2 Ways Aurora Cannabis Could Pay the Price for Its Aggressive Growth Strategy – Motley Fool

2 Ways Aurora Cannabis Could Pay the Price for Its Aggressive Growth Strategy - Motley Fool
Aurora Cannabis and CTT Pharmaceutical Announce Launch of Sublingual Cannabis Wafers
Aurora Cannabis (TSX:ACB) is one of the most popular marijuana companies, particularly among millennials. The pot grower famously ranked as the top stock holding on Robinhood. Aurora isnt just popular among younger demographics, though, with several analysts giving the company a nod of approval in the form of a buy rating earlier this year.

How did Aurora manage to attain its current status in the industry? By implementing an aggressive growth strategy marked by acquisitions, international expansion, and strong efforts to ramp up its production capacity. However, this master plan wasnt without its downsides, and the cannabis company could feel the pressure from its after effects for many years to come. Here are two ways Aurora could pay the price for its growth strategy.

The news that construction of  Aurora Polaris — ACB’s production facility for higher-margin, value-added products such as edibles —  is nearly complete ought to please the owners of Aurora Cannabis stock. The company indicated that edibles and vape products would be made at the site, which it said should be ready for occupancy at the end of this month.   

Aurora has been on an acquisition spree for the better part of three years. On the one hand, this strategy makes sense. Acquiring smaller marijuana companies presents several advantages. First, doing so eliminates at least some competition in the industry. Second, it is a relatively quick and easy way to have greater access to important assets that are critical to getting cannabis products to consumers. But in the midst of making acquisition after acquisition, Aurora seems to have paid a bit too much for many of these transactions, resulting in an astronomical amount of goodwill on its balance sheet.

In Canada, where I live, the retail cost of recreational pot is twice the cost of the black market cost. This means that cannabis producers such as Aurora have to figure out how to lower their production costs and pass those savings onto their retail customers. If they don’t, they can expect Canadians to continue to buy cannabis from their existing black market suppliers. 

Goodwill isnt necessarily bad in and of itself. In accounting terms, it represents the difference between the amount of money a company paid to acquire another entity and the fair value of said entity, whatever that is. However, too much of anything isnt good, and it is fair to say that Aurora has too much goodwill on its balance sheet. The company ended its fiscal year 2019 with more than $3 billion worth of goodwill — which, by the way, represented an increase of more than 300% year over year.

In British Columbia, ACB has  55,000 cannabis plants.  Aurora can cultivate over 200 additional acres at the location. In Quebec, it’s got 6,000 cannabis plants in the ground at the moment. All of the cultivated plants will be sent to its flagship facility for extraction and further testing

How could this affect Aurora in the future? Writedowns of goodwill can significantly reduce a companys bottom line. That is bad news for any company, particularly one that isnt even profitable yet.

That said, I think Aurora continues to have a lot of irons in the fire that will boost Aurora Cannabis stock down the road. In the meantime, as was the case for much of the past month, a dip of its share price below $4.50 provides investors with a good entry point.

Auroras expansion efforts werent free or even cheap. The company had to spend a lot of capital to grow its presence in North America and abroad. However, due to its status as a start-up — not to mention other barriers caused by the nature of its business activities — Aurora didnt always have the means to fund these efforts, and the company turned to dilutive forms of financing. To be fair, this strategy was a necessary evil. Other marijuana companies have also resorted to raising money by offering stock options, convertible debts, etc.

Although I believe that the vaping issues facing the cannabis sector at the moment will get resolved, I continue to think vaping won’t attract as many  customers over the age of 30 as edibles and cannabis-infused drinks will. 

But once again, Aurora has been one of the unfortunate leaders of this unflattering category. Aurora has already issued about 1 billion shares in its race to the top of the marijuana industry. This much dilution is unhealthy, and it is likely already having a negative impact on the company. Further, many potential investors who would have otherwise seen Aurora as an attractive option might choose to keep their distance for fear of its share price being dragged down as a result of this issue. In other words, Aurora isnt done having to deal with its share dilution problems.

