Although the United States cannabis sector offers investors a lot of upside, it offers even more risk. The Canadian cannabis industry on the other hand is less risky because medical cannabis is legal at the federal level.
The Canadian medical cannabis industry is growing at an impressive 12% per month and as of August 30, 2016, Health Canada said there were 91,178 eligible medical cannabis patients. Health Canada projects there will be more than 450,000 medical cannabis patients by 2024, which would make it a $1.7 billion market.
Canada is poised to become the first G8 country to legalize recreational cannabis when it announces this expected change in the spring of 2017. This is a significant development and it has created a great opportunity for companies as well as investors.
Aurora Cannabis: An Attractive Opportunity
One company levered to this event driven catalyst is Aurora Cannabis (ACBFF: OTC) (ACB.V: TSX Venture), one of the 36 federally licensed medical cannabis producers in Canada.
Aurora Cannabis is the only licensed producer of medical cannabis in the province of Alberta, which has a population of 4.1 million people, and has registered patients across Canada, which has a population of 35 million.
Aurora Cannabis has been selling cannabis products for less than 12 months and continues to register new patients at industry leading rates. The company received its license to sell medical cannabis on November 27, 2015, and started generating revenue from the sale of medical cannabis on January 5th
Aurora has been executing on its business plan as it continues to increase its market share in the Canadian cannabis market, while it works to receive its Health Canada cannabis oil sales license and start selling cannabis oils. Aurora’s fundamentals continue to improve and we expect to see the company transition to profitability in the near future as it significantly expands its facility for additional production capacity.
A Day of Developments
We remain favorable on Aurora Cannabis after the company reported its financial and operational results for the first quarter of its 2017 fiscal year. The company also announced that it has broken ground on an unprecedented 800,000 square foot production facility that will be known as Aurora Sky.
The hybrid greenhouse facility is expected to be the largest, most advanced and most automated cannabis production facility in the world. The facility will be located on 30 acres of leased land in Alberta.
- Management believes that Aurora Sky will be able to produce 100,000+ kilograms of high quality cannabis per year. The location of the new facility provides unrivaled access to transportation, industrial infrastructure, power, water, gas, and courier services.
- Aurora selected a closed-system, hybrid greenhouse concept of Dutch design for the expansion. This system will give Aurora’s cultivation specialists precision control over all critical environmental variables to ensure production quality.
- Management expects the high level of automation at Aurora Sky to provide for ultra-low per-gram cost of production.
- The Aurora Sky project team includes designers and suppliers with impressive track records from greenhouse projects around the world. The nature of the design of the facility will allow for a quick construction process and the company expects the facility to be completed in October 2017. Construction of the facility’s pre-engineered structure has been underway in the Netherlands since October 2016.
- Concurrent with construction of Aurora Sky, the company will be proposing a significant, additional production and processing expansion at its existing facility. On November 23rd, the municipal Council of Mountain View County approved a re-designation of Aurora’s current property as a Direct Control District, allowing for the option to expand, subject to council approval of development plans.
- The proposed Mountain View County expansion will allow for additional cultivation of high-demand medical cannabis strains, large scale expansion of Aurora’s processing of cannabis oils and other derivative products, as well as high-technology upgrades to the Company’s packaging operations.
Reports Several Significant Operational Highlights and Developments
Aurora Cannabis reported its best quarter since inception, from an operational and financial standpoint and we continue to expect remarkable growth on a quarter-over-quarter basis for years to come. Some of the highlights from this quarter include:
- Aurora reported a current cash position of approximately $50 million
- November is on track to be a record month, with product sales projected in excess of 200 kilograms and gross revenues in excess of $1.6 million. The company achieved a seven-day sales record between November 18 and 24, with more than 62 kilograms sold in that period
- Began establishment of an onsite analytical laboratory, to accelerate product time to market and increase sales capacity
Canvas Rx Developments, App Update and Delivery Update
- During the quarter, Aurora Cannabis completed the acquisition of CanvasRx, Canada’s largest medical cannabis patient outreach and counseling service with 19 locations in Ontario and Alberta
- CanvasRx has more than 13,000 registered patients, including 2,500+ patients registered with Aurora as of today. This represents a more than 30% growth rate in patient registration since being acquired by Aurora.
- During the quarter, Aurora released a first-of-its-kind mobile app for the purchase of legal cannabis. The app has been downloaded by 17,000 people and since its launch, patient ordering by phone has fallen by 33%
- Aurora became the first licensed producer in Canada to commence same-day delivery and this service is now available in Calgary and in Edmonton. Approximately 85% of Aurora’s customers in Calgary and 75% of its patients in Edmonton are using this service which has delivered more than 10,000 same-day packages shipped to date.
- During the quarter, Aurora sold 435,720 grams of medical cannabis and this generated $3.1 million in revenue, a more than 150% increase when compared to the prior period. The company started selling medical cannabis in January and Aurora has seen remarkable growth since this time. The company’s management team believes this is the fastest registered patient growth rate in the industry.
- As of November 27th, the company had 10,700 active registered patients. This number does not include patients who have not placed an order within the previous four months.
- Aurora Cannabis recorded a net loss of $5.6 million during the quarter. The loss can be attributed to a decrease in the unrealized gain on changes in fair value of biological assets, increased expenses due to the commencement of commercial operations and increased corporate activities related to the acquisition of CanvasRx and various equity and debt financings.
During the quarter, Aurora was able to significantly strengthen its balance sheet with $40.8 million in new financings. The company also repaid around $9.5 million in short-term and long-term loans.
As of September 30th, Aurora’s working capital was $23.2 million, a significant improvement when compared to the prior period when the company reported a deficiency of $2.8 million. The increase was primarily attributable to an increase in cash and cash equivalents of $23.9 million, offset partially by a decrease in short term loans of $4.4 million. The increase in cash balance was attributable to the successful completion of the following financing initiatives:
- $23 million in completed brokered subscription receipt equity financing;
- $15 million in completed private placements of 10% unsecured convertible debentures; and
- $2.8 million from exercise of warrants, stock and compensation options.
Subsequent to quarter-end, the company generated approximately $34 million in new financings as follows:
- $25 million in completed brokered private placements of 8% unsecured convertible debentures
- $9 million from the exercise of warrants, stock options and compensation options/warrants.
- Currently, approximately $30 million in potential additional gross cash proceeds remain available from the exercise of warrants, stock options and compensation options/warrants.
Outlook Remains Attractive
Technical420 is favorable on this update and we continue to view Aurora as one of the most attractive investment opportunities in Canada. Aurora has been executing on its business plan as it continues to increase its market share in the Canadian cannabis market while it works to receive its Health Canada cannabis oil sales license and start selling cannabis oils. Aurora’s fundamentals continue to improve and we expect to see the company transition to profitability in the near future as it significantly expands its facility for additional production capacity.