, as well as using its common stock as collateral to complete the more than one dozen acquisition's it's made. Although every single Canadian licensed producer has issued stock to raise capital, fund deals, or pay bonuses to its employees or execs, the level of dilution at Aurora has been particularly bad.
Taking into account the 1-for-12 reverse split that was enacted by the company in May to avoid delisting from the New York Stock Exchange, Aurora had approximately 1.3 million shares outstanding, as of June 30, 2014. But as of June 30, 2020, Aurora had 115.2 million shares outstanding. That's a more than 8,700% increase in the company's outstanding share count in six years.
Here's another interesting way to look at this data: Over the trailing four years (through Oct. 24, 2020), Aurora's market cap is up 42%, but its share price is down 77%. That gap is entirely due to the company's relentless issuance of common stock.
As one on final note on this figure, Aurora's board approved a $250 million (that's U.S. dollars) at-the-market offering earlier this year. In other words, it's not done drowning investors with its share issuances.
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Massive writedowns
A second figure that demonstrates what little thought Aurora Cannabis has put into creating value for its shareholders is the company's fiscal 2020 writedown.
When one company buys another, it's not uncommon for the purchaser to pay a premium above and beyond the tangible value of the assets being acquired. For an acquirer, the goal is simple: Unlock value from the company it's buying (both physical and intellectual/intangible) and recoup all of the premium being paid. But somewhere along the line, Aurora's management team went way off track.
When Aurora made acquisitions, it's as if there was no planning done to come up with realistic valuations. With as little as 800,000 kilos of projected domestic demand for 2020-2021, the more than 600,000 kilos in peak annual output that Aurora was targeting just didn't make sense. The fact is, many of Aurora's deals were grossly overvalued, and it resulted in some massive writedowns in fiscal 2020.
Between July 1, 2019 and June 30, 2020, Aurora Cannabis wrote down $2.54 billion Canadian in goodwill, took an impairment charge of CA$157.8 million on its property, plant, and equipment, and took a charge of CA$75 million on its intangible assets. That's more than CA$2.8 billion down the tubes because of management's poor decision-making.
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Executive bonuses for a putrid operating performance
But don't worry -- I've saved the best figure for last.
Despite writing down close to half of the company's total assets in fiscal 2020, and seeing the company's share price decline by more than 96% since mid-March 2019, you'll be happy to know that Aurora Cannabis executives received pay raises and bonuses last year.
According to disclosures filed with SEDAR, all of the company's executives listed in the disclosure received salary or pay increases ranging between 9% and 16%. Additionally, share and option-based awards to executives rose a cool 58% from the prior-year period to CA$9.8 million. The disclosure also showed that now-retired CEO Terry Booth, who was behind many of the issues I've described, received almost CA$5 million in compensation.
Put another way, Aurora Cannabis is cutting jobs and slashing expenses in an effort to avoid defaulting on its debt covenant, and in fiscal 2020 reported a net loss of CA$3.3 billion, which is currently more than four times its market cap. And despite all this, total compensation to the company's executives increased CA$14.95 million from CA$9.49 million in the previous year.
This company does not deserve your money or your trust.
