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Marijuana Producer

This major medical and recreational cannabis producer’s new strategic advisor has a proven track record of success. He now aims to help it forge profitable partnerships with some of the world’s biggest consumer companies.

AURORA CANNABIS, $12.09, symbol ACB on Toronto (Shares outstanding: 1.0 billion; Market cap: $9.9 billion; TSI Cannabis Quality Rating (CQR): ;  www.auroramj.com), is an Edmonton-based producer and distributor of both medical and recreational cannabis and cannabis oils. It owns eight production facilities, seven in Canada and one in Denmark, and has a business presence in 18 countries.

On October 23, 2018, its shares also began trading on the New York exchange under symbol ACB.

On March 13, 2019, the company appointed Nelson Peltz as a strategic advisor. Peltz is a well-known activist investor through his Trian Fund Management. He is currently serving as the non-executive chairman of The Wendy’s Company and as a director of The Procter & Gamble Company, Sysco Corporation, and The Madison Square Garden Company. He was previously a director of H. J. Heinz Company, Legg Mason, Inc., Ingersoll-Rand plc, and Mondelēz International, Inc., among other companies.

Peltz will work with Aurora to explore potential partnerships that would be good fits for successful expansion or entry into each of Aurora’s current or planned market segments. Peltz will also advise on the company’s global expansion strategy.

One key area where he could help Aurora is with selling cannabis consumer packaged goods on a large scale—given his experience with consumer companies such as PepsiCo, Dr Pepper Snapple, Procter & Gamble, Kraft Foods, Heinz, Mondelez, among others. This could include beverages, cosmetics and wellness products.

The deal with Peltz includes granting him options to purchase 19.96 million Aurora common shares at a price of $10.34 each. If he exercised the options, he would be the company’s second-largest shareholder.

Aurora Cannabis is currently the second largest cannabis company in the world by market capitalization (after Canopy Growth).

The company aims to become a global leader in the cannabis industry, with a wide and diverse product line. To do this, it is following an aggressive strategy of acquisitions, partnerships, and investments in production. These include the following:

Canvas Rx, a wholly owned subsidiary of Aurora, is a Canadian network of cannabis counselling and outreach centres. To date, CanvasRx has assisted over 42,200 patients.

In May 2017, it acquired Pedanios GmbH of Germany, a leading wholesale importer, exporter, and distributor of medical cannabis for European Union markets.

In May 2018, Aurora completed its acquisition of CanniMed Therapeutics Inc. for $1.1 billion. CanniMed produces cannabis oil for the medical market.

In May 2018, the company announced the takeover of rival producer MedReleaf for $3.2 billion in Aurora Cannabis shares. The transaction added two grow facilities.

In July 2018, Aurora entered into an agreement with Evio Beauty Group to develop and manufacture a line of cosmetic products formulated with cannabinoids.

In August 2018, the company acquired the exclusive license for technology developed by Wagner Dimas Inc. Its large-scale production is focused on pre-rolled product for the recreational market.

In August 2018, Aurora announced its intention to acquire HotHouse Consulting Inc., a greenhouse consulting business with an emphasis on large-scale cannabis production.

Also in August 2018, the company acquired Anandia Laboratories Inc., a global leader in cannabis science (genetics, breeding) and analytical product testing.

In September 2018, Aurora entered into an agreement to acquire ICC Labs Inc. for $290 million. ICC is a leading, low-cost cannabis producer in South America.

Again in September 2018, Aurora Cannabis acquired Europe’s largest producer, processor and supplier of certified organic hemp and hemp products, Agropro UAB. It also purchased hemp processor and distributor Borela UAB for $6.3 million.

In November 2018, it completed its $27 million investment in Choom Holdings (symbol CHOO on the on the Canadian Securities Exchange). Choom has completed the building of 17 retail locations across Western Canada and has 8 additional retail locations currently under construction. In all cases, these retail opportunities are subject to all the necessary provincial regulatory approvals.

In December 2018, the company completed its $10 million investment in the High Tide Inc. (symbol HITI on the on the Canadian Securities Exchange). High Tide is Alberta-based company focused on the manufacturing and wholesale distribution of smoking accessories and cannabis lifestyle products.

