For years, there was no hotter investment on the planet than marijuana stocks. With Canada legalizing recreational cannabis in 2018 and tens of billions of dollars in sales being conducted annually in the black market worldwide, the door appeared to be wide open for North American licensed producers to seize this opportunity and deliver the green for investors.
But over the past 13-plus months, investors have only seen a sea of red. Regulatory-based supply issues in Canada, stubbornly high tax rates in the U.S., and financing concerns throughout North America have haunted the industry and sent pot stock valuations tumbling.
Millennials’ favorite pot stock has been an eyesore
Arguably the biggest disappointment of all has been Aurora Cannabis (NYSE:ACB). The most popular pot stock among millennial investors was, at this time last year, projected to produce more than 650,000 kilos of marijuana annually at its peak. It also had a production, research, export, or partnership presence in two dozen countries outside of Canada. In other words, on paper, it looked like a dominant player.
Aurora had also hired billionaire activist investor Nelson Peltz as a strategic advisor in March 2019. Peltz’s area of expertise happens to be the food and beverage industry, making him the perfect liaison to negotiate a possible partnership or equity investment between Aurora and a brand-name company.
Unfortunately, little has gone Aurora’s way over the past year and change. It’s suspended construction at two of its largest projects and sold another large greenhouse, effectively paring down its peak production potential for the time being by at least 400,000 kilos a year. This was necessary to reduce its operating costs, as well as align production to more accurately match demand.
What’s more, Aurora’s international sales have been especially dismaying for shareholders. Despite its notable global presence, Aurora managed a meager $4 million Canadian in overseas sales during the fiscal third quarter (ended March 31, 2020) and hadn’t yet outlined its strategy to enter the potentially lucrative U.S. market — that is, until now.
Aurora announces its strategy to enter the U.S.
Following the closing bell on Wednesday, May 20, Aurora announced that it would acquire privately held hemp-derived cannabidiol (CBD) products company Reliva in an all-stock deal valued at $40 million (that’s U.S.). CBD is the nonpsychoactive cannabinoid best-known for its perceived medical benefits.
As a reminder, cannabis isn’t federally legal in the United States. This means New York Stock Exchange-listed or Nasdaq-listed companies would risk delisting by operating in the U.S. pot industry. However, the Farm Bill, which was signed into law by President Trump in December 2018, gave the green light for the industrial production of hemp and hemp-derived CBD. Thus, Canadian licensed producers do have the ability to enter the U.S. CBD industry without violating any federal laws. That’s important, because it allows Canadian licensed producers to establish infrastructure on U.S. soil and forge partnerships that could become fruitful if and when the U.S. federal government legalizes cannabis.
According to Aurora’s press release, the real allure of this deal is that Reliva has generated positive adjusted earnings before interested, taxes, depreciation, and amortization (EBITDA ) over the trailing 12-month period. This makes the deal, which expected to close in June, accretive to both its fiscal 2020 and fiscal 2021 adjusted EBITDA. As you might recall, Aurora is required to generate positive adjusted EBITDA by the end of the fiscal first quarter of 2021 (ended Sept. 30, 2020) as part of its new debt covenant. Reliva should help push Aurora in…