Aphria shares tumble on low sales, impairment charge on Latin American assets

Shares of Aphria Inc. plunged in morning trading as the cannabis company reported a net loss of $108.2 million in its fiscal third quarter earnings, largely attributed to a one-time non-cash impairment charge of $50 million on its controversial Latin American assets.

In a press release, Aphria said the impairment charge arose from a reassessment by a special committee that the company had appointed late last year to review the value of the Latin American assets, which had been questioned publicly by short sellers. Aphria noted that the Ontario Securities Commission had requested it perform the reassessment.

New financial information unearthed by the committee discovered “lower gross margins and EBITDA margins” and “higher than expected expenses” for the LATAM assets, which led to the impairment charge, the company said.

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Aphria’s independent chairman and interim chief executive Irwin Simon confirmed to analysts on a conference call that there were “no other assets under review” for impairment.

The Leamington,Ont.-based company reported revenue of $73.6 million for the quarter ending Feb. 28, 2019, a 240 per cent increase from the previous quarter. A large portion of this revenue, however, did not come from the Canadian market, but from the company’s foreign assets — CC Pharma, a German-based distributor of pharmaceutical products across Europe and ABP, an Argentinian pharmaceutical chain.

Domestic cannabis sales on both the medical and adult-use markets accounted for just $17.8 million of Aphria’s revenue for the quarter.

Aphria sold 1,329 kilogram-equivalents on the Canadian recreational market and 1,274 kilogram-equivalents on the Canadian medical market between the end of November and the end of February. The company sold 800 kilograms more cannabis in the previous quarter, which reflected just six weeks of recreational sales.

“The decrease in cannabis revenue and kilograms sold to the prior quarter was primarily related to supply shortages as the company transitioned growing methods during the late fall and early winter, as well as temporary packaging and distribution challenges,” stated a press release.

The company says once all its facilities are fully operational, it will be able to generate at least $1 billion in annual sales, from the production of 255,000 kilograms of cannabis and cannabis-equivalent.

But the ramp-up to achieve that target is still ongoing. The pot firm only received its licence to cultivate in Part 4 and Part 5 of its Aphria One facility in Leamington — its biggest production site — on March 1. When fully operational, Aphria One has the capacity to produce 110,000 kg of cannabis.

Aphria Diamond, its 1.4 million square feet greenhouse was supposed to begin production in early 2019, but is still undergoing retrofitting, according to the company’s website.

“We are able to supply what we can right now. By this coming September, we should absolutely have enough product to supply the domestic market,” Simon told analysts.

“We’ve already pulled significant cost out in our packaging process because of automation. I think the big thing is we got our licence for Part 4 and 5. So we feel good about our 2020 plans. The orders are there, it’s just about pulling it all together now,” he said.

The company also announced it had reached a good faith agreement with Green Growth Brands Inc. — the U.S. retailer that launched a hostile bid on Aphria earlier this year — to bring forward the expiry date on the hostile bid to April 25.

Part of that agreement involved Aphria gaining $89 million in liquidity by exiting its position in GA Opportunities Corp., and Green Growth buying back those 27.3 million shares owned by GA Opportunities.

“We are bringing our offer to an end on good terms with Aphria and are excited to turn our focus to our CBD personal care and retail cannabis businesses,” Green Growth CEO Peter Horvath said in a statement.

On the conference call, Simon told analysts that negotiating with Green Growth was a “long process” but both companies agreed that they would let the bid expire. He did not rule out the prospect of a future “commercial agreement” with the Ohio-based retailer.

Simon also confirmed that the company does not yet have plans to appoint a permanent CEO, stating that with himself and the “rest of the team,” Aphria is “moving in the right direction.”

Aphria shares were down nearly 12 per cent at $11.84 in late morning trading in Toronto.

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