In February 2019, Aurora agreed to terms to acquire a 51% ownership interest in Gaia

Pharm Lda., a license applicant in Portugal, to establish a local facility to produce medical cannabis and derivative products. It has not yet disclosed the purchase price.

The company’s production facilities now include the following:

Aurora Mountain, located in Cremona, Alberta, is an EU GMP certified facility, which means its product can be exported to Europe. This facility can produce 6,000 kilograms per year.

Aurora Vie, located in Pointe-Claire, Quebec, produces softgels for the adult consumer-use market. The facility is now producing at rate of 4,000 kilograms per year.

Aurora Sky, located in Edmonton is 100,000-kilogram-per-year production site, with production costs below $1 per gram. The company is now building Aurora Polaris, a 300,000-square-foot facility next to Aurora Sky. Completion is scheduled for late 2019.

Aurora Eau, Aurora Cannabis’ newest facility, has a production capacity of 4,500 kilograms per year and is built to EU GMP standards. The 48,000-square-foot facility is growing higher-margin strains for both the medical and adult consumer-use markets.

Aurora Nordic, the company’s Danish facility, has a capacity of 8,000 kilograms per year.

MedReleaf Bradford has a production capacity of 28,000 kilograms per year. This facility has large-scale production capacity for higher-margin cannabis oils.

In April 2018, Aurora acquired 71 acres of land in Medicine Hat, Alberta, the sunniest place in Canada, for the construction of Aurora Sun, a highly automated cannabis production facility with very low operating costs. The site will have a production capacity of over 100,000 kilograms per year.

The company has interests in a number of other firms. Aurora holds roughly 17% of Green Organic Dutchman Holdings (symbol TGOD on Toronto), with a market value of $235 million. It has options to increase that stake to more than 50%. Other public companies that Aurora has invested in include Hempco Food & Fiber (symbol HEMP on the Toronto Venture Exchange) and CTT Pharmaceuticals Holding (symbol CTTH on the U.S. over-the-counter bulletin board).

Aurora also holds 20% of private company Capcium, which is providing it with equipment for manufacturing softgel pills for the medicinal market.

Now that recreational cannabis is legal in Canada, as of October 17, 2018, Aurora has supply agreements with several provincial governments, include Ontario, Alberta, B.C. and Quebec. In most cases, that means its product will be available through government-run stores and licenced private sellers.

It also has supply agreements with private medical marijuana sellers. For example, in April 2018, the company entered into a supply deal with Pharmasave, a network of over 650 independently-owned pharmacies across Canada. Shoppers Drug Mart has signed a similar deal with Aurora Cannabis. These deals are pending Health Canada approval.

Revenue for Aurora Cannabis increased from $1.4 million in fiscal 2016 (years ended June 30) to $18.1 million in 2017. In fiscal 2018 revenue increased another 205.0%, to $55.2 million.

The company reported losses of $5.7 million ($0.04 per share) in 2016 and $13.0 million ($0.05 per share) in 2017. In fiscal 2018, Aurora reported earnings of $71.9 million ($0.15 per share). However, this figure includes $173.1 million in one-time gains on financing transactions. It reported a loss of $95.8 million from its operations.

In the three months ended December 31, 2018, the company’s revenue increased 363.1% to $54.2 million from $11.7 million a year earlier. It lost $237.8 million, or $0.25 a share, in the latest quarter compared to a profit of $7.7 million, or $0.02 a share. However, the losses and profits in both quarters were due to estimated gains or losses on the value of Aurora’s inventory of cannabis, as well as changes in the value of its investments and various financial instruments. On an operating basis, it lost money in both periods.

Aurora Cannabis holds cash of $48.0 million. The company is one of the few cannabis companies that have been able to arrange traditional bank financing. This means Aurora Cannabis’ financing costs should be lower on average than its competitors. Its long-term debt is $339.0 million.

Like most marijuana producers, Aurora Cannabis needs huge revenue growth to justify its current market cap. If its revenue growth stalls, or if its international ventures run into significant problems, the company’s shares could drop sharply as momentum traders unload the stock.

Aurora Cannabis has a 3½-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.