Outdoor cultivation of cannabis is cheaper than growing it indoors, and I would argue the process produces better tasting cannabis. As a result, shifting cultivation outdoors is a win/win scenario for Aurora Cannabis stock. 

Aurora certainly has a lot of baggage, but many still see it as one of the better options in the marijuana industry. One reason is its market-leading presence in the Canadian marijuana market. Others would point to its international presence that compares favorably to that of almost any of its competitors. Whatever argument those in the pro-Aurora camp give, they will have to contend with the companys most important problems, which include the amount of goodwill on its balance sheet and the degree to which it continues to dilute existing shares.

It might not be a huge revenue generator for the company, but it does provide ACB’s consumers with an alternative until more retail cannabis shops open across the country.     

EDMONTON and HAMILTON, ON, Oct. 8, 2019 /PRNewswire/ – Aurora Cannabis Inc. (“Aurora”) (NYSE | TSX: ACB), the Canadian company defining the future of cannabis worldwide, and CTT Pharmaceutical Holdings, Inc., (“CTT”) (OTC | CTTH) announced today the successful commercialization of CTTs cannabinoid-infused sublingual wafers. The new cannabis product line, a first of its kind, has been launched by Aurora in the Canadian medical cannabis market under the brand name “Dissolve Strips™”.

“I can say with certainty that my age group (mid-50s) are far more inclined to try THC/CBD drinks or edibles than they are vapes or dried flower,” I wrote in my column published on  Sept. 6.

Aurora has an ownership interest in CTT of approximately 9%, with a warrant allowing it to increase its stake to 42.5%, and access to CTTs sublingual wafers drug delivery technology, which is patent protected or patent pending in multiple jurisdictions.

“Auroras Dissolve Strips™ provide unique advantages over other ingestible products due to their ease of administration, discrete nature and accurate dosage, that provides more rapid bioavailability of cannabinoids via sublingual use,” said Terry Booth, CEO of Aurora. “This adds yet another innovative offering to our growing portfolio of high quality, medical products that we offer our patient base, and is testament to our industry leading ability to work with technology partners and regulators to bring new form factors to market rapidly.”

CTTs CEO Cam Birge, added, “The product launch with Aurora of the Dissolve Strips™ is a major milestone for us that marks the transition of CTT from a technology development phase to a revenue generating phase. This is the culmination of years of hard work by our founder Dr. Modi and the entire CTT and Aurora product development teams. We are very proud of this co-achievement and congratulate Aurora for the considerable efforts and product enhancements to bring Dissolve Strips™ to the cannabis market. Our sights, however, are set much higher. The next stage in our development will be the launch of a broader portfolio of unique products on a global scale. We have been working towards this, and I look forward to reporting on our progress in the coming quarters.”

Orally Dissolvable Thin Film (“ODF”) Wafers (“wafers” or “sublinguals”) are a proprietary drug delivery mechanism in the form of paper-thin polymer films used as carriers for pharmaceutical agents that have the following benefits:

Headquartered in Edmonton, Alberta, Canada with funded capacity in excess of 625,000 kg per annum and sales and operations in 25 countries across five continents, Aurora is one of the worlds largest and leading cannabis companies. Aurora is vertically integrated and horizontally diversified across every key segment of the value chain, from facility engineering and design to cannabis breeding and genetics research, cannabis and hemp production, derivatives, high value-add product development, home cultivation, wholesale and retail distribution.

Although Aurora has been making strides toward profitability recently, with shrinking losses and soaring cannabis sales, it hasn’t been quite what investors were hoping for. However, with the company’s financials starting to turn around, it’s worth asking whether this stock could make a comeback. Unlike Canopy Growth, this company’s losses are actually shrinking rather than growing, so it may have a chance. To understand why that’s the case, we need to look at the stock’s performance so far this year.

