Aurora Cannabis ties to B.C. firm raise questions about potential for fluffing sales – Yahoo Canada Finance

Aurora Cannabis ties to B.C. firm raise questions about potential for \fluffing sales\ - Yahoo Canada Finance
Global Oversupply And High Capex Spending Are Killing Aurora
Craig Wiggins of the cannabis industry research group TheCannalysts recently published a report raising concerns about dealings between the two companies.

Edmonton-based Aurora owns a roughly 12 per cent stake in Radient Technologies Inc. (RTI.V) and is referred to in company press releases as a strategic partner. Allan Cleiren, Auroras chief operational officer, sits on Radients board. Terry Booth, Auroras chief executive officer, previously held a board position.

One of the things that made ACB stock so appealing in the first place is also the company’s biggest downfall. Aurora Cannabis came out of the gate swinging and quickly blossomed into a global cannabis company. The company offers a diverse range of products, yet a bigger investor hasn’t acquired it. 

One Year After Going Public, Is the Growth Story Over for ACB Stock?

During the quarter ended June 30, Radient entered into agreements with licenced producers, including Aurora, to purchase $21.7 million worth of dried cannabis biomass, building its inventory from zero in the previous quarter. Meanwhile, Aurora booked $20.1 million in wholesale bulk cannabis net revenue in its fiscal fourth quarter, a more than $18 million, or 869 per cent, increase over the previous quarter.

Analyst ratings aren’t always accurate or the best indication of whether you should buy a stock. But these ratings encapsulate the general wariness many people have toward the company. Aurora stock is going to have a lot of ground to make up to prove it can reach profitability. 

Wiggins said an Aurora executive recently confirmed to him a sale of cannabis to Radient, without giving a dollar figure, and explained there is no formal agreement to purchase back the extract. The response did not close the door on a future purchase by Aurora outside of that type of agreement.

Of course, the cannabis industry is expected to be huge in the coming years. But it’s hard to disagree with the fact that Aurora’s first year as a publicly-traded company has been a bit of a disaster. Listed below are three things you should know about ACB stock going forward.

Yahoo Finance Canada asked Aurora and Radient to address TheCannalysts report, including whether there are plans for Aurora to repurchase the biomass. Neither company responded in time for publication.

If Aurora sells product to Radient and Aurora repurchases it, Aurora gets to claim a sale and then reacquire the extracted biomass in inventory, and then they resell it again. Essentially theres potential to double dip on sales, Wiggins told Yahoo Finance Canada. I think you have to put a big asterisk beside a material chunk of Auroras sales, gross margin and EBITDA until we get answers on this.

In general, most analysts are incredibly bullish or bearish when it comes to Aurora Cannabis stock, with very little in between. Out of the 15 analysts that are currently reviewing the stock, six consider it a buy, six recommend holding the stock, and three recommend selling.

The fact that a sale took place while the two companies have a tolling agreement where Radient can simply process the raw material for a fee is a red flag if Aurora buys back the extract, Wiggins added.

But nearly a year later, ACB stock’s prospects don’t seem quite as strong. The company lost $6.8 billion in market cap as the stock has fallen steeply from its 52-week high of $12.53 per share. And Wall Street is deeply divided when it comes to the company. 

If you have this much economic influence over this company, do you really need a written buyback agreement?

The cannabis sector is under mounting pressure to deliver stronger financial results to satisfy pent-up demand for profitability and sustainable growth one year into Canadian recreational legalization. Shares of several big Canadian players are trading near 52-week lows as regulatory uncertainty, health concerns around vaping, and fallout from the ongoing troubles at CannTrust Holdings Inc. (TRST.TO)(CTST) dampen investor enthusiasm.

Last October, Aurora Cannabis (NYSE:ACB) went public on the New York Stock Exchange. At the time, investors were full of optimism about the Canadian pot stock. The company beat out its rivals in terms of production capacity and was already expanding globally.

In its most recent quarter, Aurora reported revenue that fell short of its own guidance and an adjusted loss before interest, taxes and depreciation of $11.7 million.

This problem affects all Canadian cannabis companies, including ACB stock. Health Canada is in charge of approving the cultivation and sales licenses for Cannabis companies. And the approval process has been taking longer than anyone expected it would. 

Bulk wholesale revenue, including the sale to Radient, was a bright spot in an otherwise challenging three-month period. Speaking on the companys conference call with analysts, Auroras chief corporate officer Cam Battley noted a very attractive margin that exceeds overall gross margin, which includes sales for recreational users and to medical patients.

We caution against expecting bulk sales of the magnitude we achieved in Q4 2019 to be consistent or repeatable, Battley told analysts.

Over the past month, Aurora Cannabis has received three sell ratings. And one of these ratings came from Stifel analyst Andrew Carter. 

Chief financial officer Glen Ibbot clarified on the call that Auroras EBITDA loss was actually a heftier $25 million, due to year-end audit adjustments. That still an improvement of over 32 per cent from the previous quarter, he said.

Wiggins wrote in his report that Auroras stronger wholesale gross margin would have contributed substantially to the companys shrinking EBITDA loss. He also suspects Radient would not have been able to buy $21.7 million worth of cannabis, from Aurora or elsewhere, without generous credit terms.

The thing that drew my attention is someone gave Radient, who only had $61,000 in sales last quarter, $21 million in trade credit. Thats astonishing, he said, noting that licenced producers typically require down payments, and often full payment within about 30 days.

If you assume all of that biomass, or the majority of that biomass, came from Aurora, Aurora then becomes their biggest vendor, their biggest supplier and biggest creditor, Wiggins said.

The companys relationship (with Aurora) you could argue is arms length, and it is not related parties as per the definition in Auroras financial statements. But do they exercise significant financial control over this entity? I think the answer comes back yes. This is an item that requires further disclosure.

Purpose Investments chief investment officer Greg Taylor holds Aurora shares in his firms Marijuana Opportunities Fund. He said wholesale deals are ramping up between licenced producers with excess supply, and others that are finding it tough to make good on contracts to provinces and retailers.

What we are hearing is, some guys are buying massively above market rates to meet demands and keep purchase contracts, he told Yahoo Finance Canada. A lot of companies are also selling wholesale.

At the same time, he sees producers increasingly under the gun to expand sales each quarter. He said investors battered by negative headlines want more disclosure from the companies they are buying into.

Everyone has raised money and promised on their business plans to come up with massive growth, and they havent been able to deliver it. I think we are starting to see different companies trying to stretch either the accounting rules or break the law, like we saw with CannTrust, in an attempt to show some growth, he said. Im always in favour of more disclosure. We dont need any more negatives.

Asked about the contents of Wiggins report, Taylor said he will definitely do more work digging into this. He added that he is not yet considering paring back his position in Aurora, which amounts to under five per cent of the $39 million Marijuana Opportunities Fund.

Chris MacDonald, chair of the law and business department at Ryerson Universitys Ted Rogers School of Management, and an expert in business ethics, said clarity from Aurora and Radient on this matter, and improved disclosures in general, would go a long way with the investing public during a turbulent period for the cannabis sector.

To an uninformed outsider, it just looks like fluffing sales, he said, referring to Auroras dealings with Radient. That in itself is a problem.

This industry doesnt need another kick in the nuts, he said. Im hoping that Im wrong. My gut tells me Im not.

If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.