Aphria Results Don’t Paint the Whole Picture

Aphria Inc. (TSX:APHA), one of the Canadian marijuana stocks, saw its shares sell off Monday after reporting a $100 million plus third-quarter loss

SmallCapPower| April 17, 2019: Aphria Inc. (TSX:APHA) (NYSE:APHA), one of the Canadian cannabis stocks, Monday reported its financial results for the three months (Q3) ended February 28, 2019. Net revenue came in at $73.6 million, compared to $21.7 million in the prior quarter and $10.3 million during the same period last year. The sizeable increase in revenues can be attributed to $57.6 million of distribution revenue from CC Pharma and ABP. Aphria sold 1,329 kilogram equivalents in Canadian adult-use market and 1,274 kilogram equivalents for medical cannabis sales in the quarter. The Company saw a sequential decline in cannabis revenues and kilograms sold due to supply shortages, temporary packaging and distribution challenges.

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Change in product mix (higher oil sales) enabled Aphria to increase its average retail selling price of medical cannabis (exclusive of wholesale), before excise tax, increased to $8.03 per gram in the quarter, compared to $7.51 in the prior quarter. The average selling price of adult-use cannabis, before excise tax, declined to $5.14 per gram (vs. to $6.32 per gram in the prior quarter) due to a shift to smaller package sizes to maximize SKU assortment and shelf space for the Company’s brands.

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The Company posted an adjusted gross margin of 18%, compared to an adjusted gross margin of 47% in the prior quarter. Gross margins slumped due to an increase in revenues from the distribution business (low gross margins) rather than the cannabis cultivation business. Further, a temporary increase in packaging and distribution costs impacted the margins.

Selling, general and administrative costs rose 287.6% QoQ and 530.7% YoY as a result of $50.0 million impairment for the LATAM acquisition, an increase in non-cash share based compensation, and the inclusion of a full quarter of LATAM and two months of CC Pharma.

For Q3 2019, Aphria reported a net loss of $108.2 million, compared to net income of $54.8 million in the prior quarter, and net income of $12.9 million during the same period last year. Non-cash impairments of $58 million and additional non-operating losses of $30 million weighed on the bottom line. This staggering net loss sparked selling in the shares of Aphria on Monday, ending the day down more than 14%.

Aphria, however, seems to be moving forward after resolving the hostile takeover attempt by Green Growth Brands. And, according to BNN Bloomberg, Aphria hopes its new automation line will be part of its plan to reduce labour costs over the second half of the calendar year.

Aphria Chairman and Interim Chief Executive Officer Irwin D. Simon said, “I am proud of the efforts of our over 1,000 employees worldwide as we continue to position Aphria for future growth and success in the global medical and adult-use cannabis industry. Our organization has experienced significant change in a very short period of time, which was necessary to propel the Company forward. Our Board of Directors and executive team will remain focused on the advancement of Aphria’s leadership position in the global cannabis industry and we are pleased to have announced today the appointment of two new independent directors. Aphria will continue to drive sustainable long-term shareholder value by leveraging its strong brand positioning, superior distribution model, product innovation, industrial scale cultivation and automation, medical-use leadership and strategic global platform.”

Aphria stock currently trades at a market capitalization of C$2.9 billion with a price-to-book multiple of 1.6x.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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