It’s been a while since I’ve written about Aurora Cannabis (NYSE:ACB), or any of the cannabis companies, for that matter. So, when I noticedthat Aurora stock was available to cover today at InvestorPlace, I jumped at the opportunity. 

The only thing is, as I said, I haven’t covered it in a while. So, I was shocked to see it was trading at just 75 cents. When I last wrote about Aurora in late February, former CEO Terry Booth had recently stepped down as the top dog at the Edmonton cannabis producer, and its stock was around $1.65 a share. 

My prognosis for Aurora was that it was a speculative bet, at best, but not worth most people’s consideration until it got its act together. 

Is it there yet? I couldn’t tell you, but what I do know is that if it’s going to do a 1-for-12 reverse stock split to remain on the New York Stock Exchange, it ought to go the whole hog and up the ratio from 12 to 200.

After all, if it’s good enough for Chesapeake Energy (NYSE:CHK), it ought to be good enough for Aurora. 

Here’s why. 

Dilution. Dilution. Dilution

Aurora has a long history of diluting shareholders. Until the cannabis market in Canada took a breather in 2019, the company was using expensively valued stock to buy other producers and cannabis-related businesses.  

That’s a great tactic if you’re a moneymaker like Microsoft (NASDAQ:MSFT) or Apple (NASDAQ:AAPL). However, if you’re not making money, the bill ultimately comes due. 

Last July, InvestorPlace contributor James Brumley discussed why analysts felt the company’s dilution tactic would ultimately pay dividends. 

“Aurora Cannabis, perpetually cash-strapped, is using ACB stock in lieu of currency, diluting existing shareholders’ stake,” Brumley stated at the time.

“That’s not terribly unusual. But it’s not necessarily ideal to utilize the practice to the extent Aurora Cannabis has. As of the first quarter of 2017, 313 million shares of ACB stock were issued and outstanding. Now more than 1 billion shares of Aurora stock have been issued.”

Brumley further stated that Cowen analyst Vivien Azer, probably the first truly bullish analyst about cannabis, thought Aurora might be able to report positive EBITDA for the June 2019 quarter, its fiscal year-end. 

Spoiler alert: It didn’t do it. 

The company’s adjusted EBITDA in Q4 2019 was a loss of 11.7 million CAD on 94.6 million CAD in cannabis net revenue. For the entire year, it lost 156 million CAD on 225.5 million CAD in cannabis net revenue. 

At its June 30 year-end, Aurora stock was trading close to $8. It’s been downhill ever since. 

Certainly, no one could be more upset about Aurora’s collapse than the shareholders of MedReleaf, who received 408 million shares of Aurora stock when it was acquired in May 2018 for CAD$3.2 billion.  

If all 408 million shares were retained by MedReleaf shareholders, today their CAD$3.2 billion pay day would be worth just CAD$428 million or about one-eighth of its value. 

Dilution hurts. 

Why Not Do a 1-for-200 Reverse Split for Aurora Stock?

In mid-April, Aurora announced that it would do a 1-for-12 reverse stock split on or about May 11. Its stock fell by more than 13% on the news. As part of the announcement, Aurora said that it had just CAD$205 million in cash on its balance sheet. 

And that’s after selling $400 million of its stock under its At-the-Market (ATM) offering program. Further, to raise more cash, it intends to sell some of the $350 million of its stock still remaining under its ATM.

Who is buying this stock? I’d really like to know. If it sells the remaining $350 million at current prices, it’s going to dilute shareholders to the tune of 467 million shares. As The Motely Fool contributor Sean Williams points out, that would increase its share count by almost 40%. 

Obviously, the Aurora board feels its ATM program is really one big cash machine that it can access whenever it wants. To heck with the existing shareholders. 

Yes, I know, it’s cheaper than getting expensive debt at double-digit interest rates, but at least shareholders don’t feel like they’re being stomped on.

Williams also points out that Aurora had 16 million shares in 2014. After selling the remaining $350 million, it will be closing in on 1.8 million shares. About the same time Aurora’s board approved its 1-for-12 split, Chesapeake Energy approved a 1-for-200 split. I wouldn’t be surprised if they were talking to each other. 

On a 1-for-12 basis, 1.8 billion shares become 150 million shares. Chesapeake reduced its share count from just under 2 billion shares to just 9.8 million. While 150 million outstanding might seem like a better number, the ownership of each investor remains the same. 

Why not opt for a $150 share price, rather than $9? If it doesn’t figure out how to profitably grow its business, there’s a good chance it will end up back at 75 cents soon enough. 

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