The marijuana industry created a lot of buzz last week following the U.S. election. Residents in five states went to the polls to determine whether recreational or medical cannabis would be legalized, with every single ballot measure passing. It was a true green wave for the cannabis industry, and pot stocks have been soaring in unison ever since.
One marijuana stock that's caught fire is Canadian licensed producer Aurora Cannabis (NASDAQ:ACB), which on Thursday, Nov. 5, shot higher by 42%. Aurora has consistently been the most popular pot stock held by millennial investors on online investing app Robinhood.
But don't let these recent big gains fool you -- Aurora Cannabis isn't a well-run company. In fact, after escaping penny stock territory with a 1-for-12 reverse split in May that staved off delisting from the New York Stock Exchange, the company could well find itself a penny stock, once again, if things don't dramatically improve in the near future.
Margins will remain under pressure
At roughly the midpoint of 2019, Aurora Cannabis was the talk of the town. It had 15 cultivation facilities that could, in theory, yield north of 650,000 kilos annually if fully built out. This made the company a logical choice to land lucrative long-term supply deals, and was also expected to significantly reduce per-gram growing costs well below the industry average.
But over roughly the past year, Aurora Cannabis has shuttered five of its smaller grow farms, sold off a 1-million-square-foot greenhouse that it never retrofit for pot production, and halted construction on two its largest (and costliest) projects to conserve capital. It's no longer the projected leader in worldwide output.
What's been more concerning in 2020 is how most Canadian licensed producers, including Aurora, have been forced to go toe-to-toe with the black market on price. Even with a relatively low tax rate on legal weed in Canada, it's been difficult for average-grade cannabis to compete on price with illicitly grown pot. As a result, Aurora and its peers have had no choice but churn out value-priced cannabis products. Aurora is picking up customers but is sacrificing its margins in the process. Promoting value cannabis is pushing the company's chance of recurring profitability even further down the road.
International sales are nothing to write home about
Aurora Cannabis is also built around the idea of expanding beyond Canada's borders. At this time last year, it had a production, partnership, export, or research presence in 24 countries outside of Canada. This made it something of a lock to generate significant revenue in overseas markets... or so you'd think.
It's been more than two years since Canada waved the green flag on recreational cannabis, and Aurora hasn't managed to hit $5 million Canadian in international revenue once yet on a quarterly basis. What makes this lack of traction in overseas markets especially disturbing is that two of its chief rivals, Canopy Growth and Tilray, have had no issue substantially growing their medical cannabis revenue internationally.
Without substantive international revenue, Aurora Cannabis becomes even more reliant on the margin-suppressed and supply chain-challenged Canadian market. While I do expect Canada to work through its issues, some companies are better suited to wait for these problems to be corrected than others; and Aurora isn't one of those companies.
Cash is a serious issue
Investors also need to be seriously worried about Aurora's balance sheet, and more specifically its cash balance.
As of Oct. 27, the company announced that it had $272 million (that's U.S.) in cash and cash equivalents on hand, with another $11 million from a revolving credit facility that hadn't been drawn down. That might sound like a healthy buffer, but it's really not when you consider just how much capital the company has burned through.
In May 2019, Aurora's board of directors authorized a $400 million at-the-market (ATM) offering that allowed the company to sell up to $400 million worth of its stock, less fees, to raise capital to cover its operating activities. In April 2020, it announced another $250 million ATM offering, which was based on the same shelf prospectus filed in May 2019. That offering has also been completed. Of this $650 million, just the aforementioned $272 million remains.
On Oct. 27, the company filed a new shelf prospectus to sell an additional $500 million ATM over the coming 25 months. If history is any indication of what's to come with this company, this $500 million might only give Aurora a year, or perhaps a bit more, of cushion, even after enacting steep cost cuts.
Management is doing you no favors
Finally, Aurora's management team isn't looking out for your best interests. The company's money-losing ways and constant share issuances have ballooned its outstanding share count by over 11,800% since June 30, 2014. With absolutely no end in sight to this ongoing dilution, shareholders are fighting an uphill battle.
Aurora's management team also did a very poor job of assessing production demand in Canada. Clearly, Aurora's more than 650,000 kilos of peak annual output was unnecessary. Further, its more than a dozen acquisitions since 2016 were all grossly overvalued, with no deal representing more of an eyesore than the CA$2.64 billion Aurora paid for MedReleaf.
But the biggest slap in the face to Aurora's shareholders just might be the pay raises that Aurora's leading executives received for the fiscal 2020 campaign. Despite all the layoffs, a net loss of CA$3.3 billion that was magnified by multiple writedowns, and ongoing share-based dilution, most executives walked away with a double-digit pay hike. It's perfectly legal but morally criminal.
Given all of its shortcomings, I wouldn't be the least bit surprised if Aurora Cannabis finds its way back to penny stock territory.