Over the next decade, marijuana is projected to be one of the fastest-growing industries. We already know that tens of billions of dollars in sales are currently conducted in the global black market. If legalization slowly but surely moves these consumers to legal channels, cannabis companies shouldn't have any trouble delivering the green to investors.
Aurora Cannabis has shattered shareholders' dreams
Aurora Cannabis is an absolute favorite among millennial investors; prior to its reverse split in May, it was the most held stock on investing platform Robinhood. The bullishness surrounding Aurora can be summed up as follows:
- Top-tier production: Aurora had 15 cultivation facilities that, if fully developed, could have yielded more than 650,000 kilos of weed annually. The ability to produce so much pot made it a likely candidate for long-term domestic and international supply deals. It was also widely believed that Aurora's large-scale output would yield some of the lowest growing costs per gram in the industry.
- Unparalleled international access: Aside from being a capacity hound, Aurora had a production, export, partnership, or research presence in 24 countries outside of Canada. This includes the U.S., which Aurora entered through its purchase of cannabidiol (CBD)-based company Reliva.
- Partnership appeal: In March 2019, Aurora hired billionaire activist investor Nelson Peltz as its strategic advisor. Peltz's focus on consumer packaged food and beverage companies made him a logical liaison to broker an equity investment or partnership.
But here's where things stand today:
- Production more than halved: Over roughly the past year, Aurora Cannabis has shuttered five of its smaller cultivation facilities, sold its 1-million-square-foot Exeter greenhouse, and halted construction on two of its largest projects. Peak annual output is now probably in the 200,000 kilos to 250,000 kilos range.
- International sales are virtually nonexistent: Despite Aurora's expected reliance on foreign markets to offset supply concerns in Canada, international sales have struggled to significantly surpass $4 million Canadian a quarter.
- Peltz resigns: After roughly a year and a half, Peltz recently stepped down. He failed to broker any significant or lasting deals for Aurora.
The 11,800% gain shareholders aren't thrilled about
Aurora Cannabis' problems continue to mount.
Earlier this week, the company announced that it had fully completed a $250 million (that's U.S.) at-the-market (ATM) offering first announced in April. This $250 million ATM followed a completed $400 million ATM offering. After effectively selling its common stock at whatever the current price was for Aurora's shares, the company ended Oct. 26 with $272 million in cash and $11 million in untapped revolving credit.
More importantly, as of Oct. 26, Aurora's share count had ballooned to 160,656,048 from approximately 115.2 million on June 30, 2020. That might not seem like a huge increase, but let me back this time frame out a bit. At the end of the company's fiscal year on June 30, 2014, it had 16.15 million shares outstanding. That works out to 1,345,833 shares after accounting for its 1-for-12 reverse split enacted in May 2020. In a little over six years, Aurora's outstanding share count has ballooned by more than 11,800%. I've previously commented that "Aurora is a serial diluter of its shareholders," and I wasn't exaggerating.
Having completed its $250 million ATM offering, Aurora announced a new ATM program that'll allow the company to sell up to $500 million in shares over the next 25 months. For context, Aurora Cannabis ended Oct. 27 with a market cap of about $642 million, based on its updated outstanding share count. Another $500 million in stock issuances could balloon Aurora's outstanding share count by another 44%. If that happens, it'll constitute outstanding share inflation of greater than 21,000% from where it began on June 30, 2014.
Aurora's need to quickly usher in another round of ATM offerings suggests that the company's ongoing cash burn would quickly gobble up the remaining $272 million in cash and cash equivalents. In other words, it's still nowhere near adjusted profitability.
Aurora Cannabis has shown a complete disregard for its shareholders
If Aurora Cannabis has taught investors anything, it's that cheap stocks are usually cheap for a reason. We've also learned that not all stocks in a high-growth industry can be winners.
Aside from continuing to dilute its shareholders at an extraordinary pace, poor decisions by management have also proved how little they care about their investors.
In fiscal 2020, Aurora Cannabis reported a CA$3.3 billion net loss, which was magnified by more than CA$2.8 billion in writedowns and impairment charges. While some of these charges were tied to the closure of the company's smaller cultivation facilities and to layoffs, most relate to the company's grossly overpriced acquisitions.
For example, Aurora paid a jaw-dropping CA$2.64 billion in an all-share deal to acquire licensed producer MedReleaf in 2018. The expectation when this deal closed was that MedReleaf would support 140,000 kilos of annual marijuana production. Ultimately, Aurora sold the Exeter facility (which was never retrofit for pot production) for a meager CA$8.6 million. It was expected to yield 105,000 kilos of the 140,000-kilo estimate. The smaller Markham facility (7,000 kilos a year) also got the ax. Aurora effectively paid a net of CA$2.63 billion for 28,000 kilos of annual output and a handful of proprietary brands. Decisions like this have doomed the company's shareholders.
Management also received hefty pay raises in 2020 for meeting some of the company's key performance indicators for the year. That's right -- as Aurora's future remains in doubt and the company continues to sell its own stock at the detriment of shareholders to raise capital, it's raising its executives' pay.
What a company! What a mess.