Formulation technician Petra Miner of MedPharm Research is making a tincture at the lab in Denver. December 7, 2018. (Photo by Hyoung Chang/The Denver Post via Getty Images)

Close ties between Aurora Cannabis Inc. (ACB.TO)(ACB) and a cannabis extraction company are raising questions about the potential for the pot producer to artificially inflate quarterly sales and profit figures by leveraging that relationship.

Craig Wiggins of the cannabis industry research group TheCannalysts recently published a report raising concerns about dealings between the two companies.

Edmonton-based Aurora owns a roughly 12 per cent stake in Radient Technologies Inc. (RTI.V) and is referred to in company press releases as a “strategic partner.” Allan Cleiren, Aurora’s chief operational officer, sits on Radient’s board. Terry Booth, Aurora’s chief executive officer, previously held a board position.

During the quarter ended June 30, Radient entered into agreements with licenced producers, including Aurora, to purchase $19.5 million worth of dried cannabis biomass, building its inventory from zero at the start of the quarter. Meanwhile, Aurora booked $20.1 million in wholesale bulk cannabis net revenue in its fiscal fourth quarter, a more than $18 million, or 869 per cent, increase over the previous quarter.

Wiggins said an Aurora executive recently confirmed to him a sale of cannabis to Radient, without giving a dollar figure, and explained there is no formal agreement to purchase back the extract. The response did not close the door on a future purchase by Aurora outside of that type of agreement.

Yahoo Finance Canada asked Aurora and Radient to address TheCannalysts’ report. In response to questions from Yahoo Finance Canada, Radient said it has nothing to add to what it has disclosed publicly, and affirmed the company is compliant with regulatory requirements. Aurora did not answer emailed questions, but issued a statement.

“In June, RTI purchased their initial inventory from Aurora and other LPs to commence their commercial extractions runs. RTI has purchased from other licenced producers and can sell its products to Aurora or any other licenced producers,” the statement read in part. “Aurora’s disclosure is compliant with its IFRS obligations.”

“If Aurora sells product to Radient and Aurora repurchases it, Aurora gets to claim a sale and then reacquire the extracted biomass in inventory, and then they resell it again. Essentially there’s potential to double dip on sales,” Wiggins told Yahoo Finance Canada.

“I think you have to put a big asterisk beside a material chunk of Aurora’s sales, gross margin and EBITDA until we get answers on this.”

The fact that a sale took place while the two companies have a “tolling agreement” where Radient can simply process the raw material for a fee is a red flag if Aurora buys back the extract, Wiggins added.

“If you have this much economic influence over this company, do you really need a written buyback agreement?”

The cannabis sector is under mounting pressure to deliver stronger financial results to satisfy pent-up demand for profitability and sustainable growth one year into Canadian recreational legalization. Shares of several big Canadian players are trading near 52-week lows as regulatory uncertainty, health concerns around vaping, and fallout from the ongoing troubles at CannTrust Holdings Inc. (TRST.TO)(CTST) dampen investor enthusiasm.

In its most recent quarter, Aurora reported revenue that fell short of its own guidance and an adjusted loss before interest, taxes and depreciation of $11.7 million.

Bulk wholesale revenue, including the sale to Radient, was a bright spot in an otherwise challenging three-month period. Speaking on the company’s conference call with analysts, Aurora’s chief corporate officer Cam Battley noted a “very attractive margin” that exceeds overall gross margin, which includes sales for recreational users and to medical patients.

“We caution against expecting bulk sales of the magnitude we achieved in Q4 2019 to be consistent or repeatable,” Battley told analysts.

Chief financial officer Glen Ibbot clarified on the call that Aurora’s EBITDA loss was actually a heftier $25 million, due to year-end audit adjustments. That still an improvement of over 32 per cent from the previous quarter, he said.

Wiggins wrote in his report that Aurora’s stronger wholesale gross margin “would have contributed substantially” to the company’s shrinking EBITDA loss. He also suspects Radient would not have been able to buy $21.7 million worth of cannabis, from Aurora or elsewhere, without generous credit terms.

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