It was definitely a mixed quarter in terms of positive and negative attributes. I own Aphria, and I never expected profits in this earnings release.
The company has spent a lot of time and money trying to meet the supply needs of the recreational cannabis market. Interestingly enough, total sales on a kilogram basis declined. Thanks to higher prices, though, revenues increased. Overall, I don't see a lot here that is surprising. The concern I do carry is whether or not we're going to see dilutive financing in the future.
Revenues (in Canadian dollars) increased 617% year over year to $73.6 million. From quarter to quarter, revenues increased 240%.
Net income took a big hit. Aphria reported losses of over $108 million compared to a gain of $12.94 million a year ago. On a diluted basis, that breaks down to a loss of 43 cents per share.
The company's distant profitability of the past is what had drawn my interest in the stock in the first place. Admittedly, it's not in any way surprising that Aphria's earnings have shifted to losses. If you look at the bulk of these Canadian cannabis LP's, they're all burning cash right now. It's the nature of the muscle required to get involved in a brand new market.
While I'm not yet concerned about the losses, I do wonder about dilution. Aphria reported cash/equivalents of $107.5 million at the end of the quarter. Obviously, another quarter of big losses comparable to what we just saw can't be covered in a practical fashion with current capital.
Aphria announced in a separate press release that it will be gaining $89 million in proceeds from moves to accelerate the expiry time frame for Green Growth Brands Inc.'s (GGBXF) bid to buy out the company. That will create some nice liquidity, but I still have worries. We're not there yet, but if expenses keep rising, I could see them issuing stock or taking on debt to cover it.
The major question I have revolves around the decrease in total kilograms sold in the quarter. Aphria cited a shortage of supply due in part to changes in growing methods due to winter/fall weather. This, and this alone, bothered me about the quarter. I can accept the short-term losses in a ramp up to long-term gains, but the company does need to demonstrate that weather won't impact its ability to grow that supply. Hopefully they will be able to improve their methods for next fall and this will be a short-term issue.
Aphria's is down over 13% today (at the time of writing). Overall, I think the decline is due to the fact that losses were bigger than anticipated. Most of the big name cannabis players still lack profits, so that alone should not be digging into the stock. Moreover, the revenue growth is insanely good. Indeed, I believe the stock's move today is reactionary to the surprise increase in losses. I still own my shares, and as I have iterated in the past, will not be selling them. I want to see what Aphria can put together through the coming months as these businesses learn their processes and how best to operate in the new industry. My hope is that expenses will level off as expansion plans are completed, and we'll see the fruits of the ramp up in supply.
I view Aphria as a long-term hold. I admittedly have been considering starting a position in Canopy Growth Corp. (CGC) as well. The competitor gained a real advantage when it received that billion dollar blessing from Constellation Brands (STZ) .
Nevertheless, I believe Aphria has a good supply structure developing that will keep its name in the works.