Highly differentiated from its peers, Aurora has established a uniquely advanced, consistent and efficient production strategy, based on purpose-built facilities that integrate leading-edge technologies across all processes, defined by extensive automation and customization, resulting in the massive scale production of high-quality consistent product. Designed to be replicable and scalable globally, our production facilities are designed to produce cannabis at significant scale, with high quality, industry-leading yields, and low-per gram production costs. Each of Auroras facilities is built to meet European Union Good Manufacturing Practices (“EU GMP”) standards. Certification has been granted to Auroras first production facility in Mountain View County, the MedReleaf Markham facility, and its wholly owned European medical cannabis distributor Aurora Deutschland. All Aurora facilities are designed and built to the EU GMP standard.

ACB has been one of the worst-performing TSX stocks of 2019. Starting off the year at $7.09, it’s down about 17% as of this writing. Although Aurora is down less than marijuana stocks as a whole — as measured by Horizons Medical Marijuana Life Sciences ETF — it’s performed terribly compared to the TSX.

In addition to the Companys rapid organic growth and strong execution on strategic M&A, which to date includes 17 wholly owned subsidiary companies – MedReleaf, CanvasRX, Peloton Pharmaceutical, Aurora Deutschland, H2 Biopharma, BC Northern Lights, Larssen Greenhouses, CanniMed Therapeutics, Anandia, HotHouse Consulting, MED Colombia, Agropro, Borela, ICC Labs, Whistler, Chemi Pharmaceutical, and Hempco – Aurora is distinguished by its reputation as a partner and employer of choice in the global cannabis sector, having invested in and established strategic partnerships with a range of leading innovators, including: Radient Technologies Inc. (RTI.V), Cann Group Ltd. (CAN.AX), Micron Waste Technologies Inc. (CSE:MWM), Choom Holdings Inc. (CSE:CHOO), CTT Pharmaceuticals (CTTH), Alcanna Inc. (CLIQ.TO), High Tide Inc. (CSE:HITI), EnWave Corporation (ENW.V), Capcium Inc. (private), Evio Beauty Group (private), and Wagner Dimas (private).

Auroras Common Shares trade on the TSX and NYSE under the symbol “ACB”, and is a constituent of the S&P/TSX Composite Index.

CTTs principal asset is a unique and novel patented drug delivery technology, an orally administered, fast dissolving thin film (the “Wafer”). This technology platform will target both the human and veterinarian (pet) markets for treatment of many diseases. The Company believes that its Wafer technology will be one of the first to gain use in major markets such as pain management. Several Canadian and U.S. patents protect the Oral Thin Film (Wafer) formulation.

Fool contributor Andrew Button has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and Shopify. Shopify is a recommendation of Stock Advisor Canada.

CTTs oral fast dissolving drug delivery systems consist of edible Wafers that dissolve without water and within a few seconds after placement in the mouth. The majority of drugs administered using our drug delivery system mirror injections in that they have the ability to enter the bloodstream quickly, are convenient and discreet, and can be administered anywhere. A faster absorption rate is achieved because the mouth contains a very thin mucosa and is extremely vascular. There is no bitter taste, no smoke inhalation, less degradation of medication (by bypassing the stomach) and most importantly lower dosage units are required given the efficacy of absorption. Patient compliance is also improved especially with those who have a fear of choking or difficulty swallowing, and/or are pediatric, geriatric or incapacitated.

Marijuana was legalized across Canada on October 17th, and a little-known Canadian company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

This news release includes statements containing certain “forward-looking information” within the meaning of applicable securities law (“forward-looking statements”). Forward-looking statements are frequently characterized by words such as “plan”, “continue”, “expect”, “project”, “intend”, “believe”, “anticipate”, “estimate”, “may”, “will”, “potential”, “proposed” and other similar words, or statements that certain events or conditions “may” or “will” occur. These statements are only predictions. Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking statements throughout this news release. Forward-looking statements are based on the opinions and estimates of management at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. The Company is under no obligation, and expressly disclaims any intention or obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by applicable law.

Neither TSX, NYSE nor their applicable Regulation Services Providers (as that term is defined in the policies of the Toronto Stock Exchange and New York Stock Exchange) accept responsibility for the adequacy or accuracy of this release.

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