Summary
Aurora Cannabis is one of the largest marijuana companies in Canada, and it depends on marijuana legalization for production scale.
However, scale is not the company's primary problem. Aurora cant even generate gross profit on current sales, and fixed expenses are ballooning.
Aurora's financial statements deserve scrutiny, and the company looks badly managed. Expect a huge amount of equity issuance.
(Growing Facility)
(Editor's Note 3/9/2017: We have updated this article to remove reference to "misleading" financial statements.)
Aurora Cannabis (OTCQB:ACBFF) is a Canadian owned and operated medical marijuana business running a 55,200 square foot facility in the Canadian Rockies. By market cap, Aurora is one of the largest marijuana operations in Canada, and it competes with Canopy Growth Corp (OTCPK:TWMJF), Organigram (OTCQB:OGRMF) and Aphria (NYSE:APH).
Aurora experiences mismanagement and significant cash burn from operations. The company can't even manage to generate gross profit, and its operating expenses are unjustifiably high compared to its sales performance. Many of these expenditures are discretionary because they relate to employee compensation, and this calls management priorities into question.
Aurora Cannabis: Variable Costs
Aurora claims to have 5.2 million dollars worth in current assets up from only 1 million in 2015. The liquidation value of these assets is debatable because the vast majority are inventory and biological. Biological assets are an IFERS classification for living animals or plants controlled by a company for economic benefit in the future.
Aurora's buildup of inventory could either be a sign of inefficient management or stockpile in anticipation of legalization. However, The third and most likely possibility is that Aurora is massively overstating the value of its cannabis-based biological assets. In the Consolidated Statements of Comprehensive Loss (Income Statement), Aurora reports an unrealized gain on changes in fair value of biological assets of over 3 million dollars. They use this large non-cash "inflow" to calculate a gross margin of 2.2 million dollars that, if taken at face value, would completely mislead most retail investors.
On a cash basis, the company lost around 800,000 dollars from variable costs alone; the cost of production is significantly higher than sales. Clearly, Aurora is not truly a subscale firm; its business would be unprofitable even if it sold 100x more units. Aurora needs to get its costs down and its sales prices up before worrying about volume. Volume growth will just mean bigger losses if things continue like this.
Aurora Cannabis: Fixed Expenses
When we get to fixed costs, Aurora looks even worse. The firm's operating expenses (usually related to management and employees) are ballooning at a rate unjustifiable by performance.
Expenses
2016
2015
Percentage Change
General and Administration
3,015,499
1,735,602
73.74%
Sales and Marketing
1,706,385
1,021,807
66.99%
Research and Development
565,140
432,384
30.70%
Depreciation
593,216
304,796
94.63%
Share-Based Compensation
912.698
872,587
4.59%
Aurora employees are being paid almost a million dollars in stock-based compensation for generating a gross loss. By the time expenses are calculated, Aurora claims an operating loss of 4.5 million - including the unrealized gain of 3 million. When we subtract the unrealized gain and add back depreciation, Aurora's operating loss shoots to around 7 million.
Conclusion
Aurora Cannabis claims to generate a gross profit for 2016 by posting a large unrealized gain on the value of its biological assets. However, taking the company's financial statements at face value is a mistake. Aurora generates a massive gross loss and its employee/management related expenses are growing a staggering rate. Aurora Cannabis depends on equity issuance to continue operations, and the amount of dilution will probably accelerate as operating expenses continue to balloon.
Investors should probably not attempt to short this stock due to the speculative nature of marijuana investing. The market can stay irrational longer than you can stay solvent. However, in the end - be that twelve months or twelve years - the party will come to an end, and Aurora will be forced to justify its market cap or lose it.
