Aurora Cannabis (NASDAQ:ACB) recently did a reverse split on Aurora stock, consolidating 12 old shares into one new one. Instantly, its share price went from 62 cents a share to more than $7. As of June 3, the stock is above $14 a share.

If you weren’t paying attention to the Canadian cannabis producer’s affairs, you would have sworn something big was happening. In hindsight, we know that it wasn’t anything big. In fact, it was a desperate act of survival to avoid being tossed from the NYSE.    

“They had to do this to stay compliant with NYSE rules,” Innovation Shares managing director Matt Markiewicz told MarketWatch in May. “They can’t jeopardize the U.S. because of the large shareholder base here. There’s no way the company would risk cutting that conduit.”

This was the second reverse split of a notable company on the NYSE in less than two months.

In April, Chesapeake Energy (NYSE:CHK) did a 200-for-1 reverse split to remain on the exchange. Shortly thereafter, I was called upon to discuss its stock. For a moment, I thought it had hit the big time when I saw CHK stock trading above $30. And then I remembered it had done a reverse split. 

At the time, I called Chesapeake a “dog with fleas,” harking back to the movie Wall Street, and Michael Douglas’ great line to Charlie Sheen’s Bud Fox character. 

While I wouldn’t put Aurora in the same category as Chesapeake, it too has a lot of blemishes that can’t be hidden by a 12-for-1 stock split. Here’s why.

Aurora’s Cash Position

At the end of March, Aurora had 230.2 million CAD in cash on its balance sheet, up from 156.3 million CAD at the end of the second quarter. Most of that cash came from selling 11.7 million shares (based on the 12-for-1 reverse split) for net proceeds of 206.4 million CAD. Including the 592 million CAD in debt on its balance sheet, it finished the quarter with net debt of 362 million CAD.

By comparison, Canopy Growth (NYSE:CGC) had $1.7 billion in net cash at the end of its latest quarter. 

In order to keep the wolves from the door, Aurora expects to sell an additional $350 million in stock, which Jefferies analyst Owen Bennett estimates will dilute existing shareholders by 30%. Before the stock consolidation in May, Cowen analyst Vivien Azer said that Aurora burned through more than $200 million during the third quarter. She remains concerned about the company’s balance sheet. 

As far as cannabis investments go, there are many businesses with much better balance sheets, not to mention profitable business models.

Aurora Issues More Stock to Buy Reliva

On May 20, Aurora announced a $40 million all-stock deal to buy Reliva LLC, a U.S. maker of hemp-based cannabidiol (CBD) products. If Reliva management meets its earn-out targets, they will receive an additional $5 million in cash or stock. 

“Together, Aurora and Reliva will partner to create an international cannabinoid leader that we believe can deliver robust revenue and profitable growth,” Executive Chairman and Interim CEO, Michael Singer, said May 20. “We have taken the time necessary to carefully assess the Company’s entry into the U.S. market and we firmly believe that the combination with Reliva will create significant long-term value as Reliva provides us options to grow in hemp-derived CBD internationally.”

It seems you can’t be in the cannabis business without a hemp offer. Now they’ve got it, but not only that, Aurora management says its EBITDA accretive from day one. 

That’s good, no? Sure. What is a little more dilution when you’re already the poster child for dilutive stocks? 

Last December, InvestorPlace’s Mark Hake wrote an article that highlighted some of Aurora’s long-standing issues. It wasn’t a flattering piece about the cannabis company’s future. 

“Aurora’s tangible book value is only 16% of its present market value. That means that if the company were to be liquidated the remaining proceeds would be 84% less than the stock market price right now,” Hake wrote Dec. 11.

Hake continued: “In other words, buyer beware. The next stop is 84% below today’s price if Aurora can’t stop its losses.”

At the time, Aurora stock was trading at $29.40, adjusted for the split, almost double where it is as I write this. This means it’s got only $10 to fall to meet Hake’s 84% potential drop in value.

Reliva might not come at a huge cost to the company relative to some of the deals it’s done in the past — it paid 3.2 billion CAD for MedReleaf in May 2018, issuing 408 million shares — but eventually, it’s going to run out of financial options to keep the business going. 

The Bottom Line on Aurora Stock

Former Aurora CEO Terry Booth sold a pretty picture. Unfortunately, as Hake suggested in December, the company’s tangible book value was negligible at best. Six months later, Reliva’s acquisition doesn’t change anything. It’s still not worth much.

Once upon a time, I was a believer. No longer. 

Despite the split, Aurora Cannabis still has major holes in its business plan. There are definitely better cannabis buys at this point in the game. 

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