Aphria Financial Results Giving Investors Cause for Concern?

Aphria Inc.’s (TSX:APH) adjusted gross profit margin for Q4 fell year over year to 78.7%

SmallCapPower | August 8, 2018: Aphria Inc. (TSX:APH) reported its fourth quarter and full year results ended May 31, 2018 recently. Revenue for the fourth quarter came in at $12 million, an increase of 17% over the previous quarter and 110% increase from the same quarter last year. The strong growth was a result of the inclusion of financial performance by Broken Coast in this quarter and increased sales to medical patients at Aphria. The Company’s decision to discontinue wholesale sales to other licensed producers negatively impacted results. Cannabis oil sales, as a percentage of volume, decreased from 33.1% to 29.2% in the quarter, driven largely by the significantly lower percentage of volume sales of oil purchased by Broken Coast medical patients offset by a minor price increase in the quarter. On a year-over-year basis, revenue was $36.9 million in FY 2018 versus $20.4 million in FY 2017, an increase of 81%.

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Adjusted gross profit for the fourth quarter was $9.5 million, representing a gross margin of 78.7%, compared to $4.9 million, and a gross margin of 85.7%, in the same quarter last year.

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During the quarter, Aphria bolstered its position as one of the industry’s lowest-cost producers. For the second consecutive quarter, Aphria reported cash costs of $0.95 per gram, remaining below $1.00. The Company’s all-in costs of dried cannabis per gram increased from $1.56 to $1.60, costs consistent with the additional staff levels added in advance of production capacity increases in the quarter.

Aphria reported an adjusted EBITDA of $2.2 million in the quarter from ACMPR operations and $8.4 million for the year, an increase of 53%. During the quarter, the Company refined its definition of adjusted EBITDA to include an EBITDA definition from both ACMPR operations and non-ACMPR operations. Aphria defines ACMPR operations as activities, revenue, expenses and adjusted EBITDA from its Aphria One, Aphria Diamond and Broken Coast facilities. The remaining adjusted EBITDA relates to activities at Aphria International.

Net loss for the fourth quarter was $5 million, or $0.06 per share, as opposed to a net loss of $2.6 million, or $0.02 per share, in the prior-year quarter. The decrease in net income for the quarter was due to $6.5 million in incremental share based compensation, $3.3 million of costs associated with Aphria International, $8.6 million in net losses on the Company’s investment portfolio, all offset by almost $13.0 million in incremental gross profit. Net income for FY 2018 was $29.5 million, or $0.18 per share, as opposed to $4.2 million, or $0.04 per share, in the prior year. The increase in net income for the year was on the back of fair value adjustments associated with biological assets and unrealized gains on the Company’s investment portfolio. Annual production capacity in Canada is currently at 30,000 kg at Aphria One and 5,000 kg at Broken Coast.

Aphria CEO Vic Neufeld said, “We had a healthy fourth quarter and a solid year with many achievements we are proud of. We are excited and ready to hit the ground running on the first day of legal adult-use. It won’t be without its challenges, but we have a plan and the team in place to get it done. We continue to sign supply agreements with provinces and territories, and our Southern Glazer’s sales network partnership is unmatched, ensuring our brands and products are available and represented by retailers across the country. Beyond that, we will continue to extend our industry-leading expertise and experience into global markets. We’ve had an exciting year adding more depth and experience to our senior leadership team that has helped expand our international operations and presence outside of Canada, U.S. and Australia to an additional eight countries, and look forward to continued expansion within LATAM.

Aphria trades at market capitalization of $2.37 billion with price to book multiple of 2.47x. Post the quarterly results, shares of APH have slid more than 12% to its current price of $10.07.

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

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